by Sara McGinnis

In the years since the Bank Secrecy Act (BSA) was first introduced, CEOs and boards of directors have lamented the regulatory burden and the high cost of implementing protection against anti-money laundering (AML). Yet the consequences of noncompliance are likewise costly—severe enforcement actions and civil and criminal penalties, not to mention damage to an organization's reputation.

Generally, regulators will levy noncompliance fines when they determine an institution has failed to implement an effective BSA/AML program. Put another way, if regulators believe an institution's management has failed to give appropriate attention to the importance of instituting and maintaining a program, along with the staffing and testing it requires, then fines are imminent.

Fines have also been aimed at institutions that demonstrate systemic failures to file currency transaction reports (CTRs) and suspicious activity reports (SARs) when required.

The amount of the fine depends on the types of violations, as well as the institution's willingness to correct the issues. A discovery of insider involvement, for instance, would yield heftier penalties of $1 million or twice the value of the transaction and 20 years in prison per violation.

In view of this, a practical investment of resources to ensure an effective AML program is just plain prudent.

AML in today's environment

Financial institutions are still considered the front line in the defense against money laundering. Charged with discovering and disrupting criminal activity, institutions must adequately manage risk and reduce their vulnerability.

Today's efforts to thwart money-laundering schemes have evolved, as have the schemes themselves. Institutions can no longer address their risks based solely on a transactions approach. Instead, regulatory compliance and a strong defense depend on administering a robust anti-money laundering program.

A robust program is one that consists of sound and well-documented policies, procedures, and internal controls, as well as training and independent testing. In addition, the AML function as a whole must be considered a significant management process.

Currently the biggest program focus is the adequacy of institutions' BSA/AML risk assessments, which must be targeted and specific to each institution. Key to success is the need to include all business lines in the assessment process. From mortgage and trust activities to services and products, an enterprisewide approach is strongly encouraged.  

Organizations must also work to identify higher-risk customers through customer due diligence ("know your customer"). The steps institutions take to identify potential money launderers and their banking patterns at account opening may be the most vital program element of all. Once a high-risk customer is initially identified, ongoing monitoring must also be conducted.

Focus on the future

Given the dynamic nature of money laundering, institutions must be ready to adapt to the ever-changing environment and adopt the next valuable AML measures. Technology is giving institutions better ways to aggressively fight the money-laundering war, but not without some challenges.

Regulators are presently evaluating the adequacy of automated systems and software (AML surveillance systems) employed by institutions to help detect and monitor suspicious activities.

The advice to institutions is that such systems should not be used as "plug-and-play" solutions. Management must understand how to fully use the software to maximize its effectiveness. Unless output is understandable and data volumes are manageable, it won't be a useful tool, nor will it provide sufficient return on investment.

On the flip side, technology can also make wrongdoing easier for criminals. When introducing any new technology, service, or product, institutions must consider the risks and exercise due diligence. Here are some of the top concerns now and into the near future:

• Money laundering via electronic funds is on the rise.
• Prepaid/stored value cards may have AML implications.
• Remote deposit capture has captured the attention of regulators who are now reviewing this area.
• Suspicious activities surrounding identity theft and ACH fraud are also on the rise.

Diligence that's paying off

Reports indicate that there has been an overall decrease in money laundering and embezzlement activity. At a recent industry conference, FBI Director James Pistole went so far as to attribute this decrease to the financial industry's diligence in monitoring and reporting suspicious activity within their institutions.

Financial institutions in the upper Midwest certainly share in this accomplishment. Take pride in your contributions and in your ongoing efforts to ensure effective AML programs!