Long-awaited Bank Secrecy Act reform may finally be on the way

Eric Lee/Bloomberg

For some time, it has been widely recognized that the Bank Secrecy Act, or BSA, is in dire need of reform. The current BSA framework is rooted in 20th-century concepts and approaches, which are not only inefficient and costly to administer, but largely ineffective. It requires banks to devote substantial but finite resources ostensibly to identifying illicit activity while, in reality, chasing down large numbers of false positives and ensuring technical compliance with a slew of regulations. Consequently, the costs of compliance are exorbitant, but the amount of illicit activity that is identified represents only the tip of an iceberg. The case for BSA reform could hardly be more compelling.

While BSA reform has been discussed for many years, up until now there has been very little action. However, the time may be ripe for meaningful BSA reform. Unlike in the past, there appears to be a genuine commitment to reform at high levels of the government. Not only are senior officials in the Treasury Department on board, but leadership of the federal banking agencies is aligned with Treasury and each other. Much-needed changes to the existing BSA framework may finally be at hand.

Thus far, Treasury and its bureau, the Financial Crimes Enforcement Network, or Fincen, have taken significant steps to improve the efficacy of the system and ease unnecessary regulatory burden. For example, earlier this year, Fincen and the banking agencies issued an order that exempts banks from the requirement to obtain a customer's taxpayer identification number directly from the customer. And, recently, those agencies issued a set of frequently asked questions regarding suspicious activity reporting requirements, reversing longstanding supervisory expectations (and in some instances supervisory guidance) that were never intended by the regulatory requirements.

Additional steps appear to be forthcoming. Undersecretary John Hurley recently gave a speech in which he outlined Treasury's plans for BSA reform. In addition to suspicious activity reporting, Undersecretary Hurley cited changes to examination practices that would measure program effectiveness on the basis of outcomes rather than technical compliance with rules, and promotion of artificial intelligence and other forms of innovative technology to provide meaningful results and facilitate compliance.

If implemented properly, these are important changes that will fundamentally alter the BSA landscape for the better. Banks could revamp their BSA programs to dedicate compliance resources to activities that have the highest value to law enforcement while de-emphasizing lower-risk areas. For example, they could file fewer Suspicious Activity Reports, or SARs, for structuring of cash transactions; eliminate continuing activity reviews of already reported suspicious activity; and be freed from the burden of extensively documenting SAR no-file decisions. In addition, banks could use AI and other forms of modern technology without fear of criticism from supervisors if a new system fails to identify a suspicious transaction that would have been detected by their old system, or an expectation that the new system run in parallel with the old system in perpetuity.

Law enforcement would also benefit from well-developed SARs focused on potentially serious criminal activity, while reducing the number of low-value SAR filings such as so-called "defensive" SARs. As program enhancements continue to progress and Fincen and the banking agencies continue to redefine requirements, banks will increasingly be able to focus on matters of most concern to law enforcement and national priorities. This will ultimately result in fostering stronger collaboration, further enhancing public trust and improving overall effectiveness in combating financial crime. Banks that provide timely, useful information to law enforcement would be recognized for having effective BSA compliance programs.

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While the current environment appears poised for reform, banks should proceed carefully and maintain strong governance when implementing changes. Clear documentation, defined procedures and evidence of continued compliance with regulatory requirements are essential. While permission is not required to make changes to a bank's BSA program, engaging with examiners and supervisory agency staff to explain changes can be helpful.

Ultimately, whether these reforms will have a real, lasting impact will depend on how they are implemented by agency examiners. The reality is that, regardless of the policy pronouncements of senior officials in Washington, it is the examiners in the field that actually assess compliance with the BSA, and it is their views that matter most. For example, if examiners continue to challenge banks' decisions not to file SARs, banks will be obligated to thoroughly document those decisions or file a SAR to avoid criticism. Similarly, if examiners disagree with a bank's judgment on cash structuring or continuing activity reviews, banks will be compelled to comply with examiners' expectations, even if the reforms suggest otherwise.

Examination practices are deeply ingrained, making reform challenging for federal banking agency leadership. Treasury and federal banking agency senior leadership appear to recognize this and have committed to changes to examination procedures and training for examiners. Still, meaningful, lasting reform will require more than that and will essentially depend on a shift in examination culture. This is no easy task, but it is critical if BSA reform is to truly succeed.

Banks play an important role in BSA reform. Besides making their voices heard in response to proposed changes to regulations and guidance, banks can lead by example in establishing industry practices that are faithful to the agencies' reform agenda. By communicating these practices to their examiners, banks can help examiners become familiar with them as new industry standards.

The challenges of accomplishing meaningful BSA reform should not be underestimated. But there is a real opportunity now to achieve positive, lasting changes resulting in a modernized BSA framework that better serves the needs of law enforcement while reducing the exorbitant costs and burdens of BSA compliance. This opportunity should be seized, as it may not come again.