Anti-money laundering (AML) violations may not garner the same headlines as toxic mortgage securities multi-million dollar executive bonuses, but terrorist activities abroad in the 21st century have meant increased regulatory scrutiny of banks’ daily operations at home.
Standard Chartered, for instance, recently got slapped with a $300 million fine for its AML compliance problems when it failed to detect potentially suspicious activity at its New York location.
“You see at some of the very largest institutions some of those very big settlements and enforcement actions. I don’t think [regulators] want to be caught asleep at the wheel, so that means they ratchet up the pressure on everyone across the board,” said Jon Skarin, senior vice president, federal regulatory and legislative policy, at the Massachusetts Bankers Association.
On a smaller scale, AML compliance becomes challenging when banks do business with money service businesses that may be commercial customers of theirs. A local convenience store that offers check-cashing services or has a non-bank ATM installed in the corner might be one example, he said.
Pain Points
In a recent report, “AML: Smaller Financial Institutions in Search of Solutions,” the research firm Aite Group explored the day-to-day realities of anti-money laundering compliance at smaller to mid-sized financial institutions, compared with that of the megabanks that generate headlines whenever they’re slapped with a fine.
In the banking world, it’s practically a given that while regulators will say they’re tempering their expectations of smaller community banks with simpler business models, the reality demonstrates that best practices at the very largest financial institutions do eventually trickle down to smaller banks in the form of regulatory expectations.
Julie Conroy, research director for Aite Group’s retail banking practice, specializes in anti-money laundering, among other subjects, and said she studied the problem of AML at smaller financial institutions because she felt she wanted to broaden her coverage of AML beyond the very largest banks.
“I was expecting to hear some points of divergence between big financial institutions and small financial institutions, but I think the extent of that divergence surprised me,” Conroy said. “Some of the things I hear from big financial institutions, for instance the documentation that regulators are asking them to do or the challenges associated with beneficial ownership, none of those really even registered with the smaller guys.”
“I think right now, it really is a tale of two markets. That said, we do typically see that the pain of the big guys does eventually become the pain of the small guys,” she said.
One particular pain point that emerged in Conroy’s report was that of false positives, with a majority of the executives surveyed responding that false positives from either transaction monitoring or watch-list filtering was either a moderate or significant issue.
But Conroy says false positives are a rather universal pain point in anti-money laundering compliance. Executives surveyed in the Aite study also said they would like to see enhancements to currency transaction report (CTR) automation in order to help weed out false positives, and some voiced frustration at the current CTR limit of $10,000 and suggested it should be changed to reflect the present-day value of the dollar.
Smaller institutions also rely more heavily on their core providers, which can make technological choices a bit more challenging, and Conroy said she was also surprised at the number of smaller financial institutions looking to change vendors, with one-third of her respondents saying they were “very likely” or “somewhat likely” to change at least one AML provider within the next few years.
Seeking Solutions
In her report for Aite, Conroy encourages smaller financial institutions to shop around for AML solutions. She also encouraged collaboration and communication between peers and advises smaller banks and credit unions to watch what happens at larger financial institutions for clues as to regulators’ next points of emphasis.
One trend to keep an eye on, for instance, is predictive or behavioral analytics, which will likely emerge as a standard in anti-money laundering compliance in the next few years, Conroy said.
The challenge, especially for smaller financial institutions, is that BSA and AML compliance touch nearly every aspect of banking right on down to the teller line, Skarin said.
And while regulators may step up consent orders and fines for AML violations, Conroy said that unless there’s been willful negligence at play, bankers who’ve been playing by the rules all along ought to be fine.
“As long as they deal with it, they’re not going to get these death penalty types of fines, but if it’s disclosed that there are folks complicit in closing their eyes, then you will see some very significant actions taken,” she said.
Email: lalix@thewarrengroup.com
