Proposed enhancements to ALM programs: An overview and assessment for FinTechs

Recently, the Bank Secrecy Act Advisory Group (BSAAG) released a number of proposed regulatory changes under the Bank Secrecy Act (BSA) that are aimed at increasing effectiveness of anti-money laundering (AML) programs. The Financial Crimes Enforcement Network (FinCEN) is currently asking for feedback from stakeholders to determine if these recommendations will be effective. The comment period is open until November 16, 2020. The full notice in the Federal Register is available here.

If these regulations become law, the hope is that the current AML regime will become more modernized, better equipped to share information with law enforcement, and a stronger safeguard against criminal or terrorist activity.

Let’s take a look at these proposed regulations in detail.

Increased attention to AML priorities

The primary recommendation, which serves as a broader overview of the following, urges the national AML regime to refocus on its priority of sharing high-quality information with government authorities and law enforcement. Doing so will ensure useful and reliable outputs that may garner significant findings. In addition, clearer standards for measuring the effectiveness of future AML programs will be put forth.

Relevant government agencies are encouraged to publish a regulatory definition of AML program effectiveness. Additionally, financial institutions should receive guidance on elements of an effective AML program to ensure compliance.

Reallocation of resources

Reducing or eliminating activities not deemed essential by law summarizes the second recommendation. The goal is to reallocate any resources currently working on these non-essential activities, so they can be freed up to address national AML priorities.

Relevant government agencies are encouraged to clarify current risk assessment requirements and expectations. In addition, these agencies should also revisit their existing model-risk-management guidance to AML systems in an effort to improve compliance and effectiveness.

Modernized reporting practices

Another recommendation is focused on modernizing and improving the AML monitoring and reporting practices. Increasing the quality of information sent to the government authorities, in addition to the speed at which it is delivered, will ensure a more streamlined and effective process. There should also be a focus on privacy and data security throughout this process.

Relevant government agencies are encouraged to update practices for keep-open letters and suspicious activity monitoring and reporting. In addition, these agencies are advised to support automation opportunities where relevant, such as for currency transaction reports (CTRs) and high-frequency/low-possibility SARs.

Greater information sharing

A key component of an effective AML regime is efficient and highly useful information sharing among law enforcement, regulators, and financial institutions. In order to enhance and improve upon this facet of AML, it’s been recommended to form a BSAAG-established working group with members of different financial and law enforcement agencies. This group will convene to discuss relevant information related to AML priorities and potential red flags.

Additional recommendations include assessing options for FinCEN and law enforcements agencies to provide feedback to attorneys of certain financial institutions in regard to their BSA reports.

Commitment to innovate

The final recommendation proposed by the BSA lies in the future innovation. In an effort to keep up with a constantly changing landscape, as well as new risks from money launderers and terrorist organizations, financial institutions need to encourage better BSA compliance practices. This includes more responsible utilization of third-party software and service providers, including non-bank financial entities.

In light of these proposed enhancements to ALM programs, there are some potential issues FinTech startups and finance service providers that focus on digital assets may face.

Lofty Summit, Blurred Path

The goal of these recommendations is to increase the effectiveness of the national AML regime. Preventing all areas of financial crime, from money laundering to terrorist activity, is an important goal to strive for. However, there are no exact steps as to what is considered to be “effectiveness” in an AML program.

These proposed enhancements seek to define an “effective and reasonably designed” AML program as one that manages risk in accordance with AML priorities, provides for compliance with BSA requirements, and encourages useful information sharing with the government authorities.

However, there is no method that federal regulations can currently use to support this shift in focus for bank AML teams. This is especially problematic in FinTech startups and providers that focus on digital assets, as these organizations will not have the proper groundwork laid for this massive undertaking.

Defining “highly useful” information

Additionally, there is also the issue of sharing only highly useful information with government authorities and law enforcement. There is no current method a financial institution can utilize to determine if the information they receive actually meets the criteria for having a “high degree of usefulness”. Typically, this determination has fallen under the purview of law enforcement.

In addition, many BSA officers will argue that the very reason we have an established AML regime is to actually vet the information for its usefulness and relevance. While the goal of this recommendation is a noble one, it seems to raise more questions than answers.

Reallocating resources

There is a fear that, if banks are utilizing resources to scour the Internet and other databases for information that may raise the risk of certain customers, there will be a drain on AML resources. While one of the proposed enhancements is to utilize artificial intelligence to amplify the investigation process, the cost and time commitment needed for implementing this technology will be no small ask for start-ups and smaller financial services providers.

In conclusion…

The overall goal of these proposed enhancements is to modernize and update the current AML regime. There have been major advancements in all areas of financial crime, so it is vital that the national AML priorities stay up to date and remain heavily implemented.

In order to detect and prevent criminal activity, there needs to be greater collaboration between law enforcement and financial institutions. Additionally, there needs to be a larger investment made in artificial intelligence to aid the investigative process, along with more effective risk-management techniques.

While more clarified and better articulated guidelines on creating a more effective AML regime would be appreciated, especially for the benefit of FinTech startups, the overall goal is to create a faster and more efficient way of protecting against illegal activity. This is a good time to submit comments and enhance this proposal.