WASHINGTON -- When Rick Small, the Federal Reserve's point man on money laundering, joined up in 1989, he decided to experience a Bank Secrecy Act exam firsthand.
The tedious task of sorting through a stack of teller tickets to see if deposits of $10,000 or more had been reported convinced Mr. Small that regulators were going about catching money launderers the wrong way.
For the past two years, Mr. Small, special counsel in the division of banking supervision, has been working on ways to make the BSA exam more effective.
He and his four-person staff are almost finished. The new exams will be three-pronged, focusing on how well a bank monitors its own compliance.
This shift away from paper trails is testimony to the good job banks are doing, Mr. Small said.
"Banks have seen the light," Mr. Small said. "If their own internal procedures work effectively, we don't have to sit there and go through all that stuff anymore."
Under the new approach, examiners will focus on know'your'customer policies, compliance with the currency transaction reportexemption process, and programs that identify suspicious activity.
If the bank's programs are solid, said Mr. Small. the Fed won't check every detail. The more work the bank does itself, the more likely it can prove its compliance, said Mr. Small.
"If you've got the programs in place, then I think you've built up a very good track record for any problem that might occur," said Mr. Small.
The Fed has been testing the new exam for the past year, asking examiners to give suggestions about the process. That feedback has been used to make the final, revisions in the process, and official manuals will be out within a couple of months, Mr. Small said.
The new manuals will lead examiners through step-by-step inslruclions. Depending on the answers to certain questions, some steps may be skipped. "It gives the examiners a lot of latitude to make on-the-spot decisions," Mr. Small said.
Mr. Small. 39, is well regarded in banking circles. "He's one of the most dedicated government officials," said John Byrne, senior counsel for the American Bankers Association. "He really believes in educating the industry."
Banks have strengthened their Bank Secrecy Act compliance programs in the past few years for two masons, Mr. Small said: fear of penalties and the realization that compliance means better business.
So now, it's time to give banks a little credit, he said.
"Banks are committed to stopping illegal activity at their institutions," Mr. Small said. "They are as committed as we are."
The main problem still dogging banks is the exemption process, which allows banks to skip currency-transaction reports on certain well-known businesses.
Unfortunately, many banks mistakingly exempt businesses that need to be reported. "The exemption process is very bad," Mr. Small said. "Banks that use it and don't use it right get into a lot of trouble."
Mr. Small estimates that 80% of the civil money penalties issued to banks by the Fed and Treasury result from inconect exemptions.
The situation may be improved by a provision in the Community Development amd Regulatory Improvement Act, The law, which awaits President Clinton's signature, calls for Treasury to compile a specific list of exempted businesses.
However, industry experts are pessimistic about the process, saying the creation of such a list will be a mammoth task. Even Mr. Small said it would take until yearend to see preliminary results.
Another provision of the new law alms to reduce currency transaction report filings by 30%. Again, however, the specifics of these changes are uncertain.
Mr. Small acknowledges that banks have tradiftonally received the mgulatory bnmt of the crackdown on money launderers.
"What happened was that Congress kept on seeing gaps where people could launder money," he said.
Although Treasury. is cutting down on the' regulatory burden, the government still expects strict compliance with the Bank Secrecy Act, because money launderers aren't letting up.
"The BSA is the only good way we have fight now to make sure banks aren't either money laundering themselves or being used unwittingly to money launder," Mr. Small said.
The fight against money laundering has mined a comet in the past few years, Mr. Small said. When he was a federal prosecutor in the 19813s, the main goal was to catch the criminal.
While that's still a good goal, he said, the key now is to capture the money. "If you can stop the flow of their proceeds, it's a great way to shut them down," Mr. Small said.
Mr. Small laughs when he talks about being hired at the Fed. Originally, the Fed wasn't sure it was going to be a full-time job, and in part hired Mr. Small because of his general litigation experience.
"It's more than a full-time job," he said. In the past year, Mr. Small has traveled to Moscow, Budapest, Warsaw, Singapore, Israel, Bangkok, and Saudi Arabia.
Most of his travel is related to the ongoing BCCI investigations. for which Mr. Small is the Fed's primary investigator.
During his first two years at the Fed, Mr. Small spent about 70% of his time on BCCI. Now, he spends about 30% to 40%, he said.
Although he said the Fed has brought all the enforcement actions it plans to, some cases are now being 'appealed. "BCCI dies out and then it picks up again," he said. He jokes that his tombstone will read: "He never finished BCCI."
Other trips involve speaking to international audiences about money laundering tactics. Mr. Small said he thinks it is important for the U.S. central bank to make a good showing abroad in the antimoney- laundering arena.
"Everybody's got the same problem we have," Mr. Small said. "It's just the magnitude of the problem that's different."
While the U.S. is the most highly regulated country in the world, it's also the biggest drug user, said Mr. Small. "We're never going to alleviate the problem," Mr. Smallaid. "I'm convinced of that. But we're holding our own."
Title: Special counsel, division of banking supervision, Federal Reserve Board
Born: March 18, 1955; Scranton, Pa. Education: B.S. in business, Rider College, Lawrenceville, NJ.; J.D:, Hofstra University, Hempstead; N.Y.
Career: 1988-89: Senior counsel for law enforcement at the Treasury Dept.
1984-88: Federal prosecutor with the Justice Dept.
1980-84: Trial attorney with the antitrust division in the Justice Dept's Philadelphia field office
Home: Gaithersburg,
Md,
Family: Married, son Jeffrey, 6; daughter Samantha, 1
