How To Use Banking Secrets For Your Financial Advangage

Overview
As financial institutions begin to pick of the pieces left from the attack on our nation and focus on getting back to business, laws such as the Bank Secrecy Act are being viewed in a new light. Compliance requirements that once seemed overly burdensome and unnecessary now have relevance and meaning.
Given the attention being thrust upon the Bank Secrecy Act, it makes sense to review with your employees the basics of BSA compliance. This article is intended to provide an overview of your reporting obligations under the law and emphasize the importance of knowing exactly who your customers are.
Scope
The Bank Secrecy Act involves a unique set of federal laws that every employee must have some familiarity with. Although individual job descriptions will dictate the amount of detail needed, everyone employed in a financial institution setting needs to understand the BSA compliance requirements. In fact, under the law, financial institutions are required to provide employees with regular, ongoing BSA training.
Purpose
The purpose of the Bank Secrecy Act is to detect and prevent money laundering activity through financial institutions in this country. The law generally requires all financial institutions to monitor customer behavior, file reports, and maintain records of certain transactions. Although tedious to complete, the government relies heavily on these reports and records in their criminal investigations of money laundering activity.
Money Laundering Defined
According to the Financial Crimes Enforcement Network or FinCEN, an agency of the U.S. Treasury Department, money laundering is defined as
"disguising financial assets so they can be used without detection of the illegal activity that produced them."
Given this broad definition, it is clear that money laundering could take many forms. It typically involves schemes where illegally obtained funds are converted, or run through legitimate channels, so as to appear legal.
Over the years, money laundering techniques have changed. For the most part, the days of people walking into financial institutions with suitcases full of cash are over. Because of the Bank Secrecy Act and its requirements, launderers have been forced to become more sophisticated and look for less conspicuous ways to make their dirty money appear clean.
Money laundering is so broad and pervasive that it now takes many forms. It may include the following types of activities:
Making loan payments in cash;
Exchanging small amounts of currency for larger amounts--for example $10s and $20s for $100s;
Using wire transfers to move illegal funds to off-shore locations;
Opening accounts for fraudulent businesses and running illegal proceeds through the accounts; and
Transferring funds through cyberspace.
While such money laundering activity may seem like a big city, big bank issue, that is not the case. Small institutions, located in less populous states, are often intentionally targeted by money launderers. Less sophistication in tracking or observing illegal patterns of activity make smaller institutions easier targets for money laundering criminals.
Currency Transaction Reporting
Probably the most common reporting requirement under the BSA is the requirement that you report "transactions in currency." When these occur, your financial institution is required to file form 4789--the Currency Transaction Report, or CTR.
Transactions in currency. A "transaction in currency" involves the physical transfer of cash, either in or out of your financial institution, in amounts greater than $10,000. Every time an individual or a business deposits, withdraws, or exchanges more than $10,000 in cash it must be documented and reported on a CTR.
Daily aggregation rules. Because money launderers rarely bring in large volumes of cash all at once, the law requires that your institution aggregate smaller cash transactions that occur on the same day by or on behalf of the same person. If together, these transactions total over $10, 000, then a CTR is triggered. In addition all branch transactions must be aggregated in order to identify those depositors who may be using several locations to make smaller currency deposits, withdrawals or exchanges.
CTR --Form 4789. The Currency Transaction Report must be used to document and report transactions in currency. The law requires that the CTR be completed and filed with the government within 15 days of the transaction in currency.The CTR is critical to law enforcement efforts. As a result, information to complete the form should be collected from the depositor before the transaction is conducted. The Treasury department has indicated that if the person you're dealing with will not provide the necessary information, the transaction should not be conducted, and should be viewed with suspicion.
Structured transactions. To avoid reporting, intentional money launderers may attempt to structure their transactions so as to fall below the $10,000 threshold. An example would include taking a cash transaction that is over $10,000 and breaking it down into amounts that are under $10,000 and then spreading those transactions out over time, so that a CTR will not be triggered. Where structuring is observed, it must be reported as suspicious behavior using a Suspicious Activity Report, discussed below.
Suspicious Activity Reporting
Another reporting requirement found within the Bank Secrecy Act relates to suspicious activity reporting. Under the law, a Suspicious Activity Report, or SAR, must be filed if your institution detects or suspects any actual or attempted criminal violation, committed against your institution, or being conducted through your institution.
Suspicious activity defined. There are no clear definitions of what suspicious activity is, or looks like. Under the law, suspicious activity generally includes transactions totaling $5,000 or more that involve potential money laundering or BSA violations. This could include the following situations:
Transactions involving illegal funds that are intended to be hidden or disguised through your financial institution.
Observations of structuring (discussed earlier);
Uncooperative customers who refuse to disclose information required under the BSA;
Termination of a transaction so as to evade any BSA regulations; and
Transactions with no apparent business purpose, or that are inconsistent with normal customer activity.
The concept of suspicious activity is vague and applying it to every day customer transactions can be difficult. It is the responsibility of all employees within a financial institution to be on the lookout for unusual or illegal behavior. As a result, it is important that you get a good understanding of how suspicious activity might look in your area and what you should be looking for. Also, make sure you understand your institution's procedures for completing a SAR, in case you do observe something that is suspicious.
Record keeping Requirements
A second important set of compliance requirements under the Bank Secrecy Act involves record keeping. The record keeping requirements under the BSA are extensive. In fact, no matter what your particular job function is, you may find that much of the information you handle on a day-to-day basis must be retained or at least be retrievable under this law. Because all the records have to be kept for 5 years, it usually means having a record keeping system that can retain considerable amounts of information and retrieve the data easily.
Some of the more significant records that must be maintained include:
Taxpayer ID numbers. The Bank Secrecy Act requires that your institution maintain records of taxpayer identification numbers (SSN or EIN) for all persons or entities who open an account, or purchase a CD.
Sale of monetary instruments. Record keeping also applies to the sale of monetary instruments such as traveler's checks and money orders. Because currency can be easily laundered through these instruments, the law requires your financial institution to keep track of persons who purchase checks, money orders and traveler's checks with cash in amounts of $3,000 and up to $10,000.The record keeping requirements here require you to collect certain data and verify the identity of the transactor. Because of this requirement, most institutions have internal procedures for the sale of these instruments.
Wires and other funds transfers. Because wire transfers are becoming a popular way to launder money, the BSA contains a set of record keeping rules relative to payment orders issued for wires and other funds transfers.The funds transfer rules require that data be collected and maintained by all financial institutions who might become involved during the funds transfer process. Therefore, your institution may have different procedures, depending on whether you are sending or receiving the funds. The law sets forth unique record keeping requirements for the originating bank, where a payment order is accepted and the transfer begins; for the intermediary bank, perhaps a correspondent, who would forward the funds on; and, for the beneficiary bank, who would disburse the funds. Each institution must retain certain data documenting both the sender and receiver of the funds.
The concept of knowing your customer is not new. In fact, the regulators have encouraged financial institutions to develop internal procedures to verify the identity and legitimacy of their customers and members for years. Although the government has yet to develop standardized "know your customer" principals, every institution should have procedures in place that assist in:
Establishing the true identity of every account holder,
Understanding the source of the accountholder's funds,
Recording the type of banking activity to expect from the accountholder,
Monitoring any deviations from that activity, and
Reporting suspicious activity via an SAR.
The time to perform these "Know your customer" activities is usually at account opening. Personal data about the depositor can be easily collected through the application process. This is also an appropriate time to discuss the service needs of the depositor, and the types of transactions and account activity expected.
Conclusion
It is clear that the Bank Secrecy Act is powerful weapon in uncovering illegal activity in the United States. In response to the terrorist attacks that took place on September 11, 2001, Congress is considering amendments that would make the BSA even stronger. Be on the watch for future law changes and continue to ensure that all employees have a basic understanding of what Bank Secrecy Act compliance involves.
For more information regarding compliance requirements see the Treasury Department´s website at www.ustreas.gov/fincen/.