Financial organizations have been required to comply with the Bank Secrecy Act (BSA) since it took effect, but recent BSA enforcement actions and a heightened awareness by regulators make compliance in this area more important now than ever. In addition, Section 352 of the USA Patriot Act, which took effect last October, requires that organizations have a risk-based anti-money laundering (AML) program in place.
The Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC) are emphasizing that BSA audits will be thorough and have demonstrated that violations will result in penalties. The $25 million fine imposed on Riggs National of Washington, D.C. is the most recent example. The regulators are also suggesting to organizations during BSA audits that manually verifying identity or detecting suspicious activity are next to impossible. Even organizations with only one or two branches will need to determine whether they have the ability to monitor suspicious activities manually.
In the United States, between $100 billion to $300 billion is laundered every year. Globally, the estimates run about $1 trillion. The odds that an organization will be used to launder money at some level are high.
As a result, financial organizations are looking to implement an automated AML system that is effective but also practical. Many organizations are turning to technology solutions because they realize that automating their AML process allows them to more quickly and accurately identify their customers' identities, know their customers' normal activity, and generate the required reports.
Determining the identity of the person in front of a lender or new account representative is more efficient and consistent with the help of an automated system that accesses multiple databases and public records and checks names against government lists. An automated system not only helps give the organization a better picture of the person wanting to do business with it, but also helps ensure that employees collect the appropriate customer information. As a side benefit, it speeds up the screening process at account opening. Using technology eliminates many of the manual steps an organization's staff takes to complete a transaction, as well as helps maintain required information.
Before an organization can determine what activity is suspicious for its customers, it first needs to decide what activity is normal. Many organizations are turning to comprehensive AML systems to meet the new requirements. Some AML systems give an organization the ability to examine a customer's activity in all of its business areas. The organization can then put these activities together to create a big picture of the customer's business with the organization. Not only is the organization able to determine what is "normal" for its customers, but it also can monitor customers' cash transactions for any indication of structuring, high-volume wire activity, or unusual connections to people in countries deemed restricted by the Financial Action Task Force on Money Laundering.
For years, financial organizations have struggled with the requirement to manually analyze many pages of data to determine required currency transaction report (CTR) filings and to determine a need to file a suspicious activity report (SAR). Many of the AML systems offered today condense the related account information onto a single report, which allows an organization to determine when to file a CTR or SAR. Some systems go as far as aggregating cash-transaction records by account and customer and automatically filing the CTR with the Internal Revenue Service.
Many financial organizations are choosing vendors that offer AML solutions through an application service provider (ASP) model. This technology format makes sense to many organizations because it eliminates the need for specific hardware requirements and offers flexibility related to technology changes.
An ASP service model presents a critical advantage to financial organizations contemplating decisions related to core processor selection, technology upgrades, or conversions in general. The ASP service model provides these organizations with the ability to make independent technology-related decisions without the fear of being encumbered by otherwise restrictive AML software.
AML software that only operates on specific platforms often binds a financial organization to the vendor's technology and produces hidden costs. The vendor might be able to offer the organization a version of the software compatible to the new platform to which that organization wants to migrate. But the organization would still likely be required to license this new version and pay the related fees to continue compliance system processing. Financial organizations using an ASP service model for their AML solution need only establish an interface with the new operating environment to keep the organization's compliance process intact.
Another advantage of an ASP service model relates to BSA regulations that require financial organizations to maintain AML compliance records for at least five years, in addition to the current year. An AML solution offered through an ASP service model would likely offer quicker access to those records during the migration period of one operating environment to another. This would be extremely beneficial during a BSA audit or other mission-critical situation.
Automating the AML process will decrease the chances of "dirty" money flowing through an organization, and at the same time, improve the marks it receive from regulators. The risk to an organization's reputation is also far too great if it is found to violate BSA regulations. It will not only lose its good name and customers, but also run the risk of a penalty that has been increased from $100,000 to $1 million with possible jail time.
Shannon Bennett is a compliance specialist at Bankers Systems; Jim Atchley is the president of Atchley Systems.
