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From Banking and Finance Law Daily, December 3, 2018

Regulators call for innovation in Bank Secrecy Act compliance, reporting

By Richard A. Roth, J.D.

Financial institutions should not be reluctant to explore the use of innovative technologies to satisfy their Bank Secrecy Act compliance obligations, according to a joint statement issued by the federal agencies with BSA supervisory authority. The agencies say that new technology, such as artificial intelligence, and better ways of using existing technology can help banks identify and report money laundering, terrorism financing, and other illegal financial activity. The statement was issued jointly by the Federal Reserve Board, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, National Credit Union Administration, and the Treasury Department’s Financial Crimes Enforcement Network.

Technological innovation can enhance BSA/AML transaction monitoring and reporting, the statement says. Innovation also can make banks’ use of their existing BSA/AML compliance resources more efficient.

Pilot programs. The agencies emphasized their intent to encourage banks to test innovative programs. "[P]ilot programs in and of themselves should not subject banks to supervisory criticism even if the pilot programs ultimately prove unsuccessful. Likewise, pilot programs that expose gaps in a BSA/AML compliance program will not necessarily result in supervisory action," the statement says.

For example, a regulator will not assume that a bank’s BSA/AML compliance program is deficient simply because a pilot program reveals suspicious activity that the bank’s current program did not find. The current program will be examined independently to determine whether it is adequate given the bank’s risk profile.

Agency encouragement. The regulatory agencies are willing to grant exceptions from BSA regulatory requirements to facilitate pilot programs, according to the joint statement. However, while banks are testing innovative programs, their existing BSA/AML compliance programs must remain fully effective. The statement adds that banks that maintain effective compliance programs will not be penalized for choosing not to innovate.

Sigal Mandelker, Treasury Undersecretary for Terrorism and Financial Intelligence, pointed out that innovative technologies recently have identified illicit financial activity related to both Iran and North Korea. BSA/AML compliance efforts must adapt to the evolving tactics of persons engaged in illicit activities, he said.

An Oct. 3, 2018, joint statement from the same regulators provided guidance on how smaller, less complex banks can collaborate to satisfy their BSA/AML compliance obligations (see Banking and Finance Law Daily, Oct. 4, 2018).

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