Next stop on the reg relief train: Reforming AML rules

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WASHINGTON — The laser focus on regulatory relief among lawmakers and regulatory appointees in the Trump administration is beginning to address long-held industry complaints about anti-money-laundering regulations.

Agreement by many in the government that Bank Secrecy Act rules are too burdensome to banks, and ineffective in stopping crime, has led to a reassessment of AML regimes on numerous fronts.

Regulators have met to discuss how to streamline rules, and, according to congressional aides, House Republicans and Democrats will soon introduce a package that partly puts more responsibility on regulators to help banks track suspicious financial transactions.

The “goal is to look at this from the standpoint of: No one does not want to catch" money launderers, "but we’ve evolved into something that most major banks today are under some type of action associated with their regulators on” AML rules, said Comptroller of the Currency Joseph Otting at an American Bankers Association conference April 25. “We’ve evolved into where it’s almost impossible to comply with and so we need to . . . take this on.”

Otting said he was meeting with leaders at the Federal Reserve and the Federal Deposit Insurance Corp. this week to create a list of recommendations “offering up flexibility to banks” on BSA and AML requirements. That list will be submitted to the Financial Crimes Enforcement Network, or Fincen, which works with regulators and law enforcement to track suspicious financial transactions. Otting said they planned to meet with Fincen this month.

“We’ve done a ton of work in these last 60 days on this issue, and now we got a point where I think we’ve got some real solutions that we can put forth,” he said.

One major issue that both regulators and lawmakers will likely address is how effective the reports are that banks must submit every time a financial transaction is flagged, called a suspicious activity report, or SAR.

“Where banks are monitoring for suspicious activity, it is completely off the rails” in terms of the reports being filed “with close to zero yield,” said Greg Baer, president of The Clearing House Association. “Especially in a modern technological world, any rational system would look at what reports are useful to law enforcement and which are not.”

Otting said the industry files about a million SARs a year. Many bankers say they spend more time submitting SARs on legitimate business transactions than actual money laundering cases, and they get very little feedback from authorities thereafter.

“I can tell you that of the thousands of SARs that we file” there are “less than half a dozen cases that I know of that had actually turned into some sort of a prosecution,” said Dalia Martinez, executive vice president of the International Bank of Commerce, during a House Financial Services Committee hearing last week. “I'm not saying the information is not helpful” but “there is insufficient transparency from Fincen to the financial institutions as to how helpful that information actually is.”

House lawmakers are planning to introduce bipartisan legislation related to AML and data security that would partly modernize some of the requirements, such as raising the dollar threshold for transactions that need to be flagged as suspicious, from a lower threshold set in the 1970s. Reps. Blaine Luetkemeyer, R-Mo., and Steve Pearce, R-N.M., are working with Rep. Carolyn Maloney, D-N.Y., to combine past efforts into one legislative package that will be introduced in the coming months.

The package also considers requiring Fincen to collect data on the beneficial owners of a business when it opens an account at a financial institution. This is in direct response to a complicated Fincen rule taking effect May 11 that would require banks to collect the names and personal information of any business owner with at least a 25% stake in the company, called the Customer Due Diligence rule.

Industry representatives say adopting the Fincen rule continues to pose challenges for banks.

“We’re watching the CDD rule because we’ve seen some problems with early implementation. Banks are having difficulty developing the information on ownership and control, particularly with the requirement to obtain certification from the people opening the accounts," said Cynthia Shea, a director at Promontory Financial Group specializing in AML regulations. "Banks won’t be able to develop the information from legitimate third-party sources, and there are significant hurdles to establishing the policy for all customers, including established accounts.”

Bankers and lawmakers on both sides of the aisle largely agree that Fincen should help collect this data from states rather than the banks.

“Banks are being deputized to become law enforcement officers by this rule . . . it's costing literally millions and millions of dollars,” Luetkemeyer said during the April 27 hearing. “One large bank I was talking to actually has over a thousand employees that do nothing but take care of BSA, AML, and now they're going to have to deal with this beneficial ownership situation.”

Democrats including Rep. Dennis Heck of Washington, said during the hearing that the bankers in his district say the most “frustrating” item for them is AML compliance.

“Requirements are always getting more difficult and there isn't any countervailing effort within the regulatory context to seek to ease that . . . or to lighten BSA compliance in other ways,” Heck said. “The No. 1 complaint: nothing is being done in it. And I'm not pretending like it's easy. It's a Gordian knot. My friend, Mr. Luetkemeyer, has been working on this for a couple years.”

There has been very little significant change to AML regulations since the 1970s because preventing terrorist financing, which requires massive amounts of data sharing while not compromising national security, is complicated.

However, most observers said they expect Congress will be able to pass changes to AML regulations now that there is greater bipartisan support, partly driven by broad concerns about the incoming beneficial ownership rule and the increase in digital transactions.

“There seems to be a growing momentum from both sides of the aisle that they all want to get this done,” said Robert Rowe, vice president and associate chief counsel at the American Bankers Association. “Money laundering transactions can happen so fast, in a matter of minutes, and you can see the event happening so quickly, so how to get that information to the right people at the right time is critical.”

Neil Haggerty contributed to this article.

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