Is regulatory pressure really going up? If you listen to the vendors and the press alike, that’s certainly the impression you’ll get, but is it true?  We decided to find out by looking at the evidence to support the claim. As you will see, some surprises came up.

To look into the claim of regulatory pressure being on the up, I invited Saskia Rietbroek, CAMS, of www.nomoneylaundering.com, and our Financial Crime Advisor at Fiserv, to look into the regulatory fines that have taken place these last few years. This is what she discovered.

As of October 27, 2010, U.S. federal bank regulators (which includes the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), the Board of Governors of the Federal Reserve System (FED) and Financial Crimes Enforcement Network (FinCEN)) have imposed $671M in Civil Money Penalties and Forfeitures on financial institutions for BSA/AML-related issues, compared to only $6M (based on numbers reported by BankersOnline) for the full year in 2009. That is an increase of more than 9,000%.

The tremendous increase in 2010 is the result of two mega enforcement cases involving forfeitures: former ABN AMRO case of May (500M Forfeiture) and Wachovia Bank case of March ($110M in Forfeiture and $50M Civil Money Penalty).

By October 27, 2010, there was a total of 8 cases (including Cease&Desist Orders, Consent Orders and Forfeiture cases) for AML/BSA related violations, compared to 10 in 2009. This means that the total number of enforcement actions is not increasing, just the monetary penalties or forfeitures that come along.

Money laundering cases are often not cut and dry. They can have different enforcement angles. Sometimes it’s mere technical Bank Secrecy Act violations that a firm is being written up for. Sometimes it’s more than that and there was actual money laundering. In that case, you will see the involvement of the Department of Justice, and forfeiture actions from DOJ in addition to the Civil Money Penalties imposed by the banking regulators. If we were to disregard the Forfeiture cases, and just focus on the Civil Money Penalties (CMP), then we still see a 800% increase in 2010: $55M in CMPs, compared to $6M in 2009. The large increase was - again - the result of the Wachovia Case in March which included a $55M CMP.

With only $6M in penalties and fines for AML/BSA-related violations, 2009 showed an all time low. Compared to 2008 with a total of $43M, there was a decrease of 84% in penalties and fines. It was noted, however, that the Office of Foreign Assets Control (OFAC) jumped in to fill that “gap” and imposed multimillion dollar penalties for OFAC violations: $536M for Credit Suisse and $217M for Lloyds TSB Bank. As of 2010, even though credit problems continue, the federal banking agencies have focused their attention again on BSA/AML issues. The reported violations in the enforcement actions in 2010 included most of the time issues such as failure to implement an AML program, failure to have effective systems and written policies to identify suspicious activity, failure to implement internal controls to assure ongoing compliance with the Bank Secrecy Act, and failure to file Suspicious Activity Reports. As a consequence financial institutions were ordered to take remedial actions that included use of financial and managerial resources of corporate headquarters as a source of strength to its bank subsidiaries, retain independent consultants acceptable to the regulators to complete a review of the effectiveness of the BSA/AML compliance program

Violations in 2010 enforcement actions also involved issues such as failure to file Currency Transaction Reports, failure to conduct monitoring of monetary instruments, ineffective independent testing of the AML Program, and lack of AML/BSA training.  

The higher penalties and forfeitures are sending a strong message to financial institutions that the U.S. federal regulators are vigorously investigating and, in some instances, prosecuting financial institutions that provide safe harbor to criminals. The increased scrutiny may also be a result of the regulatory reform, with regulators that are defending their turf. In any case, it is not easy. The heat is back on, financial institutions are adjusting to a new regulatory framework, and most of them are still working with skeleton staffs in compliance because of the budget cuts in recent years.

Conclusion:
The figures in 2009 show that regulatory pressure for BSA/AML compliance (based on regulatory penalties and fines) was a myth. In 2009 the total for penalties and fines for BSA/AML violations reached an all time low, but how that has changed in 2010.  This year penalties and fines have reached the highest levels, and the year is still not finished. So, if we had reason to doubt regulatory pressure for BSA compliance in the past, think again. 2010 has changed all that.