Banks try pooling resources to help defray AML costs

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Community banks have been reluctant to share resources for Bank Secrecy Act compliance more than a year after regulators signaled an openness to the practice.

Only a handful of banks have begun collaborating on BSA and anti-money-laundering programs. Still, there are some signs more banks are looking into the practice.

The Federal Deposit Insurance Corp. has been receiving proposals from banks that are interested in working together on BSA and AML compliance, a spokesman said. And the North Carolina Bankers Association is working on a framework to help its 80 members.

"We're moving pretty aggressively," said Peter Gwaltney, the association's president and CEO, adding that he hopes to have a cooperative agreement in place later this year.

While it is unclear how much time and money banks spend on BSA and AML compliance, regulatory costs remain a big concern for small banks. Total annual regulatory costs at banks with assets of less than $10 billion averaged $4.9 billion from 2014 to 2018, based on data compiled by the Federal Reserve and the Conference of State Bank Supervisors.

Meanwhile, U.S. depository institutions filed nearly 1.3 million suspicious activity reports in 2018, or nearly double what they filed a decade earlier, according to the Financial Crimes Enforcement Network.

While individual financial institutions are responsible for ensuring full compliance with BSA-AML regulations, the October 2018 Interagency Statement from regulators opened the door to small banks and credit unions collaborating on a wide range of activities, including training, program testing and validation, and policy development.

That, in time, could yield bottom-line relief.

“There are 5,000 community banks,” Gwaltney said. “Each one is developing [BSA] policies, validating models and doing training. If we can work together to do these things collectively, we can bring down costs dramatically.”

Resource sharing could reduce banks’ BSA-AML compliance costs by 30% to 50% annually, said James Sills, president and CEO of the $267 million-asset M&F Bancorp in Durham, N.C., and chairman of the NCBA’s shared services committee.

The committee, formed in 2017, initially focused on core systems collaboration before realizing that various complexities defied simple solutions.

“It didn’t make sense to tackle that two-headed monster,” Sills said.

Sills and Gwaltney were looking for a relatively straightforward process to serve as a template for future resource-sharing agreements. They quickly took note when regulators issued the Interagency Agreement.

In November 2018, the NCBA sent a team to Washington to be briefed on the statement. Then it hired a consultant to help develop recommendations for sharing services. The next step will involve a survey of member banks; the results will be used to design a pilot program.

Some mutuals are already sharing resources.

Warsaw Federal Savings and Loan in Cincinnati and Blue Grass Federal Savings and Loan Association in Paris, Ky., are now collaborating with First Mutual Holding in Lakewood, Ohio, after both agreed to be acquired a by the bigger mutual. The ability to leverage BSA compliance across a larger organization played a part in clinching both deals, said First Mutual Holding President and CEO Tom Fraser.

“Risk, audit and compliance are some of the areas where we’re achieving significant savings," Fraser said. "BSA is part of that."

Before the Interagency Statement, mutuals interested in affiliating with First Mutual Holding were reluctant to collaborate on compliance because of the stringent penalties for BSA violations, Fraser said.

Elsewhere, banks appear hesitant to embrace BSA resource sharing.

“I don’t know that we’ve really seen a change in behavior from the banks,” said Thomas Fite, director of Indiana’s Department of Financial Institutions.

Still, an effort resembling the NCBA’s initiative, with multiple participants, has a good chance of success, Fite said.

“I don’t think the equation is right for just two banks; maybe that’s why it hasn’t emerged,” Fite said.

“If you had a group of six to eight banks ... you’d probably get into some efficiencies that make sense," he added. "We really need some banks to come forward and start seeding the field a little bit."

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