Bank Secrecy Act:

Derisking along the Southwest Border Highlights Need for Regulators to Enhance Retrospective Reviews

GAO-18-263: Published: Feb 26, 2018. Publicly Released: Feb 26, 2018.

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What GAO Found

“Derisking” is the practice of banks limiting certain services or ending their relationships with customers to, among other things, avoid perceived regulatory concerns about facilitating money laundering. The Southwest border region is a high-risk area for money laundering activity, in part, because of a high volume of cash and cross-border transactions, according to bank representatives and others. These types of transactions may create challenges for Southwest border banks in complying with Bank Secrecy Act/anti-money laundering (BSA/AML) requirements because they can lead to more intensive account monitoring and investigation of suspicious activity. GAO found that, in 2016, bank branches in the Southwest border region filed 2-1/2 times as many reports identifying potential money laundering or other suspicious activity (Suspicious Activity Reports), on average, as bank branches in other high-risk counties outside the region (see figure).

Average Number of Suspicious Activity Reports Filed, 2016.

Average Number of Suspicious Activity Reports Filed, 2016.

According to GAO's survey, an estimated 80 percent (+/- 11 percent margin of error) of Southwest border banks terminated accounts for BSA/AML risk reasons. Further, according to the survey, an estimated 80 percent (+/- 11) limited or did not offer accounts to customers that are considered high risk for money laundering because the customers drew heightened regulatory oversight—behavior that could indicate derisking. Counties in the Southwest border region have been losing bank branches since 2012, similar to national and regional trends. Nationally, GAO's econometric analysis generally found that counties that were urban, younger, had higher income or had higher money laundering-related risk were more likely to lose branches. Money laundering-related risks were likely to have been relatively more important drivers of branch closures in the Southwest border region.

Regulators have not fully assessed the BSA/AML factors influencing banks to derisk. Executive orders and legislation task the Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) and the federal banking regulators with reviewing existing regulations through retrospective reviews to determine whether they should be retained or amended, among other things. FinCEN and federal banking regulators have conducted retrospective reviews of parts of BSA/AML regulations. The reviews, however, have not evaluated how banks' BSA/AML regulatory concerns may influence them to derisk or close branches. GAO's findings indicate that banks do consider BSA/AML regulatory concerns in providing services. Without assessing the full range of BSA/AML factors that may be influencing banks to derisk or close branches, FinCEN, the federal banking regulators, and Congress do not have the information needed to determine if BSA/AML regulations and their implementation can be made more effective or less burdensome.

Why GAO Did This Study

Some Southwest border residents and businesses have reported difficulties accessing banking services in the region. GAO was asked to review if Southwest border residents and businesses were losing access to banking services because of derisking and branch closures.

This report (1) describes the types of heightened BSA/AML compliance risks that Southwest border banks may face and the BSA/AML compliance challenges they may experience; (2) determines the extent to which banks have terminated accounts and closed branches in the region and the reasons for any terminations and closures; and (3) evaluates how regulators have assessed and responded to concerns about derisking in the region and elsewhere, and how effective their efforts have been; among other objectives. GAO surveyed a nationally representative sample of 406 banks, which included the 115 banks that operate in the Southwest border region; analyzed Suspicious Activity Report filings; developed an econometric model on the drivers of branch closures; and interviewed banks that operate in the region.

What GAO Recommends

GAO recommends that FinCEN and the federal banking regulators conduct a retrospective review of BSA regulations and their implementation for banks. The review should focus on how banks' regulatory concerns may be influencing their willingness to provide services. The federal banking regulators agreed to the recommendation. FinCEN did not provide written comments.

For more information, contact Lawrance Evans, Jr. at (202) 512-8678 or evansl@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Priority recommendation

    Comments: FinCEN did not indicate whether it agreed or disagreed with our recommendation. In April 2018, FinCEN agreed that the retrospective review would be beneficial and said it had been proactively working with stakeholders to review the effectiveness of the BSA regulatory and supervisory framework. FinCEN expects to complete its retrospective review by late March 2019.

    Recommendation: The Director of FinCEN should jointly conduct a retrospective review of BSA/AML regulations and their implementation for banks with Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and Office of the Comptroller of the Currency (OCC). This review should focus on how banks' regulatory concerns may be influencing their willingness to provide services. In conducting the review, the FDIC, the Federal Reserve, OCC, and FinCEN should take steps, as appropriate, to revise the BSA regulations or the way they are being implemented to help ensure that BSA/AML regulatory objectives are being met in the most effective and least burdensome way. (Recommendation 1)

    Agency Affected: Department of the Treasury: Financial Crimes Enforcement Network

  2. Status: Open

    Priority recommendation

    Comments: In its agency comment letter dated February 2018, FDIC said it would work jointly with FinCEN and the other federal banking agencies to review BSA/AML regulations and their implementation for banks, and how banks' regulatory concerns may be influencing their willingness to provide services. They said this review would leverage other, similarly focused interagency work that has occurred or is currently underway. In January 2019, FDIC staff said that FDIC convened a working group in 2018 with the Federal Reserve, OCC, FinCEN, the National Credit Union Administration, and the Office of Terrorism and Financial Intelligence to identify ways to improve the efficiency and effectiveness of BSA/AML regulations and supervision. FDIC staff noted two recent interagency joint statements that resulted from the activities of the working group as examples of the working group's outcomes. The first, issued in October 2018, clarified the permissibility of sharing BSA resources among institutions with lower risk profiles to increase efficiency and reduce burden. The second, issued in December 2018, encouraged innovative industry approaches by banks to enhance the efficiency and effectiveness of their BSA/AML compliance programs. While the establishment of the working group has produced outcomes consistent with encouraging greater efficiency and effectiveness of banks' BSA/AML compliance programs and reducing burden, we have not yet seen outcomes that address the full range of factors that may be influencing banks to derisk or close bank branches. Without assessing the full range of BSA/AML factors that may be influencing banks to derisk or close branches, the federal banking regulators, FinCEN, and Congress do not have the information needed to determine if BSA/AML regulations and their implementation can be made more effective or less burdensome.

    Recommendation: The Chairman of FDIC should jointly conduct a retrospective review of BSA/AML regulations and their implementation for banks with the Federal Reserve, OCC, and FinCEN. This review should focus on how banks' regulatory concerns may be influencing their willingness to provide services. In conducting the review, FDIC, the Federal Reserve, OCC, and FinCEN should take steps, as appropriate, to revise the BSA regulations or the way they are being implemented to help ensure that BSA/AML regulatory objectives are being met in the most effective and least burdensome way. (Recommendation 2)

    Agency Affected: Federal Deposit Insurance Corporation

  3. Status: Open

    Priority recommendation

    Comments: In its agency comment letter dated February 2018, the Federal Reserve said it would leverage ongoing initiatives to respond to our recommendation. Specifically, it noted ongoing work with FinCEN's Bank Secrecy Act Advisory Group to review the efficiency and effectiveness of specific BSA requirements and the Federal Financial Institutions Examination Council's BSA/AML Working Groups to develop and update interagency BSA guidance and examination procedures. Regarding the latter, the Federal Reserve noted it had engaged with industry groups on issues such as derisking. In January 2019, Federal Reserve staff noted that the Federal Reserve convened a working group in 2018 with FDIC, OCC, FinCEN, the National Credit Union Administration, and the Office of Terrorism and Financial Intelligence to identify ways to improve the efficiency and effectiveness of BSA/AML regulations, supervision, and examinations. Federal Reserve staff cited two recent interagency joint statements that resulted from the activities of the working group as examples of the working group's outcomes. The first, issued in October 2018, clarified the permissibility of sharing BSA resources among institutions with lower risk profiles to increase efficiency and reduce burden. The second, issued in December 2018, encouraged innovative industry approaches by banks to enhance the efficiency and effectiveness of their BSA/AML compliance programs While the establishment of the working group has produced outcomes consistent with encouraging greater efficiency and effectiveness of banks' BSA/AML compliance programs and reducing burden, we have not yet seen outcomes that address the full range of factors that may be influencing banks to derisk or close bank branches. Without assessing the full range of BSA/AML factors that may be influencing banks to derisk or close branches, the federal banking regulators, FinCEN, and Congress do not have the information needed to determine if BSA/AML regulations, and their implementation can be made more effective or less burdensome.

    Recommendation: The Chair of the Federal Reserve should jointly conduct a retrospective review of BSA/AML regulations and their implementation for banks with FDIC, OCC, and FinCEN. This review should focus on how banks' regulatory concerns may be influencing their willingness to provide services. In conducting the review, FDIC, the Federal Reserve, OCC, and FinCEN should take steps, as appropriate, to revise the BSA regulations or the way they are being implemented to help ensure that BSA/AML regulatory objectives are being met in the most effective and least burdensome way. (Recommendation 3)

    Agency Affected: Federal Reserve System

  4. Status: Open

    Comments: In its agency comment letter dated February 2018, OCC said it would work jointly with the FDIC, Federal Reserve, and FinCEN to leverage the substantial interagency work that has occurred or is currently underway to review BSA/AML regulations and their implementation for banks. In January 2019 OCC staff noted that the Federal Reserve convened a working group in 2018 with FDIC, the Federal Reserve, FinCEN, the National Credit Union Administration, and the Office of Terrorism and Financial Intelligence to identify ways to improve the efficiency and effectiveness of BSA/AML regulations, supervision, and examinations. OCC staff noted two recent interagency joint statements that resulted from the activities of the working group as examples of the working group's outcomes. The first, issued in October 2018, clarified the permissibility of sharing BSA resources among institutions with lower risk profiles to increase efficiency and reduce burden. The second, issued in December 2018, encouraged innovative industry approaches by banks to enhance the efficiency and effectiveness of their BSA/AML compliance programs. While the establishment of the working group has produced outcomes consistent with encouraging greater efficiency and effectiveness of banks' BSA/AML compliance programs and reducing burden, we have not yet seen outcomes that address the full range of factors that may be influencing banks to derisk or close bank branches. Without assessing the full range of BSA/AML factors that may be influencing banks to derisk or close branches, the federal banking regulators, FinCEN, and Congress do not have the information needed to determine if BSA/AML regulations, and their implementation can be made more effective or less burdensome.

    Recommendation: The Comptroller of the Currency should jointly conduct a retrospective review of BSA/AML regulations and their implementation for banks with FDIC, the Federal Reserve, and FinCEN. This review should focus on how banks' regulatory concerns may be influencing their willingness to provide services. In conducting the review, FDIC, the Federal Reserve, OCC and FinCEN should take steps, as appropriate, to revise the BSA regulations or the way they are being implemented to help ensure that BSA/AML regulatory objectives are being met in the most effective and least burdensome way. (Recommendation 4)

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

 

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