Credit unions play waiting game with anti-money laundering reforms

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Credit unions may shoulder less of a compliance burden if proposed legislation reforming anti-money laundering requirements is passed.

There are currently different bills before Congress that would overhaul AML rules, including raising the threshold for suspicious activity reports and no longer requiring financial institutions to gather beneficial ownership information. The industry is mostly cheering these proposals as necessary to simplify AML compliance and lower costs.

“The current AML/BSA regime is extraordinarily costly and the bulk of that is borne by financial institutions, including credit unions,” said David Burton, a senior fellow in economic policy at the Heritage Foundation, a conservative think tank.

According to a 2016 report from Burton and Norbert Michel, director of Heritage's Center for Data Analysis, AML requirements cost an estimated $4.8 billion to $8 billion annually, yet resulted in fewer than 700 convictions each year. In other words, each conviction ran approximately $7 million.

Burton also found that the current framework requires financial firms to file millions of reports annually despite that no more than 2,000 AML investigations are conducted per year.

One bill that has been introduced, though it doesn’t seem to be a priority for Congress, would triple the threshold for filing currency transaction reports to $30,000 and would double the requirement for SARs to $10,000. That is a much needed change since the current thresholds were set when the Bank Secrecy Act was passed in 1970 and haven’t been adjusted for inflation, said Brad Thaler, vice president of legislative affairs of the National Association of Federally-Insured Credit Unions.

“The asset thresholds for SARs and CTRs have not been updated in decades,” Thaler said. “When they were initially established, it was a much larger amount of money than it is today.”

Another proposed BSA amendment aims to alleviate pressure on smaller institutions by inviting them to work together and create a pool of resources, such as a shared AML center.

Most of the financial industry sees the proposed reform as a good first step, “but there’s a lot of modernization that has to happen under the BSA,” said Brian Frey, a partner with Alston & Bird who serves on the firms white collar, government and internal investigations team.

“Smaller credit unions and smaller financial institutions generally don’t have the kind of AML resources that the bigger institutions have, and they find it particularly difficult,” Frey said. “You often see it one of two ways; that institutions don’t follow the SARS or they file a SAR on virtually anything, which [dilutes] the value of SARs from a law enforcement perspective.”

The House Financial Services Committee already passed a different bill that would strengthen information sharing between law enforcement and banks and credit unions that invest in AML compliance.

Finally, another bill, sponsored by Rep. Carolyn Maloney, D-N.Y., would require companies to disclose their true owners at time of incorporation, known as beneficial ownership. It is likely to be voted on at the next House Financial Services Committee markup, which could happen in late June. The Senate had a hearing on the issue on Tuesday but Democrats mainly focused on a recent report that Deutsche Bank didn’t file SARs on transactions completed by companies tied to President Trump and Jared Kushner, his son in law.

The bill would exempt companies with a physical presence in the U.S. with more than 20 employees and $5 million in gross receipts or sales from the reporting requirements, because "companies that employ this many people and that have legitimate, business-related income are very unlikely to be anonymous shell companies that were created to hide or launder illicit funds," according to a press release from Maloney's office.

The legislation is largely supported by the banking industry, because it would free financial institutions from regulatory requirements to collect beneficial ownership information of their account holders. Law enforcement has also supported it as a tool to combat illicit finance.

Still, there are some critics of the legislation because it would increase costs for small businesses, including those that belong to credit unions.

"I'm quite concerned about Maloney's bill [because] I think it will target several small businesses,” said Diego Zuluaga, a policy analyst at the Cato Institute.

Despite the support from the financial services industry and others, the various proposals could face difficulty in becoming law. For example, the beneficial owners legislation is likely to pass the House, though it’s unclear what would happen to the bill in the Senate.

“It’s a lot more difficult to tell in the Senate. It’s not the first time that people have put forth bills to try and modify the BSA but it hasn’t had any real substantive amendments since 2001,” Frey said.

Neil Haggerty contributed to this report.

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AML Regulatory reform Regulatory relief NAFCU House Financial Services Committee