GAO Report Finds BSA "Derisking" Practices Along Southwest Border Limiting Banking Services
Written by Shari R. Pogach, Regulatory Paralegal, NAFCU
The U.S. Government Accountability Office (GAO) released a report in February concerning the impact of "derisking" by financial institutions along the Southwest border. Derisking is the practice of limiting certain services or ending a customer relationship to avoid perceived regulatory concerns about facilitating money laundering. The study was undertaken due to some Southwest border residents and businesses reporting problems in trying to access banking services in the region because of derisking and branch closings.
The survey audit was conducted from March 2016 to February 2018 on a nationally representative sample of 406 banks, including the 115 banks operating in the Southwest border region. A total of five discussion groups across three Southwest border locations were conducted to determine what banking customers and others said about the impact of account terminations and branch closures on their communities. The sessions included business banking customers and nonbusiness retail banking customers. The GAO also interviewed economic development specialists, industry and trade organizations that focus on border trade and commerce, and chambers of commerce and municipal officials.
With its high volume of cash and cross-border transactions, and large number of foreign accountholders, the Southwest border region is considered a high-risk area for money laundering activity. As a result, the GAO found that banks have to engage in more intensive, frequent monitoring and investigating of transactions in order to comply with anti-money laundering (AML) regulations under the Bank Secrecy Act (BSA). The GAO report found that: 1) the average number of SARs filed was two and a half times the number for high-risk counties outside the region; 2) 80 percent of banks in the region terminated accounts due to risks related to BSA/AML; 3) 80 percent limited or did not offer accounts to certain businesses considered high risk for money laundering and terrorist financing because those customers drew heightened oversight; and 4) money-laundering risks were a more important driver of branch closures in the region than elsewhere.
The GAO recommends that FinCEN and the federal banking regulators do a retrospective review of the BSA regulations with a focus on how regulatory concerns may be influencing banks' willingness to provide banking services. According to the report, the regulators have not fully assessed this in previously conducted reviews of parts of the BSA/AML regulations. The prior reviews have not evaluated how banks’ BSA/AML regulatory concerns may influence them to derisk or close branches as the study shows banks do make such considerations when providing services. In making its recommendation for a retrospective review, the GAO report states, "Without assessing the full range of BSA/AML factors that may be influencing banks to derisk or close branches, FinCEN, the federal banking regulators, and Congress do not have the information needed to determine if BSA/AML regulations and their implementation can be made more effective or less burdensome."
Credit unions serving areas of heightened money laundering concern may want to remember that a well-developed risk assessment is paramount to the development of a strong BSA/AML compliance program to effectively mitigate risk. The Federal Financial Institutions Examination Council's (FFIEC) BSA/AML Examination Manual indicates an institution's risk assessment and internal controls must appropriately identify risk within its operations (products, services, customers, entities and geographic locations) and incorporate the risk into its BSA/AML compliance program. Appendix I to the manual diagrams the risk assessment link to an institution's BSA/AML compliance program.