WASHINGTON — A Clearing House Association plan to reduce banks' anti-money-laundering compliance costs is drawing fire from other trade groups and some industry observers who argue it could wind up being costlier than intended for financial institutions.
The advocacy group for the largest U.S. banks issued a wide-ranging report last month that suggested ways to cut down on AML expenses while preserving banks' role at the forefront of national security, but some analysts faulted the approach. The plan was backed by a variety of industry heavyweights, including Juan Zarate, a former Treasury assistant secretary for terrorist financing and financial crime.
But some other industry representatives argue the plan includes missteps. For example, some objected to a provision that would call for large banks to provide more raw data to the Treasury Department's Financial Crimes Enforcement Network, forcing the agency to shoulder more of the analytics work.
“They seem to suggest that banks could just dump data to law enforcement,” said Robert Rowe, a vice president and associate chief counsel for regulatory compliance at the American Bankers Association. “We’ve talked about data security and privacy and yet this seems to go in the opposite direction.”
Rowe pointed to reports in 2006 that the Society for Worldwide Interbank Financial Telecommunication had shared millions of financial records to U.S. counterterrorism officials, under subpoena.
“It almost cost Swift a lot of business in Europe,” Rowe said.
But Greg Baer, the president of The Clearing House Association, countered that the proposal would change the format, not the type of records delivered to law enforcement.
“You're already disclosing information about the customer’s account,” Baer said. With The Clearing House plan, he added, “that doesn't necessarily mean more SARs" — suspicious activity reports — "it may mean that when you file the SAR, a different kind of data is provided.”
Aaron Klein, a Brookings Institution fellow who backed the report, argued that could create a more efficient AML system.
"This will better enable law enforcement to achieve their top priorities while reducing unnecessary filings," Klein said. "Think of looking for a needle in a haystack. Adding more hay does no one any good."
Another sticking point was a recommendation to delegate AML exams —which are currently conducted by banks’ functional federal regulators — to Fincen.
The measure would apply only to large banks, Baer noted. “We proposed for Fincen to take over examinations only for large multinational banks that present uniquely difficult issues," he said.
But this was viewed by some as unrealistic given Fincen’s level of resources and lack of experience in conducting examinations.
“Fincen already doesn't have enough staff to do what they're expected to do, and they don’t have the personnel to do examinations,” Rowe said. “That would have to be something that they would have to create from scratch.”
The larger banking regulators also have more flexibility to expand and contract their staff of AML examiners as needed, industry observers suggested.
“Having the examiners in the banking agency allows the banking agencies to shift resources when needed into areas such as credit quality, as they did during the Great Recession of 2008,” said Ross Delston, a Washington-based attorney who specializes in AML.
Community banks also expressed concern that some of the proposals, though aimed at large banks, could ultimately find their way to smaller institutions.
The Independent Community Bankers of America was supportive of the report overall, said Lilly Thomas, a senior vice president and senior regulatory counsel at the ICBA. But she stressed that some of the recommendations targeting large banks would be costly if they were ever expanded to community banks.
Having to undergo separate examinations from both a primary regulator and Fincen, for instance, would be a big draw on a small bank's resources, Thomas said.
“You'd have to have the resources and the staff to work with the separate agencies as opposed to having the same examination by the same regulator,” she said. “We want to make sure that it doesn’t apply to the smaller community banks as well as the large banks.”
In addition, Thomas said, community banks could suffer from a Fincen-imposed “mandate” to support innovation, as proposed by The Clearing House. “That would be an area that we would not want to see trickle down into the community banks,” she said.
But Baer argued that his group's plan would ultimately have positive effects on community banks, as well as larger banks.
“A lot of community banks get dinged for minor AML violations,” Baer said. “To the extent that there was a broader view of AML compliance ... I think they'd benefit from that too.”
Klein said that, even if such a program were to drive technological change throughout the industry, it could ultimately make it stronger.
"Large banks invented the ATM," he said. "If technology allows for better AML compliance and to achieve the objectives of national security ... then banks will need to embrace those costs."