BSA/AML: Overview

BSA/AML: Overview

© 2020 American Bankers Association

BSA/AML: Overview

ABA course content is not a substitute for professional legal advice.

VERSION 2

VERSION 2

BSA/AML: Overview


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Introduction

Foundation of the BSA

BSA Expectations

Impact of Financial Crime

Money Laundering Stages

Terrorist Financing

Compliance Programs

Wrap Up

BSA/AML: Overview


Introduction

This course provides a basic explanation of the Bank Secrecy Act (BSA) fundamentals. It covers the three stages in the money laundering process and explains the required elements of a Bank Secrecy Act compliance program.

Version: 2.0

Update: July 2020. No significant changes.

ABA course content is not a substitute for professional legal advice.

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BSA/AML: Overview


Introduction

Congress passed the Bank Secrecy Act (BSA) to safeguard our financial system from abuses of financial crime, including money laundering, terrorist financing and other illegal financial transactions. Criminals can exploit weaknesses in the system to hide criminal proceeds, finance terrorism and obscure their real activities. To help detect and deter criminals from exploiting the financial system and financing their illegal activities, the BSA helps furnish law enforcement agencies with information about suspicious activities and large currency transactions. These reporting requirements provide the federal government with a “paper trail” that law enforcement agencies can use to track and investigate financial crime.

Objectives By the end of BSA/AML: Overview, you will be able to

Describe the foundation of the BSA

Explain the BSA’s expectations for the components of a bank’s risk management process

Describe the impact of financial crime on society

Explain the funding sources terrorists may use for financing

Name the key compliance program elements banks must implement to combat financial crime

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BSA/AML: Overview


Introduction

Overview Congress passed the Bank Secrecy Act in 1970 as the first laws to fight money laundering in the United States. The BSA requires businesses to keep records and file reports that are determined to have a high degree of usefulness in criminal, tax, and regulatory matters. Law enforcement agencies, both domestic and international, heavily use the documents filed by banks under the BSA requirements to identify, detect, and deter money laundering whether it is in furtherance of a criminal enterprise, terrorism, tax evasion, or other unlawful activity. All bank employees have responsibilities under the BSA.

Specifically, the BSA requires banks to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities.

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BSA/AML: Overview


Introduction

Financial Crimes Enforcement Network (FinCEN) The Bank Secrecy Act also established the Financial Crimes Enforcement Network, or FinCEN, as a bureau within the Treasury Department and describes FinCEN's duties and powers to include the following areas:

Maintaining a government-wide data access service with a range of financial transactions information

Analysis and dissemination of information in support of law enforcement investigatory professionals at the federal, state, local, and international levels

Determine emerging trends and methods in money laundering and other financial crimes

Serve as the Financial Intelligence Unit of the United States

Carry out other delegated regulatory responsibilities

FinCEN is responsible for implementing, administering, and enforcing compliance with the authorities contained in the "Bank Secrecy Act."

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BSA/AML: Overview


Introduction

Customer Due Diligence Since its inception, Congress has amended the BSA to expand and strengthen the scope and enforcement of the BSA’s anti-money laundering (AML) provisions. The most significant changes were requirements added by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act), which Congress passed following the attacks of September 11, 2001.

On May 6, 2016, the FinCEN released its Customer Due Diligence Requirements for Financial Institutions. The rule requires banks to collect information on beneficial owners when a legal entity customer opens an account. Using the included model form or other methods, a bank must collect information regarding beneficial ownership provided by the customer opening the account.

Banks must also use Customer Identification Program (CIP) procedures to verify the identity of all beneficial owners. The rule also includes a number of exceptions from coverage.

Note: For more information on customer due diligence (CDD) requirements, see the Frontline course, BSA/AML: Beneficial Ownership and Customer Due Diligence.

Glossary term:

Beneficial owner A beneficial owner is an individual who owns more than 25 percent of the equity interests in a company or is the single individual who exercises control.

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BSA/AML: Overview



The BSA implemented tools to provide evidence for prosecuting money laundering and other financial crimes. The BSA was designed to create a paper trail to help investigators track illegal financial activities and prevent money laundering. Among the original provisions of the BSA are the following two basic requirements:

Financial institutions must keep detailed records and report transactions involving currency being withdrawn or deposited in excess of $10,000 by filing a Currency Transaction Report (CTR)

Persons (including banks) who transport currency or monetary instruments in excess of $10,000 into or out of the United States must file a Report of International Transportation of Currency or Monetary Instruments (CMIR) (FinCEN form 105)

Glossary terms:

Money laundering The criminal practice of processing ill-gotten gains, or dirty money, through a series of transactions; in this way the funds are cleaned so that they appear to be from legitimate sources. Currency The coin and paper money of a country which is designated as legal tender and is customarily used as a medium of exchange in the country where it was issued. Page 6

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BSA/AML: Overview



Self Check Quiz

Which two actions accurately describe the fundamental components of the bank’s BSA responsibilities?

» Select the correct answers and click Submit.

A) Monitor transactions to identify illegal, suspicious, or unusual activity, or specific monetary transactions that cross particular thresholds

B) Record or submit information to the government for law enforcement purposes about identified suspicious activities or specific monetary transactions

C) Submit an annual list to the FBI of all customers denied transaction accounts

D) Exercise appropriate care when mandating that all persons must be treated fairly when applying for credit

A and B are correct.

C is incorrect because banks are not required to obtain, retain, or submit such a list to the FBI. D is incorrect because this is not the purpose of the Bank Secrecy Act. Page 7

BSA/AML: Overview


BSA Expectations

The BSA has evolved over time to make detecting, reporting, and deterring money laundering, terrorism financing, and other financial crimes part of a bank’s risk management process. Although each bank’s risk assessment is tailored to its own unique operations, every bank must address the fundamental components of a BSA program to help prevent financial crime.

» Roll over each risk assessment component in the circle to view their descriptions.

Detecting Monitoring transactions to identify illegal, suspicious or unusual activity, or specific monetary transactions that cross particular thresholds. Reporting Recording information or submitting reports to the government for law enforcement purposes about identified suspicious activities or specific monetary transactions. Deterring Exercising appropriate care in account management to identify customers and understand their financial habits in order to limit the possibility that criminals or terrorists will access or abuse the financial system. Page 8

BSA/AML: Overview


BSA Expectations

Self Check Quiz

Which set of fundamental components must banks include as part of a risk management process?

> Select the correct answer and click Submit.

A) Detecting, Reporting, and Deterring B) Detecting, Reporting, and Monitoring C) Reporting, Detecting, and Referring D) Deterring, Detecting, and Prosecuting A is correct. B, C, and D are incorrect because Monitoring, Referring, and Prosecuting are not one of the three risk assessment fundamental components. Page 9

BSA/AML: Overview


Impact of Financial Crime Financial crime comes in different forms and attacks the U.S. financial system in a variety of ways. Check fraud and wire scams prey on unsuspecting customers and cause hundreds of millions of dollars in losses each year. Identity theft is a growing threat to consumers and exposes banks to liability from claims of unauthorized transactions. Money laundering and terrorist financing are also financial crimes with potentially devastating social and financial effects. In both money laundering and terrorist financing, transactors can exploit loopholes and other weaknesses in the legitimate financial system to pursue their illegal schemes, and ultimately, hide the actual purpose of their conduct. These activities abuse our payment processes and undermine the integrity of our banking system. By following BSA requirements as put in place by each bank’s policies and procedures, bank employees play an important part in monitoring transactions that may help lead investigators to the top level of an organized money-laundering effort or help stop a major fraud ring. Page 10

BSA/AML: Overview


Impact of Financial Crime Impact on society Money laundering is the means criminals use to separate the proceeds of crime—the dirty money—from the crime itself by using a series of transactions that cleanse the taint of the crime and make the funds appear legitimate.

The impact of money laundering is not isolated to financial institutions. Money laundering has an effect on society as a whole, because money laundering helps support criminal activities and terrorist financing. As a result, it also requires increased law enforcement efforts and security measures. Annual estimates of funds laundered reach into billions of dollars and the amount from drug trafficking alone is so staggering that it may be impossible to determine.

From the profits of narcotics traffickers to assets looted from government coffers by dishonest foreign officials, criminal proceeds have the power to corrupt and ultimately destabilize communities or entire economies. Most people are unaware of the major effect money laundering has on society and how it supports and promotes other criminal activities.

The following illegal activities support money laundering:

Drug trafficking

Gambling

Terrorist activity

Tax evasion

Arms trafficking

Trade, bank, medical and insurance fraud

Human trafficking and human smuggling

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BSA/AML: Overview


Impact of Financial Crime Challenge of stopping money laundering Banks are targets for money-laundering efforts because they provide ready access to the payment system. In addition, with the large volume of transactions that are processed by banks on a daily basis, criminals believe that a single transaction will move through the system undetected.

Federal investigators who try to stop money laundering find it a never-ending process. As soon as banks and law enforcement agents discover the latest money-laundering schemes, criminals respond by creating more inventive and complicated methods to launder money. The methods they use range from simply smuggling bulk cash to creating intricate webs using wire transfers and shell companies.

At the same time, it is important to recognize that the banking industry is complex and experiences constant change. As a result, law enforcement officials and bankers face additional challenges trying to identify and investigate money laundering.

Overall, the process of tracking the money takes time and effort because investigators are dealing with the continuous changes and complexities of both new money-laundering schemes and the evolving banking industry.

Glossary term: Shell companies A shell company generally refers to an entity that does not have a physical presence in any country. A shell company may have a mailing address, but typically generates little or no economic value. Most shell companies are formed by individuals and businesses for legitimate purposes, but shell companies have become common tools for money laundering and other financial crimes, primarily because they are easy and inexpensive to form and operate. Ownership and transactional information on these entities can be concealed from regulatory and law enforcement authorities. Page 12


BSA/AML: Overview


Impact of Financial Crime

True or False?

Money laundering affects only financial institutions.

True False

Answer The statement is false because money laundering is not isolated only to financial institutions. Money laundering has an effect on society as a whole because money laundering helps support criminal activities and terrorist financing. Page 13

BSA/AML: Overview


Money Laundering Stages There are three basic stages in the money laundering process.

» Roll over each stage to see examples of each.

Stage 1: Placement This is the first stage of the money-laundering process. The goal is to introduce or “place” money into the financial system in an attempt to hide the true source of the funds from law enforcement authorities.

Example One mechanism commonly used for placement is to break larger transactions into smaller amounts, sometimes called “smurfing.” For example, one individual might go to several branches to make deposits to attempt to avoid the currency reporting threshold or a large amount of cash might be handed to several individuals to make the deposits to avoid detection (these individuals are sometimes called “mules” or “smurfs”). Stage 2: Layering The purpose of layering is to move funds around the financial system, often using a complex series of transactions in order to create confusion and obscure the connection to the initial deposit or placement. The goal is to separate the proceeds of criminal activity from its origin through the use of layers of financial transactions. Typical methods of layering include wire transfers, stock dealings, or other transactions to change the form of currency to prevent the money from being traced back to the original criminal activity.

Example A common example of a layering transaction is a customer who deposits funds and almost immediately transfers them out, often by wiring the proceeds to another bank the next day. Stage 3: Integration Integration is the final stage in the money laundering process and is the ultimate goal for money launderers. At this stage, the illegal funds are integrated into the legitimate financial system using additional transactions to create the appearance of legality. For example, the funds may be used to purchase real estate, investment securities or other assets.

Example Funds are deposited in one bank, then wired to a second bank and combined with funds from a variety of other sources to make a down payment on a piece of real estate.

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BSA/AML: Overview



Self Check Quiz

> Select the money laundering stage that matches each scenario, then click Submit.

Scenario A: Funds return to the criminal as if they were obtained from legitimate sources. Having been layered through a number of financial operations, the criminal proceeds can now be used for any purpose including the financing of more crime. Scenario B: An individual takes proceeds from selling illegal drugs in small denomination bills to the bank and converts the bills to larger denominations, cashier’s checks, or other negotiable monetary instruments to be deposited into an account at another bank. Scenario C: A criminal with large sums of money to launder sets up shell companies in countries having either no strong bank secrecy laws or tax law enforcement. The tainted funds are then transferred to these shells until they are completely untraceable.

Answer choices:

Stage 1: Placement Stage 2: Layering Stage 3: Integration

The correct answers are:

Scenario A—Stage 3: Integration Scenario B—Stage 1: Placement Scenario C—Stage 2: Layering Page 15

BSA/AML: Overview



Self Check Quiz There are three basic stages in the money laundering process. What is the purpose of the layering stage?


A) To move funds around the financial system B) To introduce money into the financial system to hide the true source of the funds C) To incorporate funds into the financial system using additional transactions to create the appearance of legality D) To engage in complex monetary transactions with ever-changing circumstances

A is correct. B is incorrect because, to introduce or “place” money into the financial system in an attempt to hide the true source of the funds from law enforcement authorities is the placement stage. C is incorrect because integrating funds into the financial system using additional transactions to create the appearance of legality is the integration stage. D is incorrect because it is not the purpose of the layering stage. Page 16

BSA/AML: Overview


Terrorist Financing

Terrorists are usually motivated by ideological and political goals, unlike other criminals, who are motivated by profit. For the terrorist, money is a means to an end while for other criminals the money is an end in itself. Therefore, terrorists may use funds that come from legitimate sources while money launderers have funds from illegitimate sources that they are trying to make appear legitimate. Page 17

BSA/AML: Overview


Terrorist Financing

Criminal money laundering is a circular process where individuals or entities benefit directly from the funds they deposit. Terrorist financing is linear and deposited funds often flow from the person depositing funds to other individuals who use the funds to further the terrorist activity.

One key difference between terrorists and traditional criminal organizations is that to fund their activities, terrorists may rely on lawful activities as well as on unlawful activities such as narcotics trafficking, credit card fraud, and smuggling. The use of legitimate funding sources for terrorist objectives is a form of financial crime that often defies detection. However, unlike money laundering where the activity is for personal financial gain, terrorists engage in these activities to fund terrorism. The actual methods of conducting terrorist financing can be the same as those used by more traditional money launderers, such as currency smuggling, structured deposits or withdrawals, wire transfers, and purchases of various monetary instruments such as money orders and prepaid cards. The challenge for bankers is that terrorist financing may not be readily detectible.

Funding for terrorist attacks does not often require large sums of money, and the associated transactions may not be complex. This is another reason that detecting terrorist financing is particularly challenging.

Glossary term:

Structured deposits or withdrawals Transactions conducted in cash that are intended to evade the reporting requirements for currency transactions and consequently constitute their own criminal violations. Structuring is the breaking up of transactions for the purpose of evading the BSA reporting and record keeping requirements. Page 18


BSA/AML: Overview


Terrorist Financing

Self Check Quiz

What two reasons explain why it is difficult to detect terrorist financing?

> Select the correct answers and click Submit.

A) Terrorists often finance their activities through legitimate sources B) Terrorist transactions may not appear different from normal transactions C) Terrorists do not open bank accounts so banks do not have to be concerned about them D) Terrorists do not use the same money laundering techniques that other criminals use A and B are correct. C is incorrect because terrorists do open bank accounts. D is incorrect because terrorists use any money laundering techniques available to hide the true intent of how the funds are to be used. Page 19

BSA/AML: Overview


Compliance Programs

Every bank employee has a role to play in meeting a bank's responsibilities under BSA. All banks are required to create and maintain programs to manage BSA compliance, set up processes to monitor the effectiveness of these programs, and train employees on their BSA responsibilities. The bank's board of directors must approve the bank’s written compliance program. The BSA requires banks to implement four key elements as part of their BSA compliance program. These elements are sometimes called the four pillars of a BSA compliance program and all banks must include these elements in their compliance program. The following four elements are components of a BSA compliance program:

A system of internal controls (policies and procedures) to ensure compliance

One or more individuals designated as responsible for coordinating and monitoring day-to-day compliance efforts

Ongoing and appropriate training for personnel in BSA requirements

Independent testing of compliance conducted either by bank personnel or an outside auditor Page 20

BSA/AML: Overview


Compliance Programs

Customer Due Diligence and Beneficial Ownership Rule FinCEN’s Customer Due Diligence and Beneficial Ownership Rule imposes new requirements for identifying and verifying beneficial owners of legal-entity customers. This new rule amends the Bank Secrecy Act, and compliance was mandatory on May 11, 2018. This revised rule adds a fifth core element to the original four core elements of an effective BSA and anti-money laundering compliance program. Under the new rule, a bank must now include these four core elements plus the new, fifth core element noted below:

Risk-based procedures for conducting ongoing customer due diligence, to include, but not be limited to: o Understanding the nature and purpose of customer relationships for the purpose of developing a

customer risk profile o Conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to

maintain and update customer information NOTE: The customer due diligence and beneficial ownership requirements are sometimes called the 5

th Pillar, although

the BSA does not officially recognize that designation. Regulatory agencies consider these requirements to be part of the system of internal controls necessary to ensure compliance and not a separate “pillar.” Page 21

BSA/AML: Overview


Compliance Programs

Self Check Quiz Which action is part of the five basic components of BSA compliance?


A. Training your customers on the BSA B. Monitoring loan documents for compliance with the BSA C. Advertising in the local paper that your bank complies with the requirements of the BSA D. Training your personnel in BSA requirements on an ongoing basis

D is correct A, B, and C are incorrect because they are not part of the four basic components. Page 22

BSA/AML: Overview


Wrap Up

By completing BSA/AML: Overview, you now have a “big picture” understanding of the Bank Secrecy Act and Anti-Money Laundering Act. You can describe the foundation of the BSA and explain the BSA’s expectations for the components of a bank’s risk management process. You gained a better understanding of the impact of financial crime—check fraud, identity theft, money laundering, and terrorist financing—has on society. You also learned the three stages of money laundering and the funding sources terrorists may use for financing.

Note: This course provided a broad overview of the requirements of the BSA, but there are other BSA courses you will need to take based on your job responsibilities at the bank. For example, Currency Transaction Reports (CTRs) and Suspicious Activity Reports (SARs) are the primary means banks use to satisfy the reporting requirements of the BSA. In addition, there are recordkeeping requirements designed to provide a paper trail of transactions, particularly for any records which have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.

Click the EZ Reference button to download and print a listing of additional Frontline BSA/AML courses.

Click Exit to close this course.

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Documents

BSA/AML: Overview