With banks under intensified pressure to identify accounts linked to the United States growing list of suspected terrorists and hostile nations, questions are arising over small banks ability to handle the workload or the technology investment required.
Banks that do not comply with the rules, issued by the federal Office of Foreign Assets Control (generally referred to as OFAC) face stiff penalties. The office, a division of the U.S. Treasury that enforces economic and trade sanctions against foreign countries, terrorism-sponsoring organizations, and international narcotics traffickers, can impose fines of up to $1 million and 12 years in prison, plus civil penalties of up to $250,000 per incideIt can also require the forfeiture of funds or otherproperty involved in a violation. In recent years it has imposed millions of dollars in civil penalties on U.S. financial institutions, usually because of failure to block illicit transfers.
Products that handle the range of OFAC compliance activities screening new accounts and wire transfers as they occur and screening customer files regularly, especially when OFAC changes its master lists used to cost $4,000 to $10,000, putting them out of reach for many smaller companies. Vendors of compliance systems and the community banks they sell to say that small banks, especially those that are not in states with a large immigrant population, may feel that their risk of an OFAC violation is so small that it is not worth investing in a filter product.
But signs are visible that awareness of OFAC regulations is growing, even among community bankers. Bert Chesterton, chairman of the retail banking operations, security, and technology committee of Americas Community Bankers in Washington, recalls a meeting five years ago at which no one knew about OFAC or that its rules applied to them.
That, I believe, has changed, Mr. Chesterton said Wednesday. Awareness is increasing, and now most banks, even smaller ones, have some product to deal with compliance, he said.
And prices have been coming down for smaller banks. Dave Belote, the vice president of Bridger Products Inc., a Bozeman, Mont., firm that sells software to help banks comply, said that some major software vendors have recently cut prices substantially and that community banks can now buy OFAC filtering software for $600 to $2,000.
Guy Lazzeri, the chairman of $82 million-asset Home Federal Bank in Hollywood, Fla., an area where some of those suspected of involvement in the Sept. 11 attacks lived for a time, said his company has installed a partially automated OFAC compliance system. He said that Home Federal had not made a fuller investment because of the size of the institution.
But even partial systems have not yet found their way into every institution.
Chuck Schardong, the senior product manager of Innovative Products Inc., said that many smaller banks have no automated process, based on a marketing survey his Pittsburgh-based firm did last May. It suggested that many small community banks had only manual screening processes or in some cases nothing at all for OFAC rule compliance.
Large institutions have been installing OFAC filters for several years, checking high-risk areas such as new accounts, wire transfers, and customer files. But community banks have not been buying these products, partly because of the expense and partly because of ignorance about OFAC rules and a belief that the rules might not apply to them. It is assumed that terrorist groups would be more likely to use larger banks with broader territorial reach and more international money-moving capability.
Lacking automation, small banks may have to compare their customers manually against a paper list of thousands of names of suspects for which banks are barred from doing transactions.
It is shocking how many in the banking industry do not have an automated OFAC compliance product, said Dave DeMartino, the vice president of sales and marketing for Prime Associates in Clark, N.J., which makes OFAC compliance software. In our experience, smaller institutions, credit unions, community banks, and small broker-dealers often do not have fully automated OFAC capabilities.
These banks may have a simple inquiry capability bank employees can plug in a name and see whether it is on OFACs list or may download the list, print it out, and screen customers manually, Mr. DeMartino said. A manual look-up is just not going to work.
Mr. Belote said that community banks may be attractive to terrorists because of their inexperience in dealing with international clients. Because almost all the large banks have an automated solution, anyone who is going to try and launder money is going to avoid those banks and try to find other avenues, he said. In addition, Mr. Belote said, smaller banks are at risk because not all OFAC-targeted entities are situated abroad.
