Compliance Blog

On September 17, the Financial Crimes Enforcement Network (FinCEN) proposed changes, that if finalized, could have a widespread impact on how we deal with everyday BSA/AML compliance. Of course, the idea is to provide the most effective information to FinCEN and law enforcement to protect our financial system from bad actors. But will FinCEN’s proposals really provide the most effective information and make compliance easier, as hoped? Or is it all just wishful thinking? NAFCU raised several issues in our comment letter, which you can access here.

Effectiveness Proposal

NAFCU detailed FinCEN’s advanced notice of proposed rulemaking (ANPR) regarding changes to the regulatory anti-money laundering (AML) requirements in this Regulatory Alert and previously discussed it in a BSA/Compliance Network Insights post. To recap, the ANPR seeks to establish that all financial institutions must maintain an “effective and reasonably designed” AML program. As part of this definition, the regulations would explicitly require a risk-assessment that considers national AML priorities set by the Director of FinCEN every two years. National AML priorities could include those identified in FinCEN advisories. Credit unions will need to demonstrate effectiveness, and this could include the reallocation of resources from lower priority risks to higher priority ones. Although credit unions already conduct risk-assessments, it is important to highlight the potential ramifications of the inclusion of national AML priorities.

First, the national AML priorities would be set every two years, complicating the timing of how we currently conduct our risk-assessments. For those credit unions who review and update on an 18-month cycle, you would either need to re-review your risk-assessment when the priorities are set, or possibly change to a 12-month review cycle to ensure you are capturing the set priorities. This misalignment creates the additional burden of potentially having to review and update the risk-assessment more than currently required.

Second, including national AML priorities seems to treat all credit unions equally. This is the exact opposite approach banking regulators have taken in supervisory guidance, which identifies that each institution has its own unique risk profile. Larger, more complex credit unions may already include some national priorities due to the nature of their risk-assessment; however, requiring inclusion for all institutions, regardless of whether these priorities are actually applicable, creates additional burdens on smaller credit unions.

Additionally, what happens if a national priority continues to be a priority for more than two years? It is reasonable that a large-scale national priority could take some time to properly identify, monitor, and resolve. If the national AML priorities are set every two years, this may create a layering effect on overall BSA/AML compliance. To illustrate this potential pitfall, let us pretend that FinCEN’s most recent supplemental advisory on human trafficking is set as a national AML priority. Human trafficking continues to be a prevalent issue and has garnered a lot more national attention lately, and it is safe to say that this issue will likely not go away in a two-year span. FinCEN issued this supplement to a prior 2014 advisory as they developed a deeper understanding and could provide case studies as examples. If human trafficking is set as a national AML priority in 2020 and continues to be an issue in 2022 when the new priorities are set or beyond, does that mean that we must continue to work this priority into our risk-assessments and allocate compliance resources accordingly? Or does the previous priority expire upon the issuance of new priorities? It is important to remember that this proposal is just an ANPR, which means that FinCEN is still gathering information about how this could possibly work and it is likely that these lingering questions may be addressed in further rulemaking efforts.    

This leads us to our next issue…examinations. A focus of examinations continues to be on BSA/AML compliance. The inclusion of national AML priorities does not address the potential subjectivity of an examiner in their determination of whether a credit union properly incorporated the priorities into their risk-assessment. Should FinCEN finalize this rule as proposed, the agency should provide a template risk-assessment or guidance that provides credit unions a safe harbor for compliance. NAFCU continues to advocate for examiner consistency regarding BSA/AML. Proposed legislation also addresses examiner consistency and would provide more resources for examiner training.  

A Better Alternative to Achieve Effectiveness

Although it is not FinCEN’s intent to increase compliance burdens on credit unions, the proposal seems to do just that. The compliance mechanisms in place provide the same information to FinCEN and could be more effective and provide more flexibility for credit unions with some adjustments. NAFCU continues to advocate for reform to the information-sharing mechanisms and BSA reports. FinCEN has a proposal listed on its rulemaking agenda regarding the 314(b) information-sharing program and we hope to see that proposed rule by the end of the year. In addition, the Bank Secrecy Act Advisory Group (BSAAG) has made several recommendations to enhance the utility of BSA reports including a streamlined SAR for continuing activity. Leveraging existing mechanisms can achieve increased effectiveness with additional amendments. Broader BSA/AML reforms are also part of pending legislative efforts.

Recordkeeping and Travel Rule Proposal

FinCEN published a notice of proposed rulemaking (NPRM) (see NAFCU Regulatory Alert 20-EA-22) reducing from $3,000 to $250 the threshold for cross-border transfers and transmittals that begin or end outside of the U.S. The Recordkeeping and Travel Rule thresholds have remained in place since their inception in 1995. FinCEN’s justification for the adjustment is that lower-dollar, cross-border transactions are occurring that relate to terrorist financing. Obviously, credit unions seek to detect and mitigate terrorist financing; however, it is interesting that FinCEN has chosen now to lower the thresholds. FinCEN must consider the usefulness of the information with the effects on the cost and efficiency of the payments systems. The proposal theorizes that the impacts are minimal because the current practices of financial institutions include the collection, retention, and transmittal of information under the rules, regardless of the dollar amount. Once again, not all credit unions are created equal, and this practice is not uniform. The proposed threshold change could have severely negative impacts on smaller credit unions.  

Please reach out to me at kschafer@nafcu.org or 571-317-4560 with any thoughts or comments on the AML priorities, broader BSA/AML reform, or feedback on the Recordkeeping and Travel Rule Proposal. Comments on the Recordkeeping and Travel Rule Proposal are due to NAFCU by November 24, 2020.