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MSBs have credit unions in the headlines

FinCEN releases national money laundering and terrorist financing risk assessments

By: Jennifer Morrison, VP, Senior Risk Manager

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Jennifer MorrisonJuly 29, 2015 -- Credit unions and BSA/AML have spent much of June in the headlines, and it’s not good news.

Credit unions are buzzing about the June 2, 2015, Wall Street Journal1 front-page article, “Treasury Scrutinizes Credit Unions.” The authors cited a confidential report from the Financial Crimes Enforcement Network (FinCEN) issued in February that listed more than 50 credit unions the agency cited as vulnerable to potential money laundering.

While the report did not cite the credit unions for any wrongdoing, the report cited the credit unions’ exposure to check-cashing companies and similar money-services businesses (MSBs). The article went on to state that MSBs are increasingly turning to credit unions for banking services because MSBs have been driven from the big global banks that have been subject to a series of fines and probes into money laundering over the past several years. J.P. Morgan has been culling its list of clients since at least 2013, shedding hundreds of domestic and foreign correspondent-banking customers.

The February FinCEN report also stated that “criminal groups and drug trafficking organizations may be actively targeting vulnerable credit unions to access the formal financial system” in part by moving money through MSBs.2

“As larger institutions with more resources do a really good job rooting out some of the worst activity, we clearly see it going to other parts of the financial industry, including smaller depository institutions,” said Jamal El-Hindi, deputy director at FinCEN, at a January conference.3

The report also cited broad concerns based on an apparent increase in the number of money-laundering probes involving credit unions. The analysis was based on a review of currency-transaction reports from credit unions from February 2012 to January 2014 and suspicious-activity reports filed by other banks and financial institutions from April 2013 to January 2014. Those trends have continued since then, officials have said.

Our reputations are under attack.

According to the follow-up article in the Credit Union Journal4, “Weighing the FinCEN Fallout: Reputation Risk, Examiner Scrutiny & More,” the Wall Street Journal article may have made credit unions into the “bank of last resort” for the illicit businesses and their proceeds. And the natural question is this: How does a confidential report get released to the journalists in the first place?

While the National Credit Union Administration (NCUA) was shown a copy of the report prior to the Wall Street Journal article, it would be illegal for the NCUA to disclose to a credit union that they were on the list. But a consequence of this list and recent headline news is that the examiners will likely focus additional scrutiny on credit union BSA/AML practices and procedures during their examinations.

Expected outcomes

“I would expect [additional scrutiny] is going to occur,” said Steve Williams, a principal at Cornerstone Advisors. “I always tend to see the regulatory winds come to credit unions later than banks, so given the past decade of very intense, almost punitive regulation on this topic with banks, it doesn’t surprise me that it’s arriving at this point now with credit unions.” Williams went on to say the following in the Credit Union Journal: “What I worry about is an overreaction.”5

Former NCUA chairman Dennis Dollar went further in his comments. “It seems to be an anti-small institution bias on the part of FinCEN, and it appears to be based more on speculation than fact,” Dollar said. “They completely overlook the familiarity with members and member tendencies that I would submit is much more likely to detect money laundering activities than the totally systems based approaches that larger FIs [federal institutions] have.”6

Despite our outrage, it is important to focus on what the FinCEN report is telling us. If you are serving MSBs, ensure that you have a focus on risk processes and controls. And be willing to accept the additional regulatory burden that these members bring. Or, terminate these memberships. As the Credit Union National Association’s (CUNA’s) Bill Hampel stated, “The reason the banks got out of this [serving MSBs] was as much the fact that there is going to be additional regulatory burden.”

New tools for BSA/AML compliance

The value of information and education in the fight against money laundering and terrorist financing threats cannot be understated. On June 12, 2015, the U.S. Treasury, through its department FinCEN, released two important risk assessments that all BSA/AML Officers and compliance personnel should read:

  1. National Money Laundering Risk Assessment (NMLRA)
  2. National Terrorist Financing Risk Assessment (NTFRA)

The purpose of these assessments is to help the public and private sectors understand the money laundering and terrorist financing methods used in the United States, the risks that these activities pose to the U.S. financial system and national security, and the status of current efforts to combat these methods. For BSA/AML staff and compliance officers, the information in these assessments is important in your efforts to more effectively detect and combat illicit finance.

The underlying concept FinCEN employs in the risk assessments is the identification of threats or the predicate crimes associated with money laundering, as well as the global terrorist financing threats; vulnerabilities or the opportunities that facilitate money laundering and terrorist financing; the consequences or the impact of a vulnerability; and the resulting risk, or what FinCEN calls the synthesis of threat, vulnerability, and consequence.

The assessments lay out some interesting statistics that can be quite useful when you scope your risk universe in preparing your annual BSA/AML risk assessment. I call your attention to page 35 of the NMLRA and the discussion of banks and the distribution of deposits and financial services activities.

Get ready now

Now is the time for BSA/AML Officers and compliance personnel to ensure you have a thorough AML policy and program in place and that you are ready to face what will likely be additional scrutiny in your next examination.

Be sure to engage a reliable, well-qualified, outside reviewer of your BSA/AML program to scrutinize your program every year. Given that these professionals often provide similar reviews to our banking peers, now is the time to benefit from their experience with the higher degree of scrutiny banks have long-faced from the FDIC, OCC and FRB. Share best practices with your peers, and take advantage of the training opportunities to make sure you and your team are ready for the likely increase in scrutiny as a result of the recent headlines. Corporate One is here to help.

2 Wall Street Journal.
3 Wall Street Journal.
4 Passman, Aaron, “Weighing the FinCEN Fallout: Reputation Risk, Examiner Scrutiny & More,” Credit Union Journal, June 11, 2015.
5 Passman.
6 Passman.