Strengthening financial integrity: BSA, AML, and emerging trends

The Bank Secrecy Act (BSA), first passed by the U.S. Congress in 1970, requires financial institutions to assist government agencies in helping to detect, report, and prevent money laundering. Over time, the BSA has evolved through amendments that expand its scope and reinforce the role of financial institutions in safeguarding the financial system from illicit activity.

The regulations that implement the BSA require financial institutions to keep records of cash purchases of “negotiable instruments” (e.g. written documents that promise payment and can be transferred to other entities, like a check or money order); file reports of cash transactions exceeding $10,000; and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activity. 

For BSA anti-money laundering (AML) compliance, financial institutions are expected to maintain a compliance program that aligns with five BSA AML pillars.

1. Internal controls
2. Designation of a BSA AML officer
3. Establishment of BSA AML training program
4. Independent testing of compliance program
5. And, customer due diligence

The five pillars are intended to work together to lay the framework for an AML program.

1. Internal controls
   The internal controls part of the BSA AML program might typically involve setting up systems to manage how an institution operates, making sure the specific risks they may need to address are included in their compliance plans, and keeping their Board of Directors informed about what’s being done to follow rules.
   
   
2. BSA Officer
   Typically, in regulated firms, a Board of Directors designates a qualified individual as BSA Officer. The BSA compliance officer would be responsible for coordinating and monitoring the institution’s day-to-day BSA AML compliance. The compliance officer may also be best positioned to manage each aspect of the BSA AML compliance program. The Board of Directors is ultimately responsible for the bank’s BSA AML compliance however and could therefore require oversight of activities, while making sure the BSA compliance officer has sufficient authority, independence, and access to resources to execute their duties. 
   
   
3. BSA AML training
   It is common for banks to provide BSA AML-related training to appropriate personnel within an organization. Appropriate personnel could include those whose duties require knowledge of or involvement in some aspect of BSA AML compliance activity. Training might cover aspects of the BSA that are relevant to the bank and its risk management processes.
   
   Foundational training for board members and senior management is also commonly included in BSA AML programs to support awareness of regulatory developments.
   
   
4. Independent testing
   Independent testing could involve a periodic review of a financial institution’s BSA AML compliance program, conducted by internal staff who are not involved in day-to-day compliance, or by external parties. Its purpose might be to assess the effectiveness of a program, help identify gaps, and support regulatory adherence. It might typically be performed every 12–18 months or it could be based on a risk-related event the bank needs to respond to.
   
   This kind of independent evaluation can also help inform the board of directors and senior management of potential AML vulnerabilities, or areas that might need enhancements with stronger controls. 
   
   
5. Customer due diligence
   Customer due diligence (CDD) generally involves designing a program or set of processes that enable institutions to develop an understanding of their customers, and the nature and purpose of that customer relationship, as well as maintaining and updating customer information on an ongoing basis. CDD can help banks mitigate the risk of working with bad actors, such as those attempting to launder money through the institution.

To assist with BSA AML compliance and to hold financial institutions accountable, the United States Treasury Department established the Financial Crimes Enforcement Network (FinCEN) in 1990. FinCEN’s mission to “safeguard the financial system from the abuses of financial crime, including terrorist financing, money laundering and other illicit activity” means it can implement, administer, and enforce BSA AML compliance.

FinCEN works to help ensure banks adhere to the three main AML requirements of the BSA:

1. Report cash transactions over $10,000 using the Currency Transaction Report
2. Properly identify those conducting transactions
3. Keeping appropriate records of financial transactions to maintain an accurate paper trail

FinCEN is the bureau of the US Treasury Department primarily responsible for establishing policies and standards related to BSA AML, but other areas of government also have oversight, depending on the nature of the institution or business in question. The Office of the Comptroller of the Currency (OCC), Federal Reserve System (FRS), National Credit Union Administration (NCUA), Federal Deposit Insurance Commission (FDIC), the Consumer Financial Protection Bureau (CFPB), and state financial regulators can also have BSA/AML regulatory oversight, as well as other regulators not named here.