Banks and credit unions aren’t the only organizations fighting against money laundering. In fact, some businesses like insurance brokers and jewelry dealers, among others, are considered financial institutions, and are required to comply with the Bank Secrecy Act (BSA)—a law that requires financial institutions in the United States to help government agencies detect and prevent money laundering—a complex task.
Many businesses don’t realize that they’re required to comply with anti-money-laundering (AML) policies and end up suffering significant fines as a result. Proactive compliance with AML regulations is crucial, especially during a time of increased regulatory scrutiny. CSI’s whitepaper, The Constant Battle to Prevent Money Laundering, provides guidance about what BSA/AML regulations require, which businesses are on the hook and how technology solutions can aid compliance.
There are More Financial Institutions Than Commonly Thought
The U.S. Treasury Department estimates that more than $300 billion in illicit profits are generated annually by criminals attempting to move money through the U.S. financial system. As such, money laundering is a significant operation, affecting traditional financial institutions as well as companies that interact with those institutions.
The BSA is designed to combat this problem by requiring financial institutions to take measures to prevent money laundering. The USA PATRIOT Act of 2001 updated the BSA, broadening the definition of what counts as a financial institution and laying out key actions financial institution need to take.
Further, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) in 2018 released the Consumer Due Diligence Final Rule. This rule specified which institutions are included in AML regulations and prescribed that companies adopt risk-based customer due-diligence procedures.
According to FinCEN, casinos, gaming establishments, mortgage companies, and security brokers are just a few industries classified as financial institutions. And they’re required to employ an anti-money-laundering compliance plan, including a designated compliance officer, an independent audit system, internal policies to detect and prevent money laundering and employee training.
Furthermore, the Consumer Due Diligence Final Rule mandates developing risk-based customer due diligence procedures that include developing and maintaining customer risk profiles and identifying and reporting suspicious activity.
Compliance with regulation has been lax, partly because many financial-adjacent businesses chose to avoid the issue until it became abundantly clear that they had no choice.
This wait-and-see policy has been a costly one, according to CSI’s report. Annual fine totals have increased from $800,000 in 2002 to $169.9 million in 2022.
AML Systems can be Challenging to Implement
Although part of the lack of compliance may be due to negligence, the fact that anti-money-laundering systems are hard to implement also plays a key role.
The ongoing customer monitoring required to identify and report suspicious activity can be tedious if it’s done manually. It’s expensive to hire the staff necessary to do it, and standard AML software solutions that automate this process can create their own problems and be easily bypassed by money launderers.
According to CSI, AML software typically has a limited number of rules, which when implemented yield too many or too few red flags. If rules are too general, there may be too many red flags for a limited staff to review.
The CSI whitepaper notes: “A 2021 FinCEN enforcement action highlights this exact scenario. The organization’s AML monitoring system was generating too many suspicious activity alerts for the three-person BSA analyst team. As a result, they ‘often did not review supporting documents (cash deposit slips, wire transcripts, check images, etc.), although all of this information was readily available. In turn, FinCEN levied an $8 million fine.’”
Overall, the rules can cause a few headaches. For example, if the rules are too loose, the system is too lax on enforcement. But if they’re standardized—and they often are—money launderers can figure out consistent ways to get around them.
Moreover, if companies do find red flags and don’t file suspicious activity reports (SARs), they often don’t explain the reasoning for that decision. This is illegal and can open them up to further fines.
At one company, FinCEN examiners “noted that 22% of SAR filing decisions did not have sufficient information as to the customer’s source or purpose of funds to justify not to file a SAR.” In other words, the company couldn’t explain its reasoning.
And that company is not an outlier. CSI analysis found that 40% of the AML software market doesn’t have systems that effectively produce such explanations.
Part of the reason more SAR reports are not filed, or are filed late, is they must be filed outside the AML system. All of this makes it difficult, expensive, and time-consuming for small companies to comply with anti-money-laundering regulations, especially when they didn’t have to think about it much before 2018, when the definition of what’s considered a financial institution was broadened.
Tech Solutions for Money Laundering
During a time of increasingly bold regulations, AI-infused tech solutions are helping many companies meet AML obligations.
For example, CSI’s AI-infused AML software analyzes customer transactions to detect patterns and create better models for detecting money laundering. AI can better distinguish between actual suspicious activity and false positives, and it can close out the positives that seem least likely to be actual money laundering. The software can complement limited human staffers by sending them only the cases most likely to be real money laundering.
CSI’s software also comprises more than 30 customizable rules. It generates a risk score—and an explanation—for every activity it reviews and generates dynamic risk scores for each customer based on customer information that is updated daily. Furthermore, the software streamlines the SAR filing process, so SARs can be filed from within the software’s case management dashboard.
For the increasing number of businesses that must comply with anti-money-laundering regulations, AI-infused AML software can solve compliance problems and reduce headaches.