Trump immigration crackdown hurting small banks on border

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It’s getting more and more expensive for small banks to do business in U.S. border towns.

While life for banks on the U.S. divide with Mexico has always come with heightened security worries, bankers say that compliance costs have soared in recent years as they have had to strengthen their defenses against money laundering amid increased scrutiny from regulators and law enforcement.

At the same time, they are seeing commerce slow in border towns as a federal crackdown on illegal immigration has created bottlenecks at border checkpoints and discouraged residents of Mexico from crossing the border to buy goods and services.

The upshot is that some banks are either exiting border towns or shuttering branches, and there’s concern in banking circles that these trends could accelerate if the cost of doing business continues to climb.

“For a smaller institution to spend hundreds of thousands of dollars on [compliance] it’s a drag on earnings,” said Les Parker, the CEO at United Bank of El Paso del Norte.

The biggest cost comes from compliance with the Bank Secrecy Act, a 1970 law that has been tweaked over the decades to require institutions to more aggressively monitor transactions for money laundering, fraud, human trafficking and terrorism financing.

Suspicious activity reports, or SARs, serve as red flags banks raise with federal regulators when scouring accounts and dealings with customers. Banks file a report whenever criminal activity has taken place above certain dollar thresholds, or they are made when wrongdoing is suspected and involves transactions totaling as little as $5,000.

SARs filings from border states have risen in recent years as the Trump administration has cracked down on illegal immigration, and banks have felt pressure to more aggressively scour accounts to make sure they aren’t unwittingly facilitating illegal activity.

“We're an extended arm of these law enforcement agencies, but we're not being paid for it,” said Terry Frydenlund, the CEO of the $321 million-asset 1st Bank Yuma in Arizona.

In California, for instance, the number of suspicious activity reports filed by banks climbed from just over 316,00 in 2013 to 540,000 in 2017, according to data from the Financial Crimes Enforcement Network within the Treasury Department. The number of SARs filed by banks in Texas climbed from above 184,000 in 2013 to nearly 250,000 in 2017, Fincen data shows.

After dropping from a spike in 2013 seen in Arizona, SARs filed by banks there gone on a similar climb since. And in New Mexico, filings have almost quadrupled over the past five years.

The pace of filings did slow last year, but bankers say that’s in part because a number of banks have exited or closed branches in these markets because of the higher expenses of performing the scans.

The Yuma metropolitan statistical area had 20% fewer branches in 2018 than it did five years earlier, according to data from the Federal Deposit Insurance Corp. Total branches in El Paso, Texas, have declined by 11% and in Brownsville, Texas, they have fallen 13% in the same five-year period.

Frydenlund said he believes there is a direct link between the heightened regulatory scrutiny and the decline in branches.

“If the scrutiny for BSA stays where it's at,” he added, “you'll see other banks withdraw.”

Parker said his $250 million-asset bank has had to make constant technological upgrades over the years to keep up with regulators’ and law enforcements’ expectations for tracking potential wrongdoing.

Compliance costs, he said, “went from low six figures to medium six figures very quickly.”

While scrutiny from examiners has certainly increased, some bankers acknowledged that they are going beyond what’s required of them for BSA and anti-money-laundering compliance because immigration has become such a politically charged issue.

“We spent a lot of money making sure that everything is correct,” said Ignacio Urrabazo, the CEO at the $590 million-asset Commerce Bank in Laredo, Texas. “The last thing I want is to have Commerce Bank in connection with money laundering.”

Still, law enforcement’s heightened focus on illegal immigration is taking a toll on banks' business clients, which depend on residents in both the U.S. and Mexico moving freely across the border.

In particular, trucking companies that operate along the border and retail shops and malls have seen business slow as more border agents have been deployed at U.S. entry points, said Karen Neeley, the general counsel for the Independent Bankers Association of Texas.

“There's a huge slowdown in the ports of entry that is affecting economic activity all along the border,” Neeley said.

Executives at the border also say that lending to businesses has grown too costly given the amount of screening required to avoid any risk of facilitating money laundering or fraud.

“In some cases the expense is greater than the return,” Frydenlund said.

Industry trade groups and large banks have historically shied away from commenting on immigration, but that’s changing.

Earlier this year, Dennis Nixon, the CEO of the $11.8 billion-asset IBC Bank in Laredo and the chairman of its parent company International Bancshares, wrote an open letter that was sharply critical of the Trump administration’s efforts to build a border wall. He said that funds should instead be used to patrol the Rio Grande more efficiently and clear backlogs in immigration courts.

“The Trump Administration should speak with people who live and do business in border communities here in Texas to find practical solutions for both border security and immigration policy,” Nixon wrote. “Doing so will help build broad support for initiatives that are far more effective and far less costly than a border wall, and that serve the long-term interests of the United States.”

Urrabazo, whose Commerce Bank is a subsidiary of International Bancshares, said that the industry needs to become more involved in pushing immigration reform.

“We have a role to play here as banks,” he said. “Is the immigration issue relevant? Yes, it is relevant to us.”

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