Lobue News: Oct 06, 2014

BSA/AML Regulations

A Holistic Approach Towards Solving BSA Issues
As legal and regulatory requirements increasingly demand more of the Financial Institution's resources and human capital, Boards and Senior Management are looking for solutions to counteract the rising costs of compliance.  As the cost of compliance remains on a steady exponential rise, fines for non-compliance are getting larger, and the threat to reputational risk weighs heavy.
In the last year alone, bank regulators have imposed enormous fines in civil money penalties for BSA and other issues, and they are certainly not shy in doing so.   Some of the most salient illustrations of recent fines for non-compliance are the US Attorney’s Office fine to JP Morgan Chase as mandated by FINCEN in the amount of $2.0 Billion, the Justice Department’s tentative $13 Billion penalty to JP Morgan Chase for questionable mortgage practices resulting from a breakdown of controls and Bank of America’s $16.6 Billion penalty from Regulators and the US Justice Department.  HSBC for example, agreed to a $1.9 billion penalty last year over money laundering accusations while TD Bank was given a $37 million fine in civil money penalties for AML violations.  Many other local, super regional and global banks have been cited with numerous consent orders and cease-and-desist orders issued by the OCC and the FDIC.   The regulatory environment has changed and the effects will be lasting.
As fines are levied across the industry, giving attention to the need for compliancy, the costs of remaining compliant have grown exponentially.  Regulators have pushed for more and more compliance staff, which has in turn increased demand and, consequently the cost for such talent.   In the last 24 months alone, tens of thousands of BSA/AML staff positions have been posted for hire into BSA/AML compliance departments.  Most newly assigned compliance staff are involved in KYC activities, mainly conducting transaction monitoring activities.  In the case of those banks sanctioned by regulators for falling short of properly managing the BSA function, compliance staff are performing a myriad of “transaction back-testing” reviews, a typical activity imposed on banks by regulators when examiners find inappropriate application of AML policies and procedures. 
The continued pressure to add more resources as a way to remain compliant has given rise to unintended consequences.  There has been a rapid depletion of experienced BSA/AML resources with the necessary knowledge, experience, or appropriate professional certifications. This situation exposes a new risk to financial institutions as they deploy newly trained yet inexperienced staff, increasing the likelihood of inadvertently missing prevention or detection of financial transactions that in fact should be flagged and treated as suspicious transactional activity; or similarly, overlooking transactions while conducting back-testing that should have been properly reported to the regulatory agencies. Perhaps the biggest risk is sending the message that, with all the newly assigned staff, that the compliance departments are solely responsible for compliance, while the most effective controls occur on the front lines and within the operations functions.
With this dilemma on their hands, regional and global banks, working in close collaboration with technology companies, are developing increasingly innovative methods of conducting automated transaction monitoring activities such that they can provide early detection of synthetic identities and potentially suspicious transactions. These technology solutions are typically based on “intelligent approaches” with self-learning capabilities for early detection and prevention of suspicious financial transactions, thereby systematically reducing the manual approach performed by BSA compliance individuals. The automated transaction monitoring approach, which is largely based on scanning mega-loads of data from numerous internal and external sources including public and private data repositories, associates banking transactions to this information and determines if any part of the transaction is potentially illegal so the corresponding regulatory agencies can be properly notified.
Although these intelligent, or heuristic, automated transaction monitoring capabilities are becoming an essential part of the ‘arsenal of tools’ that financial institutions are equipping themselves with, banks are quickly recognizing that simply deploying powerful automated tools such as the ones currently evolving and coming to the markets, do not immediately result in the efficiency and cost reductions they had anticipated.  In fact, banks are increasingly aware that while the accuracy of “potential hits” within transaction monitoring has positively increased, the staffing levels and expenses required to maintain an effective operation remain largely unchanged, especially since the pressure from regulators to increase compliance staff has not subsided.  As is the case with all automated tools, a deep understanding of the inherent process is what allows the tool to be effective.  Both regulators and internal bank staff need to have a clear understanding of the underlying logic which drives the automation for both to be convinced that fewer, well trained staff using the tool is better than the prevailing more-is-better approach. 
To properly leverage the use of technology and automation in the increasingly complex BSA/AML operations, the entire process must be thought of in very different ways.  The complete solution will not be found only by increasing staff and/or adding technology within the compliance department.  Rather, operational alignment and tighter integration is needed with other functional areas of the bank, including the initial customer touch points, Marketing and Sales, Branch and Loan Operations, Transaction Processing, Statement and Billing, Finance, Legal and Collections operations.
The LoBue Group maintains high specialization in Operations Rationalization, Sales and Service Optimization and Business Strategy, providing consulting services to financial institutions for over 35 years. If you’d like to optimize your Compliance resources, we can help. Contact LoBue Associates today to learn about our no-cost assessment, which provides you with a rapid deep dive on your pain points and process issues. 

Carl LoBue, Jr., President, LoBue Americas, clobuejr@lobue.com

Wilfried Jackson, Program Director, wjackson@lobue.com
Process standardization coupled with smart integration using advanced operating models will enable Banks to effectively implement and benefit from new technologies which will better support transaction monitoring activities and gain the flexibility to rapidly scale operations in a controlled environment.
                                                                                                                The LoBue Group