Regulators' Thorns (Bank Secrecy Act) And Roses (Tips For 'Eternal Bliss')

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One regulator referred to the Bank Secrecy Act as "the biggest thorn in my side." Another warned credit unions they are considered the "weak link" in BSA compliance.

Together, Melinda Love, director, NCUA Region V, and Bert McLane, financial institutions manager for the California Dept. of Financial Institutions, offered to attendees of the recent California and Nevada Credit Union Leagues' annual convention here advice on better compliance with regulations that are being enforced more vigorously than in the past. The two regulators spoke at the convention's Shapiro Group session, designed for smaller CUs.

According to Love, small credit unions tend to have four "hot buttons" at examination time: recordkeeping, BSA compliance, due-diligence and the Small CU Program. She said recordkeeping is the "most persistent area of loss and most frequent reason for liquidating or merging a small credit union."

"NCUA formerly was benign in its outlook," she said. "It excused small credit unions because it knew the managers were so busy. Today, we are more persistent."

If recordkeeping problems appear to be ongoing for some time, NCUA will require an audit by an outside accounting firm, she added.

The Bank Secrecy Act started as a way to stop laundering of drug money, Love said. After the Sept. 11, 2001, terrorist attacks, it became part of the war on terror.

Today, "It is the biggest thorn in my side," she declared. On the other hand, "It is something we all do every day to fight the war on terror, which makes us lucky. Most people don't get that chance."

NCUA issued a memorandum redefining what serious violations are, and it implemented a 90-day incremental approach to enforcement. Love said if a CU has issues, NCUA will perform a documented resolution and give the credit union 90 days to resolve the problem.

If after 90 days the issue has not been corrected, NCUA will send a letter and give an additional 90 days. Six months after the initial notification, if the problem still persists, NCUA will issue a cease and desist letter- though moves this drastic have been rare. "No credit union in my region has gone past the first 90 days," Love said.

One continuing problem, she said, is a lack of independent testing. Love suggested three or four CUs "buddy together" and test each other.

Love And Bliss

Love offered four secrets to "eternal bliss" with NCUA: identify, measure, monitor and control. "If you think of things in those four terms, that's going to make us very happy," she told attendees.

Due diligence is not getting any easier, she acknowledged, because there are more and more things for CU management to do. Love said to keep three "Ps" in mind: paper, people and practices. Regarding paper-which includes contracts, financial projections and marketing materials-she said things must "fit" the CU.

"Make sure any contracts cover you and give your members the best service."

People includes staff, contractors and references. Love said one oft-overlooked consideration is management getting along with its contractors. "Make sure the contractor is delivering. Remember, the credit union is in the driver's seat," she said.

The practices category includes policies, procedures, systems, infrastructure, training and monitoring. "Due-diligence with infrastructure can be as simple as installing a new locking door somewhere in the credit unions," she explained.

Risk management often comes down to self-knowledge, Love said. This includes something as mundane as selecting a third-party service provider. "No one can do your own credit union like you. No one knows your credit union like you. Don't rely on vendor recommendations by other credit unions or by the local league-do your own due diligence."

DFI Perspective

McLane said California's state charteres are functioning fine. As of June 30, the growth rate is below that of previous years, but still is "healthy."

"The credit union industry is doing well overall," he began. "For Shapiro Group credit unions, loans are up 5% June 2005 versus June 2004, and net income is up 29%."

The Bank Secrecy Act is "such an important area" for CUs, McLane asserted. Echoing Love's remarks, he said small credit unions should not assume they can be lax in keeping up with regulations.

"In the eyes of the BSA, all credit unions are created equal. No matter size or complexity, all credit unions are expected to be in full compliance."

"There is a perception that credit unions are the weak link in BSA compliance," he continued. "This is not my perception: from audits I've seen, credit unions are doing a good job. But, that is the perception, and they are looking for a credit union to make an example of."

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