Reducing the regulatory burden on small and midsize banks is a hot topic in Washington these days. Proponents of reform point to a recent report from the Harvard Kennedy School of Government, "The State and Fate of Community Banking," which found that the rising wave of consolidation in this sector "is likely driven by regulatory economies of scale" and that "larger banks are better suited to handle heightened regulatory burdens than are smaller banks, causing the average cost of community banks to be higher."

Compliance costs for Bank Secrecy Act and anti-money-laundering requirements stand out among the most onerous of these burdens. Indeed, the American Banking Association has identified BSA and AML requirements as "the most costly regulatory burden." In a 2012 survey of bank compliance officers, the ABA "found that mid-sized banks ($1-$9 billion in assets) have an average of four full-time compliance employees dedicated to BSA/AML functions." Many smaller banks do not have that kind of capacity.

Realistically, regulatory relief is unlikely to come in the form of relaxed BSA and AML protocols. The threat of terrorist financing and other criminal activity is too pressing for either Congress or banking regulators to retreat from their exacting standards. But standards need not slacken in order for community banks and other small financial institutions to find respite. There is a private market solution to this public challenge.

In this day and age, community banks should not be hunting global money launderers on their own. The price of technical competence is both far too high and a poor allocation of resources. BSA and AML compliance would be best achieved by smaller institutions with the assistance of expert third-party service providers. By aggregating clients, such vendors could implement proper divisions of labor and thereby lighten the regulatory burden with economies of scale.

In order to understand how BSA and AML compliance vendors could help ease community banks' regulatory burden while strengthening their controls, it's useful to consider three significant obstacles that small banks currently face in this space.

Shortage of Talent. Right now, the market is short on qualified personnel to satisfy expanding BSA and AML demands. Some experts think that large banks will confront this human resources problem by investing in BSA and AML training programs and repurposing other employees. However, as American Banker reported in December, "smaller institutions may have trouble finding people with the right quantitative skills to develop those programs and systems." This is bad news: endless staff poaching is not a sustainable compliance strategy.

Independent service providers, however, should be able to attract, train and maintain adequate numbers of BSA and AML professionals in order to leverage staffers on behalf of multiple clients. Succeeding in that task will be a keystone of their business.

Insufficient and Outdated Technology. In the AML arena, technology is the engine of success. Technology is quickly evolving, and the high costs of keeping up with rapid developments can be challenging or even prohibitive for individual community banks.

It makes little sense for each institution to reinvent the wheel and separately pay for it. That compliance model is obsolete. High technology costs should be borne by specialized businesses that can most efficiently spread them.

Industry Derisking. In the past year, many large banks have exited entire business lines or particular business segments because of the perceived BSA and AML regulatory risk. As a result, those riskier businesses are becoming customers of smaller banks. This is cause for concern, since smaller institutions are less likely to have the stringent controls that their larger competitors have in place. Small banks can mitigate these concerns by using expert BSA and AML service providers.

Vendors could also provide community banks and other like-size institutions with greater flexibility to offer new products and services. Before expanding into any new business line, responsible management should always ask whether an institution has "the expertise, capacity, and compliance resources to take on the new product or service," as the Federal Reserve Bank of San Francisco's BSA/AML risk coordinator Bronwen Macro writes. A free-standing and easily accessible reservoir of sophisticated BSA and AML controls could help banks answer that question far more quickly.

For all these reasons, federal and state bank supervisors might consider promoting the development of expert BSA/AML compliance vendors for community banks. This plan has advantages for regulators, too. Vendors could help standardize BSA and AML practices in a highly balkanized environment, thereby facilitating the work of bank examiners. And their bird’s-eye view of multiple client institutions could help regulators spot problematic or suspicious trends across several banking sectors.

One old adage remains true. Necessity is still the mother of invention — especially in a world of increasing regulatory burden.

Daniel S. Alter is an adjunct professor and senior fellow at New York University Law School's corporate compliance and enforcement program. He previously served as general counsel to the New York State Department of Financial Services.