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6 December 2022 / Matthew M. Young

Unlocking the "Secrets" of the Bank Secrecy Act: Your Top Questions, Answered

Did you know that there is an estimated $2 trillion of money laundered across the world every year, according to the United Nations Office on Drugs and Crime? Approximately $300 billion of that money is laundered through the U.S. 
 
It’s not a secret that money laundering has been a major issue throughout history. Back in 1970, U.S. Congress passed the Bank Secrecy Act (BSA) to protect the financial industry against criminals hiding and laundering money. If you work at a credit union or other financial institution, it’s critical to know how you can uphold procedures of the act while also protecting your organization against illegal activity. 
 
One of our shareholders, Matt Young, is the go-to expert on BSA. He offers credit unions and financial services institutions guidance on how to recognize and report fraud, ensure compliance, and more. In our latest webinar, “How to Uphold the Bank Secrecy Act – Keeping Safeguards in Effect,” Matt shared how you can do your part to mitigate any possibility of fraud within your financial institution. 
 

WATCH THE FULL WEBINAR HERE

Here are a few of the top questions answered by Matt during this engaging webinar.
 

1. What is the goal of the Bank Secrecy Act (BSA)?

BSA puts systems, procedures, and programs in place that protect against illicit financial threats. To aid in that goal, U.S. financial institutions are required to assist government agencies by keeping detailed records and reports, designating an individual responsible for compliance, and establishing customer identification programs under the Code of Federal Regulations. 
 
For example, all credit unions are required to establish compliance programs with internal controls such as independent auditing by personnel or a third-party organization. Credit unions also need to designate a compliance officer, such as the CEO (if it’s a small credit union), another dedicated person, or an entire team, who oversees all compliance-related reporting and training. Ultimately, this person or team is responsible for reporting suspicious currency transaction reports. 
 

2. What are the minimum BSA requirements for the financial industry?

Credit unions and other financial services institutions need to conduct independent BSA compliance tests that review overall compliance and individual monitoring systems for suspicious activity reports (SARs), currency transaction reports, and other reporting instruments.
 
The complexity of the testing largely depends on your products, services, customers, size, and geographic location. The ultimate objective of the compliance tests is to capture the data, convey it to the compliance officer and ensure proper SARs are filed. Otherwise, the institution may face penalties and fines. 
 

3. How can your institution be on the lookout for money laundering activity?

SARs are filed for a variety of reasons. However, the most common red flag issues – more than 50% – are related to money laundering. 
 
Money laundering typically involves three stages: placement, layering, and integration. Placement is the most vulnerable stage in which a thief attempts to introduce unlawful or ill-gotten gains into the financial system without attracting attention. 
 
Some common placement red flags to look out for include:
  • Structuring deposits in amounts to evade reporting requirements.
  • Large deposits made in smaller, less conspicuous amounts.
  • Refund check deposits from canceled vacation or insurance policy.
  • Purchasing a series of monetary instruments (cashier’s checks/money orders) that are then collected and deposited to another branch or financial institution. 
 
In the second stage of money laundering, referred to as “layering,” someone may attempt to move funds around the financial system, often in a complex series of transactions, to create confusion and complicate the paper money trail. 
 
Some common layering techniques to watch for include:
  • Exchanging monetary instruments for larger or smaller amounts.
  • Wiring or transferring funds through numerous accounts, in one or more financial institutions.
 
And finally, the third stage of money laundering is called integration. Integration is the ultimate goal of money laundering because it creates the appearance of legality. It further shields the criminal from a recorded connection to the funds by providing a plausible explanation for the source of the money, such as the purchase and resale of real estate, investment securities, foreign trusts, etc. 
 

4. What is a Customer or Member Identification Program (CIP or MIP)?

The key to a MIP, in the case of a credit union, is including risk-based procedures for verifying a member’s identity so the organization can form a reasonable belief that the member is  exactly who they say that they are when opening an account. 
 
Certain procedures for opening an account must exist, including:
  • Name and date of birth (for an individual)
  • Address (residential or business street address for an individual; army or fleet PO number; or a principal place of business, local office, or other physical location)
  • Identification number, which shall be a tax identification number for a U.S. citizen
 
If your credit union relies on non-documentary methods of verification, you must document the procedures in the MIP. Methods may include contacting the member, independently verifying the member’s identity by comparing information provided with information obtained through a public database, checking references with other financial institutions, and/or obtaining a financial statement. 
 
To learn more about BSA and important compliance-related issues and reporting, watch the full webinar here. If you have additional questions on this topic, please reach out to shareholder Matt Young at any time.
 
This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.

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