Key Takeaways:

• The Bank Secrecy Act (BSA) is a U.S. federal law enacted in 1970 to combat money laundering and terrorism financing.
• BSA mandates financial institutions to record transactions, report cash transactions over $10,000, and monitor suspicious activities.
• FinCEN oversees BSA and collaborates with international Financial Intelligence Units (FIUs).
• BSA compliance programs include internal controls, independent testing, designated BSA officers, training, customer identification, and customer due diligence.

 

Money laundering is a thriving global crime industry. Criminals leverage financial institutions to transfer illegal funds, evade taxes, and violate other financial regulations, thereby introducing illicit gains into the economy as legitimate profits. The challenge of tracking and reporting such criminal activities has persisted.

Fortunately, the Bank Secrecy Act, enacted in 1970, provides a framework to address these issues. The act actively addresses critical questions, such as how to track, report, and stop criminal money movements.

What Is the Bank Secrecy Act (BSA)

The Bank Secrecy Act (BSA) is a vital federal law in the United States, engaging financial institutions to assist government agencies in identifying and preventing financial crimes, including money laundering and terrorism financing. Established in 1970 under the Currency and Foreign Transactions Reporting Act, the BSA has evolved through multiple amendments to combat changing criminal strategies.

How Does the BSA Work?

The BSA imposes key requirements on financial institutions:

• Maintaining records of all financial transactions and cash purchases of financial instruments.
• Filing reports for cash transactions exceeding $10,000 in a single day or for suspicious activity indicative of potential criminal activity.
• Monitoring and reporting structuring, the practice of breaking down large transactions into smaller ones to circumvent reporting thresholds.

Who Enforces the BSA?

Both the Office of the Comptroller of the Currency (OCC) and the Internal Revenue Service (IRS) play crucial roles in enforcing the BSA. The OCC regularly examines banks and financial institutions to ensure compliance with BSA regulations. The IRS, through its Anti-Money Laundering (AML) program, plays a key role in combating illegal financial activity by requiring businesses to report cash transactions exceeding $10,000.

The BSA is an important tool in the fight against financial crime. By requiring financial institutions to report suspicious activity and large cash transactions, the BSA helps law enforcement agencies to identify and investigate criminal activity.

Brief History of the Bank Secrecy Act (BSA)

The Bank Secrecy Act (BSA) was established in 1970 with the primary goal of fighting money laundering, also known as anti-money laundering (AML) policies. This legislation was one of the earliest attempts to combat the movement of illegal funds within the financial system. As terrorism financing is also a product of money laundering, the BSA policies simultaneously target terrorism funding. Criminals were using the banking system to launder money, fund terrorism, and acquire weapons of mass destruction, hence the need for the BSA.

Initially, the BSA faced resistance in the U.S. with claims that it violated the fourth and fifth amendments, which are the rights against unwarranted search and seizure and the right to due process, respectively. However, a California court upheld the constitutionality of the BSA regulations. Since then, the BSA has been gradually embraced by U.S. financial institutions, with compliance improving steadily since 1980.

The BSA has undergone several amendments, including one covered under the 2001 USA PATRIOT ACT, which was a response to the 9/11 terrorist attack. Under this amendment, financial institutions actively must establish internal anti-money laundering policies to combat the financing of terrorism. The Patriot Act specified procedures and controls, such as having designated compliance officers, providing continuous employee training, and conducting independent audits to test these controls.

The Role of FinCEN in BSA

The Financial Crimes Enforcement Network (FinCEN) is responsible for administering the Bank Secrecy Act and enforcing policies and regulations on financial institutions to prevent illicit use by criminals. Its main objective actively aims to protect financial institutions from exploitation by criminals and actively combat money laundering and other financial crimes. FinCEN achieves this through collecting and analyzing financial transaction data, utilizing available financial intelligence, and strategically employing financial authorities.

The United States Congress has given FinCEN the responsibility to analyze and manage data reported under FinCEN’s purview, including other related data that helps the government safeguard the financial system. Below is a list of some of these responsibilities:

• Issues and interprets guidance and regulations authorized by the government.
• Enforces compliance with the BSA regulations.
• Manages the data filed by financial institutions under FinCEN’s reporting requirements.
• Supports civil enforcement actions involving law enforcement investigations and prosecutions where needed.
• Exchanges information and coordinates with foreign financial intelligence units (FIU) counterparts on anti-money laundering and terrorism financing efforts.
• Provide support for policymakers, regulatory bodies, law enforcement, and intelligence agencies.

FinCEN is one of the world’s leading Financial Intelligence Units (FIU). It exchanges information with other countries’ FIUs when needed to safeguard the global financial system from criminals. The international body guiding the cooperation and exchange of intelligence between these 166 FIUs worldwide is known as the Egmont Group.

Who Should Be BSA Compliant?

The Bank Secrecy Act (BSA) applies to all businesses in the United States actively engaging in financial transactions or fund movement, including both depository institutions and non-banking financial institutions (NBFIs). Let’s explore the specific requirements and considerations for these two categories in detail.

Non-Banking Financial Institutions (NBFIs)

Non-Banking Financial Institutions (NBFIs) strengthen a country’s economy. However, unlike depository institutions, they actively lack the license to accept traditional financial deposits or savings from the public. However, they provide other banking-related services such as risk pooling, market brokering, currency exchange, contractual savings, and individual and collective investments.

Examples of Non-Banking Financial Institutions are:

• Cryptocurrency Industry
• Loan/Finance Companies
• P2P Lenders
• Insurance Companies
• Money Service Businesses
• Casinos
• Precious Metal/Stone Dealers
• Securities/Commodities Firms
• Hedge Funds & Private Equity Funds

Depository Institutions

Depository institutions, as the name suggests, are businesses legally authorized to accept public deposits for business transactions and savings. These institutions primarily obtain funds through public deposits. Examples include:

• Banks
• Savings Associations
• Credit Unions

Components of the BSA Compliance Program and How to Stay Compliant

The BSA has specified a variety of components of an organization in order to be compliant. These are listed below: 

1. Internal Control System: Essential for monitoring and reporting transactions in line with BSA requirements. To stay compliant, organizations should regularly update these controls to align with current regulations and address operational risks.
2. Independent Testing by a third-party auditor: Involves external audits to assess the effectiveness of the BSA compliance program. Compliance is achieved by regularly engaging qualified auditors for thorough assessments and promptly acting on their findings.
3. Designated BSA Officer: A key role responsible for overseeing the BSA compliance program. Organizations maintain compliance by appointing a knowledgeable individual tasked with implementing and managing the program effectively.
4. Training Program: Aimed at educating staff about BSA regulations and their roles in ensuring compliance. Organizations ensure adherence by providing continuous, role-specific training and keeping staff updated on regulatory changes.
5. Customer Identification Program: Focuses on verifying the identities of customers to prevent fraud. For compliance, firms must establish rigorous procedures for identity verification and maintain accurate, up-to-date customer records.
6. Customer Due Diligence: Entails conducting risk assessments to understand and manage customer-related risks. Organizations stay compliant by performing regular risk assessments, particularly for high-risk customers, and adjusting their due diligence processes as necessary.

What Is a BSA Compliance Officer?

Compliance with the BSA is crucial for companies, regardless of their industry, to avoid penalties for non-compliance. One step towards achieving compliance is appointing a designated staff member to oversee BSA compliance and report to the board of directors.

Known as the BSA compliance officer, this person oversees and coordinates the company’s daily compliance needs. Additionally, they oversee internal compliance programs and are familiar with BSA and AML regulations.

What to Look For in a BSA Compliance Officer

1. Knowledgeable in BSA/AML subject matter or the readiness to learn and be vast within the shortest possible period.
2. Ability to develop a compliance strategy and the road map for executing it.
3. Familiar with the industry or sector the company operates in.
4. Creating a culture of compliance among fellow employees.
5. Continuous training of fellow staff.
6. Ability to collaborate with the board of directors to develop strategies that aid effective compliance programs.

Reporting and Recordkeeping Requirements Under the BSA

Below are the established BSA regulatory requirements for financial institutions:

1. Suspicious Activities Monitoring and Reporting
2. Currency Transaction Reporting
3. Recordkeeping Requirements

1. Suspicious Activities Monitoring and Reporting 

Banks are to monitor, identify and report unusual & suspicious activities, but it is not the bank’s duty to carry out detailed investigations in search of evidence linking the suspected transaction to a financial crime. The only investigation expected of the bank is one that further cross-checks if a violation indeed happened to help decide if the transaction is worth reporting. The process of reporting involves filling out a SAR form, and banks are to file a SAR when any of the following is suspected:

1. Violations involving insider abuse of any amount.
2. An aggregate of $5,000 or more when they can identify the suspect.
3. An aggregate of $25,000 or more when they can not identify a potential suspect.
4. Transactions aggregating $5,000 or more with no lawful purpose or transactions violating other BSA regulations on money laundering & terrorism financing.

Suspicious Activities Monitoring & Reporting Processes

FinCEN and other financial regulatory bodies welcome the reality that not all potential illegal funds or transactions would be detected and reported 100%. However, it is important to have guidelines and internal controls that facilitate easier and faster detection of suspicious transactions.

These monitoring and reporting processes are part of each financial institution’s overall responsibility to ensure an effective risk-based BSA compliance program; therefore, the board should approve policies that address the following:

1. 1. Transaction monitoring
   2. Alert management
   3. Suspicious activities investigations
   4. SAR filing decisions.
   5. Ongoing suspicious activities monitoring.

To ensure the correct identification, investigation, and reporting of these suspicious activities, the board should provide adequate resources that measure up to the bank’s overall risk profile and volume of transactions.

Five Components For Suspicious Activities Monitoring And Reporting

1. Identification or alerts of unusual activity: This can come from a transaction-based system or as inquiries from law enforcement.
2. Management of alerts: This refers to processes used to evaluate suspicious activities put in place by the management.
3. SAR filing decision-making: Based on research and analyses, an authorized and knowledgeable staff/team in charge of BSA compliance decides to file or not to file the SAR.
4. SAR completion and filing: Procedures should be in place to ensure the accurate filing of SAR forms within the stipulated time. A sufficient description of the transaction and/or suspected irregularities which is the basis for filing should be provided.
5. Monitoring and SAR filing on future activities: There should be guidelines that monitor future activities in concerned accounts and address recurring SAR filing.

2. Currency Transaction Reporting (CTR)

CTR is the second BSA regulatory requirement that banks must comply with. Banks must submit an electronic Currency Transaction Report (CTR) for transactions exceeding $10,000, which must be done within 15 days of the transaction. A CTR can also be filed for smaller amounts. This occurs when it is noticed that the customer is employing a method called “structuring.” Structuring is a deliberate attempt to transact lower amounts to avoid the $10,000 reporting threshold.

3. Recordkeeping Requirements

The SAR and CTR reports are critical in assisting FinCEN and other law enforcement agencies in detecting and investigating financial crimes. The third BSA requirement emphasizes the importance of recordkeeping, which mandates that banks maintain accurate financial records and provide necessary information to law enforcement upon request. These records must be kept for at least five years from the transaction or account closure date. Failure to do so can result in severe penalties. In addition, adequate recordkeeping actively helps financial institutions comply with the law. It also enables them to promptly provide the requested information to law enforcement agencies, actively aiding in investigating and prosecuting financial crimes.

Conclusion

The Bank Secrecy Act (BSA) is a crucial regulation that every financial institution in the U.S. must comply with. The BSA requires financial institutions to implement internal policies and procedures to detect and prevent money laundering and other financial crimes. This achievement is possible through the collection and analysis of financial transaction data and readily available financial intelligence. Additionally, it relies on the strategic use of financial authorities.

BSA compliance includes several requirements, such as filing Currency Transaction Reports (CTR), Suspicious Activity Reports (SAR), and maintaining financial records. To better understand BSA, it is recommended to read about Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations.

By complying with BSA, financial institutions can help safeguard the financial system from illicit use by criminals and protect themselves from potential fines and legal action.

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