For many bankers, it’s hard to imagine a time before the Bank Secrecy Act, with its exam prep and raft of compliance demands. That’s because this piece of US legislation turned 50-years old in 2020, and the days before financial institutions were required to help the government detect and prevent criminals from laundering or hiding money obtained illegally are now a distant memory.
When the BSA was originally enacted, it made history as one of the first examples of dedicated anti-money laundering legislation in the US and the world.
Practically speaking, the BSA means that banks and credit unions, among other financial businesses, must keep extensive records and file reports that may prove useful in criminal, tax, and regulatory matters. As it says on the IRS website: “The documents filed by businesses under the BSA requirements are heavily used by law enforcement agencies, both domestic and international, to identify, detect and deter money laundering whether it is in furtherance of a criminal enterprise, terrorism, tax evasion or other unlawful activity.”
For banks and credit unions, the BSA occupies considerable mental mindshare and is a large budgetary item. The amount of money spent on financial-crime compliance rose sharply during the pandemic. A recent study found that this one area of compliance alone cost US financial firms $35.2 billion in 2020.https://www.complianceweek.com/aml/study-financial-crime-compliance-costs-top-42b-in-us/canada/29626.article
Some Important Milestones
Here are some key events that helped shape the BSA’s evolution over the past 50-plus years:
● How and why the BSA came to be. The BSA was enacted in response to large currency deposits of illicit profits, according to the US Treasury’s Financial Crimes Enforcement Network, or FinCEN, website. The original BSA was passed by Congress and signed into law by then President Richard Nixon on October 26, 1970.
● The Supreme Court upholds the BSA. Soon after the BSA was passed, groups attempted to have courts rule the law unconstitutional on the grounds that it violated the Fourth Amendment right against unwarranted search and seizure, as well as Fifth Amendment rights of due process. The Supreme Court ruled that the BSA was constitutional in 1974: California Bankers Assn. v. Shultz. In a second Supreme Court challenge in 1976, the high court overturned a lower court ruling, establishing that the BSA did permit law enforcement to access customer bank records.
● The BSA goes largely ignored for many years. During the 1970s and much of the ‘80s, financial institutions paid little attention to the BSA. When banks and credit unions did begin to comply, however, money launderers and tax evaders started structuring their transactions in new ways so that their activities would sidestep government reporting. https://digitalcommons.law.scu.edu/cgi/viewcontent.cgi?referer=https://en.wikipedia.org/&httpsredir=1&article=1058&context=lawreview
● Legal sanctions reinforce the importance of the BSA. The penalties for financial institutions that run afoul of the BSA are stiff. In 2010, for instance, Wachovia paid $160 million to end a government probe after admitting serious violations of the BSA by not having an effective anti-money-laundering program. Wachovia’s failure to comply with the BSA was believed to have allowed Mexican and Colombian drug cartels to launder $420 billion between 2003 and 2008. https://web.archive.org/web/20100323010353/http://www.businessweek.com/news/2010-03-18/wachovia-to-pay-160-million-to-end-money-laundering-probe.html
● September 11th terrorist attacks lead to expansion of the BSA. In 2001, the government passed the USA Patriot Act with overwhelming bipartisan support; this legislation was designed to help detect and prevent the financing of terrorism.
One key aspect of the USA Patriot Act was the strengthening and expansion of reporting and record-keeping under the BSA. As part of additional record-keeping requirements, financial institutions were tasked with establishing their own anti-money laundering programs, complete with appropriate internal policies and controls. Among the new requirements was the need to verify the identity of customers by collecting names, addresses, and dates of birth—and checking this personal information against international sanctions and watch lists.
● In 2005, the FFIEC BSA/AML examination manual was published. This manual reinforced the idea that financial institutions need to establish and run sound BSA programs and provided examiners with procedures for examining BSA procedures at financial institutions.
● BSA software boosts compliance. Over the years, companies like RiskScout began providing compliance software for banks and credit unions so that managing high-risk bank customers is less of a burden. BSA/AML software can help with daily compliance management for high-risk banking programs.
● AMLA passes on January 1, 2021. The passage of the Anti-Money Laundering Act of 2020 helped to modernize the BSA by responding to the money-laundering threats posed by a broader range of entities. AMLA, for instance, expanded BSA/AML into the trade of antiquities and art and brought the providers of cryptocurrency wallets and crypto exchanges under the scope of BSA legislation, increasing crypto banking challenges. https://legal.thomsonreuters.com/en/insights/articles/4-takeaways-on-bsa-aml-reform
So remember, the BSA has been a moving target for years. One that has continued to change to meet the needs of the time and to be more effective in its purpose of identifying, detecting, and deterring illicit activity. This ever shifting landscape reminds us how important it is for BSA regulated entities to review and update their BSA program for it to remain effective and compliant on a recurring basis.