“The sky was bright, a traffic light, now and then a truck
And they hadn’t seen a cop around all day…”
—Last Days of May, Blue Oyster Cult
Have things been cool with you and your regulator lately? Credit quality’s clean? Strong earnings? CRA performance is looking downright Satisfactory? Well, I guess it’s time to kick back and relax in the warm, friendly waters of regulatory comfort, right? I don’t think so…..
The Holy Crap! Button has been hit by banking regulators recently. Some of you know already, the rest are about to know it. Tough BSA/Money Laundering enforcement is the next Big, Big Thing coming from Bank Cop Land. This is not going to be your garden variety Federal Checklist-a-thon. No, GonzoBankers, this newfound Big, Big Thing is going to feature card tables full of coffee-swilling examiners in bank basements for months at a clip, disdainful press releases, and cease and desist orders. Banks that are failing to scour their cash wire histories for evidence of money laundering, carelessly filing SARs or generally unable to prove that they are proactively trying to win the war are going to be in for an ugly awakening.
There are two kinds of regulatory panic buttons. The Official Panic Button is hit to quiet the media and deflect general criticism about a particular issue. The Official Panic button is acting; it’s the sissy panic button that results in added but predictable regulatory scrutiny du jour.
The second type of panic button, now being hit in reaction to our banking system’s money laundering problems, is the Holy Crap! Button. This is the button that gets pressed by sweaty-armpitted senior bureaucrats after they get The Call. The Holy Crap! Button is usually the result of stern congressional pressure or a scathing GAO report. When the Holy Crap! Button is hit, examiners start camping out in banks for indeterminate time periods. Specialists, the savviest career examiners and anal attorneys are carpooled across the country to kick ass and name names. Actually solving the problem, not generating sound bites, is the goal here.
I have spent considerable time in recent weeks talking with friends – compliance officers, bank examiners and auditors. (I know, I run with a wild crowd.) They all agree that the next round of BSA exams is going to be brutal and result in scores of headlines, scare the living bejeezus out of many bankers, and seriously irritate the rest. The money laundering game has evolved; the stakes and sheer dollar volumes are rising; and some powerful fingers (Congress, FinCEN, etc.) are pointing at bank regulators to shape up and fix things or let someone else do the job.
Money laundering has gone high tech. We’re not dealing with Cousin Jed moving the cash proceeds from his moonshine sales through your Uncle Cletus’s Laundromat business. No, it’s all in the Wires now, electric money coming and going so fast it makes you goofy. It’s drug money from the Black Market Peso Exchange being wired through nested correspondents. It’s billions hidden annually by international financial scammers, drug lords and arms czars. It’s offshore banks helping U.S. citizens hide money from the IRS. And the common denominator is…the use of fast, automated electronic payment systems via U.S. banks, often through correspondent banking relationships.
Yes, our country’s banks are indeed right there in the thick of money laundering – sometimes knowingly, often unwittingly. Either way, the newfound bigshots at FinCEN think that neither banks nor banking regulators are making even a passable attempt at stopping it. FinCEN has Congress’s ear, and Congress has always had the regulators by the ear.
“Some things…will never change
They just stand there looking backwards
Half unconscious from the pain
It may seem…rearranged
In the backwater swirling there
is something that’ll never change”
—Backwater, Curt Kirkwood (Meat Puppets)
The root of the problem, according to my esteemed colleagues, is that the vast majority of banks are doing absolutely nothing to monitor their wire activities for money laundering. Nada, amigos. Some banks know what’s going on, but they don’t want to KNOW. Whether they do not want to stop the fee income from wire traffic or do not want to formally uncover something unsavory in their customer base, some banks who should know better do nothing to monitor wire activities. You can’t stop something if you don’t know it exists, right? Nudge nudge, wink wink.
Other banks, even very large banks, have no idea how real the risk in their wire room is. They do not know how quickly they can get fined, nor how dramatically the nasty headlines can affect their reputations, nor how reputation risk is truly tangible and malignant. Ask the boys at Riggs how far down a fine and a headline can take you.
Criminals are using our banks’ wire systems to launder untold trillions of dollars each year, and the sheer scale is staggering. According to John Walker Crime Trend Analysis, “a total of over $2.8 trillion is obtained for global money laundering” each year, with nearly half of that originating in the United States. One of our country’s largest banks processes over $2.3 trillion in wires per day. That’s like daily churning through the entire United States credit union and thrift industries combined. You run that kind of volume through a single bank’s wire department in a day, and some critical details are going to fall through the cracks unless that bank is trying really hard to find ne’er-do-wells.
The risk is real, and pressure from FinCEN and Congress along with the sheer scale of potential graft ensures that regulators are going to continue to take off their gloves and make examples out of banks. The regulators’ weapon of choice will not be some wimpy MOU this round, friends. No, they will be wielding very public Cease and Desist Orders, the required document (by Congressional order) for banks that are found to have inadequate internal controls when it comes to BSA and Money Laundering. REQUIRED C&D Orders, and there is no “knowingly and willfully” requirement! Examiners used to be more lenient here, but Congress has forced the Feds to sharpen their blades.
GonzoBanker is not the forum for a how-to on money laundering compliance. But, as I asked these industry experts what are the key red flags to look for as bankers evaluate their own wire shops, the advice was consistent. If you see the following at your bank, you are going to want to make sure that your house is in order before your next exam:
I will supply you with one more piece of advice that every expert I spoke with mentioned: Do Transaction Testing. This is where you take a sample of wire transactions and test them for irregularities and commonalities such as:
The keys to success in transaction testing are:
Transactional testing is what the regulators now require but almost never see. Examiners say that even expensive external BSA reviews are nearly always myopic in their focus on policies and procedures. In fact, none of the experts I interviewed could recommend a software tool for wire-based money laundering detection because the most they had seen in use so far was a home-grown Excel download. (However, a quick Google search found that fraud/money laundering tools for the wire room are available from vendors such as Carreker, IBM and SAS.)
Bankers, I feel your pain on the BSA and money laundering front. You have received ambivalent and conflicting instructions from the Feds on what you should be looking for and a sliding scale of interpretation and enforcement as the topic has gained weight. How deeply do you have to know your customers’ customers? We’re not positive yet, thanks to regulators, Congress, FinCEN, etc. and their inability to communicate, but let us not kid ourselves, GonzoBankers. The feds have hit the Holy Crap! Button, and banks are only riding shotgun now. You can fight the good fight and whine about incompetent examiners, but at the same time you better get educated on what you need to do and err in the short term on the side of over compliance. (Have you ever seen a Board member’s face after the compliance officer blames a bad exam on shoddy examiners?) The risks are real, and the potential fraud and regulatory downsides are staggering.
Regulators, I agree that the level of controls implemented by most banks has not been commensurate with the level of risk out there. I also understand that much of your heavy-handedness recently comes from a grandstanding Congress and other external pressures. But, you just have to get your act together and deliver consistent expectations. Your inability to do that along with the heavy official paperwork you’re laying on banks with seemingly minor internal control problems is causing an expensive reaction in big and small banks nationwide. Hell, I have a $2 billion client with 5 FTE devoted to BSA and money laundering compliance. I suspect that as regulators this is not what you had in mind, but I could be wrong. You tell us.
(See this Senate report on money laundering for background, stats used in this article and some wild case studies.)