How Did We Get Here?: A History of BSA

Have you ever seen one of those old homes that’s been built onto over the generations? As the family grew, fortunes changed and time moved on, a wing was added here and a room was added there. Often different styles and ideas combine to create a building that tells an interesting story—even if the building is a bit disjointed with an odd layout or mismatched appearance.

It’s kind of like Bank Secrecy and Anti-Money Laundering laws today. If you’ve ever thought BSA seems like a mishmash of regulations, that’s because it is. It evolved over time to address changing circumstances, and no one has ever taken an eye to the assortment of rules and regulations to modernize it.

BSA: A Quick History Primer

When the Bank Records and Foreign Transaction Act was enacted in 1970, money laundering wasn’t even a crime yet. The law’s goal was to aid criminal and tax evasion investigations, recounts the most recent issue of FDIC Supervisory Highlights. It was intended to help track foreign bank accounts used to hide money.

Money laundering became a crime in 1986 with the passage of the Money Laundering Control Act of 1986. The statute made it illegal to launder money or structure transactions to avoid reporting requirements and required the agencies to:

• Examine for BSA compliance during each examination cycle.
• Issue regulations requiring institutions to establish and maintain BSA compliance procedures.
• Issue cease and desist orders to address failures to have or correct identified BSA compliance procedures.

Suspicious activity reports came about in 1992 with the Annunzio-Wylie Anti-Money Laundering Act. Like many laws, the act was in response to a major event. In this case, it was the discovery that The Bank of Credit and Commerce International, which had more than $20 billion in assets, was a hotbed of money laundering for some of the world’s most notorious figures including Saddam Hussein, Manuel Noriega, and the Medellin Cartel. Just as bad, BCCI controlled at least one U.S. institution.

After the attacks of September 11, 2001, stopping the flow of terrorist funds became a huge priority, resulting in the “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism” (USA Patriot Act) in October 2001. The law made it illegal to finance terrorism, created customer identification requirements, required information sharing and enhanced due diligence of some accounts. The Financial Crimes Enforcement Network (FinCEN) also got a major upgrade from a U.S. Treasury Department office to a bureau charged with administering BSA.

Making It Right

The question is what to do with the current collection of laws? If this were a house on TV experts would come in, strip the house down to its guts, remove an addition that wasn’t built on a solid foundation and build it back up. The result would be a modern, more practical, and beautiful home filled with shiplap and subway tile. (And we could watch it all unfold over the course of an hour.)

BSA is much trickier. While there is no simple way to enact a new, more streamlined rule, there are plenty of would-be designers out there. As part of the Treasury’s proposed rule to reduce regulatory burden, the agency asked for feedback on “Treasury Department regulations that can be eliminated, modified, or streamlined in order to reduce burdens.”

A search of the 80 comments submitted found 12 that address BSA. While the industry agrees that it’s important to thwart would-be money launderers and other financial criminals, there were also a lot of ideas for how to modernize BSA. Here’s a sampling of some of the most popular recommendations:

Customer due diligence. Brought up by many, commenters agree customer due diligence on beneficial owners of new accounts puts a disproportional burden on financial institution. Perhaps the government could perform this job. Many commentators offered suggestions for improvement. ICBA wants banks to be able to open new accounts for existing customers based on previous due diligence, unless its ongoing monitoring suggests there is a risk. CUNA suggests that there is no reason to check the beneficiaries of payable-on-death accounts against the OFAC list, unless that payment is actually going to be made.

Raising CTR thresholds. It was set at $10,000 in 1970, nearly $65,000 in today’s money, and hasn’t changed. ICBA suggests it increase to $30,000 since the vast majority of SARs today are for ordinary business purposes. CUNA suggest raising it to $20,000 and extending the deadline from 30 to 40 days for the most complex cases.

Quality over quantity in SARs. Due to examiner pressure, many banks file SARs defensively instead of concentrating on investigating suspicious cases, which creates a lot of work for banks that doesn’t do much to detect financial crimes, according to the ICBA. CUNA agrees, saying each SAR case takes 3 to 5 days to complete with an average of 30 to 45 SAR filings a month. ABA would like FinCEN to identify which CTRs are most likely to be useful. Florida International Bankers Association (FIBA) thinks institutions shouldn’t have to examine transactions under $5,000.

Combine SAR and CTR reports. CUNA believes using a single form for both would make things simpler. ABA wants the SAR form simplified with thresholds more carefully defined.

Understanding errors. There’s a big different between systemic or intentional noncompliance and the occasional clerical error, CUNA notes. Institutions shouldn’t face harsh punishments for the occasional, small oversight. As the ABA puts it, “The punishment should fit the crime.”

More flexibility. ABA argues institutions have the flexibility to use a risk-based approach for CIP and customer due diligence. It also wants banks to be able to use discretion when filing CTRs and exempt customers or have FinCEN create a registry of exempt entities.

In its 20-page response, ABA made a large number of additional suggestions including more feedback from law enforcement, letting institutions know which types of reports have been most useful and to discover, which are rarely used and should be discontinued. It thinks banks should quickly inform law enforcement of issues and let them do the investigating. Training should be held for bankers and examiners to ensure exams are consistent and less up to the individual views of examiners.  The ABA would like to eliminate requirements to aggregate transactions, eliminate CTRs for withdrawals from existing accounts, and make expectations for safeguards and reporting suspicious activity clear. It would also like more resources for answering OFAC questions while FIBA would like its lists to be better organized.

There were other ideas as well. ICBA suggests banks receive either financial compensation or reduced burden elsewhere to allow institutions to keep up with increasing requirements. CUNA notes it’s redundant to have a separate system to track CTRs in a computerized world where all transactions are recorded.

FIBA would also like FinCEN to make it easier for law enforcement to get and read SARs reports so they don’t subpoena banks for them. They and ABA would also like to make it easier to share SARs information. It would also like rules for digital currency.

It wasn’t only trade associations that responded. Corporate One Credit Union, a correspondent credit union, pointed out the inefficiency and duplicate efforts when it must file a report on its members’  members (the credit union directly serving the member already does this work and has more information at its disposal) The Clearing House is in favor of a total redesign. They even issued a report on it, A New Paradigm: Redesigning the U.S. AML/CFT Framework to Protect National Security and Aid Law Enforcement, earlier this year.

Where, if anywhere, will all these suggestions go? It’s too early to say. But at least if the government ever decides to take concrete action, there will be no shortage of ideas on how to remodel.