When the Bank Secrecy Act was signed into law in 1970, its purpose was to "require certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings."
But the regulations the act brought about go far beyond the goals set in 1970. Changes to the law over the years have been a patchwork of regulations that have added responsibilities to financial institutions without any thought to the law's original purpose.
Some of the regulatory changes have had a negative effect on the U.S. economy because the international community is not subject to many of the record-keeping and reporting requirements in U.S. law.
In fact, several countries that have reviewed U.S. requirements on currency transaction reporting, for example, have rejected them as unwieldy, costly, and unnecessary.
Need for Interpretation
One of the major problems for bankers, after 22 years of compliance with the secrecy law, is the lack of guidance on interpreting the act.
Administrative rulings are released infrequently in the Federal Register, making it difficult for bankers who do not have access to that publication, which carries details of further regulatory changes.
An annual agency review of the law's regulations, similar to what the Federal Reserve Board uses in its commentary on Regulations Z and B, is needed. Many bankers say the Fed's commentary system has had a positive effect on compliance because of the certainty it provides.
Without adequate communications, it is difficult if not impossible for bankers to protect themselves against liability and the unintended use of financial institutions as vehicles for money laundering.
Cost of Compliance
There are no reliable figures on how much it costs to comply with the Bank Secrecy Act. However, since most of the expense borne by banks results. from currency transaction reports, or the filing of Internal Revenue Service Form 4789, it is relatively simple to approximate.
It takes about a half hour to complete a currency transaction report, which is required for each cash transaction of $10,000 or more. Therefore, financial institutions say it costs anywhere from $3 to $15 (exclusive of overall compliance costs) to file a report. The cost depends on whether the information is filed manually or on magnetic tape.
Last year, financial institutions filed 7.2 million currency transaction reports with the IRS. At a conservative $3 each, the annual cost topped $21 million and could be five times that high.
While the cost of compliance is significant - one of the many regulatory costs imposed on the industry - banks might be less critical of the reporting aspects of the secrecy act if only its benefits to law enforcement could be learned.
As it now stands, the government is short-handed when it comes to monitoring and reviewing currency transaction reports.
In fact, a Senate Foreign Affairs committee report said agents of the IRS Criminal Investigation Division need staff and resources "desperately" and that the government is totally "outgunned." The problem is not improving as even more regulations are heaped on commercial banks.
Several changes could improve the effectiveness of the secrecy law.
Raising the Threshold
For starters, the Treasury Department could raise the threshold for currency transaction reports for corporations to $25,000.
The $10,000 threshold has been in effect since the law was passed and no longer reflects the realities of currency transactions. Economists have found that the amount would be closer to $36,000 in 1992 dollars if adjusted for inflation and other factors.
By keeping the $10,000 threshold for individuals and raising to $25,000 the threshold for corporations, fewer currency transaction reports would have to be filed, resulting in lower costs to banks and their customers as well as quicker response from law enforcement to questionable activities.
Another area of compliance that could be improved is the "exemption and excepted" process, which allows banks to waive a filing for individuals and businesses that are clearly engaging in a legitimate activities.
While the process may sound self-explanatory, there is a high level of confusion among bankers, especially those who did not receive the handbook on exemptions prepared by the Office of Financial Enforcement in 1988.
May bankers are also aware that law enforcement officials are weary of exemptions and have said those provisions may actually assist money launderers.
Therefore, to stay on the safe side, many banker have decided to eliminate or substantially reduce exemptions. This change in direction, however, has resulted in a new problem: a challenge by bank examiners to the narrowing of exemption lists.
In fact, some agency officials have threatened to penalize banks for "malicious compliance" with the secrecy act.
Clearly, this response to exemption limits by the government is inappropriate and has no statutory basis for charging banks with overcompliance. This confusion must be reconciled.
The nation's bankers, in their efforts to continue to stop money laundering and other white-collar crime, have argued that they should be able to refuse to do business with individuals or corporations that may reasonably be suspected of engaging in illegal activity. But current law makes that difficult or impossible.
Today, there is a distinct possibility that well-run financial institutions will face criminal and civil liability simply because of the lack of adequate protection under the law.
This is because banks face criminal liability if they fail to uncover money laundering or if they uncover suspected money laundering and actually report it.
Public policy, in the view of the banking industry, plainly requires that financial institutions take an aggressive attitude toward potential money laundering.
However, the American Bankers Association believes that now is the time for the Treasury to review possible avenues that may be expanded to provide good corporate citizens with the protection they need for supporting law enforcement.
Several countries provide for a "safe harbor" for financial institutions that report illegal activity. That needs to be done in the United States as well: The time has come to protect an industry that stands at the front line of the war on drugs.
The Bank Secrecy Act was designed to assist the government and have a "high degree of usefulness" in certain proceedings.
The problems and suggestions outlined here, and submitted recently to the Treasury Department, would not only reduce regulatory burdens but also help banks achieve a long-sought goal: providing quality information to help stop money laundering.