This article was submitted to BS&T on September 7, 2001.
Treasury Secretary Paul O'Neill has been widely quoted as questioning whether the $700 million spent annually in efforts to crack down on money laundering is being wisely expended. A large portion of this money is spent on Bank Secrecy Act (BSA) compliance, input and record keeping. O'Neill's assessment is that the benefit of requiring banks to report all cash transactions exceeding $l0,000 needs to be balanced against what he terms as the ?significant cost? to society that this requirement imposes.
Secretary O'Neill's statement raises questions about the banking community's practice of unnecessary filing of Currency Transaction Reports (CTRs). Regulations are in place that encourage banks to exempt certain accounts from the CTR reporting requirements. However, most banks have ignored the exemption process over concerns about fines for technical violations of the exemption process. How did we get into this mess? And is there any way out?
A Quick History of Money Laundering
Congress passed the Bank Secrecy Act (BSA) in 1970 based on evidence that organized crime was generating most of its illegal proceeds in the form of cash being deposited into banks in offshore tax havens. The passage of the Bank Secrecy Act ushered in identification, record keeping and currency reporting requirements by financial institutions designated under the Act by the Secretary of the Treasury.
Financial institutions exerted little effort to comply with the Bank Secrecy Act until the government's compliance efforts increased in the early l980s. As prosecutions and fines against banking institutions began to heighten awareness of and compliance with the regulations, money launderers began to take evasive maneuvers to avoid detection and reporting of their transactions, such as structuring transactions in increments below $l0,000 and purchasing assets with currency.
During l986 Congress passed and President Reagan signed the Money Laundering Control Act which criminalized money laundering and the structuring of currency transactions to prevent a financial institution from filing Currency Transaction Reports (CTR) Form 4789. Money launderers responded to this new law by lowering the amounts of their structured transactions at banks, using remittance companies for their wire transfers, and purchasing money orders at non-bank financial institutions. Congress countered those moves with the $3,000 monetary instrument log, the Travel Rule, and a redefinition of cash to include monetary instruments with a face value of $l0,000 or less for the sale of goods and services. The Anti-Money Laundering Act of l992 emphasized, but did not codify, the ?Know Your Customer? (KYC) Rule. The Federal Reserve Bank subsequently released KYC guidelines; however, due to negative responses from the financial community those KYC guidelines were withdrawn. Federal bank regulators have continued to stress KYC otherwise known as Enhanced Due Diligence (EDD) guidelines even in the absence of regulations. Many financial institutions have instituted KYC and due diligence standards.
During the early years of the BSA, awareness of and compliance with the currency reporting requirements by the banking industry was very lax. For example, during l975 there were approximately 3,500 CTRs filed nationwide. In order to increase compliance the government used the criminal and civil sanctions of the BSA. Within a month of the first indictment and multi-million dollar civil fine levied against a bank for failure to file CTRs, filings jumped from approximately l0,000 CTRs to more than l80,000 CTRs per month. Over the past 15 years, increased regulatory monitoring as well as fines for non-compliance levied against financial institutions have ensured compliance with the requirement to file CTRs. Unfortunately, those same fines have had the unforeseen effect of discouraging the financial institutions from exempting qualifying accounts, which has resulted in the filing of hundreds of thousands of unnecessary CTRs each month.
The Code of Federal Regulations Title 3l part l03.22(d)(2) defines which accounts can be exempted from the CTR reporting requirements, l03.22(d)(3) outlines the procedures for the initial designation of exempt persons and l03.22(d)(4) describes the annual review process which must be conducted and verified at least once each year. Banks have not created the extensive exempt list allowed by the regulations because, using their current manual processes, it is more burdensome and costly to exempt accounts than it is to file CTRs.
Exemptions Don't Have to Be This Difficult
Sophisticated data mining technology is being developed that will detect suspicious transactions and other activity conducted through financial institutions. Such software systems can be adapted to automatically identify qualifying accounts for exemption, continually review account activity, and prevent the filing of CTRs on exempted transactions, while still monitoring accounts for suspicious activity.
In an increasingly global, electronic economy, criminals find new opportunities to launder money every day. From a national security and market integrity perspective, it doesn't make sense to do away with our controls on money laundering. It does make sense, however, to make those controls more efficient and effective.
Don Temple, Money Laundering & Bank Secrecy Act Subject Matter Expert for Mantas, is a nationally recognized expert in the area of currency reporting, money laundering, the detection of suspicious transactions, and fraud investigations. Don joined Mantas after 26 years with the Internal Revenue Service in the Delaware Maryland District where he served as a Special Agent. While at the IRS, he became the Title 31 Coordinator and developed the Maryland Financial Investigative Task Force -- a multi agency task force that included the FBI, U.S. Customs Service, U. S. Postal Service, U. S. Secret Service, and the Drug Enforcement Administration -- that was used as a model for subsequent task forces formed in the U.S. At Mantas, he works with clients on their business requirements and provides assessment services in the areas of compliance planning, programs, and training.