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The dark side of “Once a member, always a member”

By: Naomi Glass, BSA/AML/OFAC Compliance Manager

Credit unions love their members. In fact, they love them so much that many offer the benefit of life-time membership. Even if a member retires, changes jobs, or moves to another city, he/she is still considered a valued member of the credit union and may keep their accounts open. While this “member for life” tenet might make sense from a community outreach and business standpoint, there are significant money laundering and terrorist financing risks associated with the practice.

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Considering the risks

Many credit unions that have embraced the “member for life” philosophy now feel like their hands are tied in terms of being able to exit a member whose accounts are being used for purposes of engaging in suspicious or criminal activity. Maintaining relationships with these bad actors can have serious regulatory implications for the credit union if the unusual activity is not consistently identified and reported timely in a suspicious activity report (SAR) to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

Let’s take a quick look at “3 SARs you’re out,” a best-practice policy within our industry that credit unions should utilize to ensure criminals don’t continually abuse their accounts for illicit or criminal purposes.

Examining the best practice of “3 SARs you’re out”

Financial institutions in the U.S. are required to file SARs every 90 to 120 days if an individual’s suspicious transactional activity is ongoing. Frequent SAR reporting uses up an enormous amount of the institution’s resources (i.e. staffing, technology) and increases its overall exposure to BSA/AML compliance deficiencies. As a result, many financial institutions have implemented what’s become known industry-wide as a “3 SARs you’re out” policy. (For those of you who aren’t big into baseball, this is simply a catchy way of saying that a financial institution will terminate a banking relationship with a customer after it has filed three consecutive SARs on that customer.) The financial sector and BSA compliance community have embraced the “3 SARs you’re out” policy as a best practice.

Credit unions that have lifetime members have not embraced the “3 SARs you’re out” policy for exiting member relationships. While these credit unions might have procedures in place to restrict an account, or even close it, due to the identification of suspicious activity, the relationship with the member is never terminated. This leaves the credit union open to significant liability. Essentially, these credit unions hope that the inconvenience to the member will get them to “go away.” While this is the outcome in most cases, the member is not prohibited from opening new accounts since the relationship is never terminated. The BSA/AML risk to the credit union is, therefore, never fully mitigated.

Terminating member relationships: An exception

Interestingly, credit unions with lifetime members will terminate a member relationship under one clause that has nothing to do with the member’s usage of the credit union to perpetrate suspicious money laundering or terrorist financing activity. Rather, the termination is due to verbal or physical abuse directed by the member towards credit union staff. Unfortunately, threats to and verbal abuse toward credit union staff are frequent occurrences, and automatic termination of the member relationship is the result.

Reconsidering your current policies

The “Once a member, always a member” tenet has become the foundation on which successful credit unions are built, and while it sounds nice on paper, there is a dark side to it. It’s great that credit unions that offer lifetime membership will exit abusive members; it is not great when credit unions won’t terminate relationships with members who continually engage in suspicious account activity.

The “3 SARs you’re out” policy, which is the industry standard, should be adapted by these credit unions to ensure criminals don’t continually abuse accounts for illegal purposes. The policy should also be adopted to limit the credit union’s exposure to BSA/AML compliance deficiencies.