On December 3, the Financial Crimes Enforcement Network (FinCEN) and the four federal financial institution supervisory agencies (the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency) issued a joint statement encouraging banks (i.e., banks, savings associations, credit unions, and foreign banks) “to consider, evaluate, and, where appropriate, responsibly implement innovative approaches to meet their Bank Secrecy Act/anti-money laundering (BSA/AML) compliance obligations, in order to further strengthen the financial system against illicit financial activity.”
The statement expressed the agencies’ recognition “that private sector innovation, including new ways of using existing tools or adopting new technologies, can help banks identify and report money laundering, terrorist financing, and other illicit financial activity by enhancing the effectiveness and efficiency of banks’ BSA/AML compliance programs.” The statement declared that “[i]nnovation has the potential to augment aspects of banks’ BSA/AML compliance programs, such as risk identification, transaction monitoring, and suspicious activity reporting.” In that regard, it cited examples of innovations that some banks have already undertaken:
Some banks are becoming increasingly sophisticated in their approaches to identifying suspicious activity, commensurate with their risk profiles, for example, by building or enhancing innovative internal financial intelligence units devoted to identifying complex and strategic illicit finance vulnerabilities and threats. Some banks are also experimenting with artificial intelligence and digital identity technologies applicable to their BSA/AML compliance programs. These innovations and technologies can strengthen BSA/AML compliance approaches, as well as enhance transaction monitoring systems.
The statement specifically noted that the agencies “welcome these types of innovative approaches to further efforts to protect the financial system against illicit financial activity,” and that “these types of innovative approaches can maximize utilization of banks’ BSA/AML compliance resources.”
The statement offered an additional assurance that the agencies are committed to continued private-sector engagement with financial institutions, advocating early engagement with bank management to discuss pilot programs for innovative BSA/AML approaches. Such early engagement, according to the statement, “can promote a better understanding of these approaches by the Agencies, as well as provide a means to discuss expectations regarding compliance and risk management,” and provide the agencies with the opportunity to “clarify supervisory expectations, as appropriate and necessary.”
The statement also made four points critical to assuring financial institutions that the agencies do not intend to whipsaw them by encouraging innovation but then effectively penalizing them for the consequences of innovation. First, it said that they “will not penalize or criticize banks that maintain effective BSA/AML compliance programs commensurate with their risk profiles but choose not to pursue innovative approaches.” Second, it stated that while they expected banks to maintain effective BSA/AML compliance programs, they “will not advocate a particular method or technology for banks to comply with BSA/AML requirements.” Third, it indicated the agencies’ openness to banks’ conducting pilot programs, “in conjunction with existing BSA/AML processes, [as] an important means of testing and validating the effectiveness of innovative approaches,” and to providing feedback to the banks on such pilot programs. In particular, it stated that “pilot programs in and of themselves should not subject banks to supervisory criticism even if the pilot programs ultimately prove unsuccessful.” Fourth, it offered a measured assurance that “pilot programs that expose gaps in a BSA/AML compliance program will not necessarily result in supervisory action with respect to that program.”
Note: This statement is the second result of the ongoing work of a working group that the United States Department of the Treasury’s Office of Terrorism and Financial Intelligence and the Federal depository institutions regulators formed with the aim of improving the effectiveness and efficiency of the BSA/AML regime. Previously, on October 3, FinCEN and the agencies issued a joint interagency statement on sharing Bank Secrecy Act resources.
Both of these statements are welcome developments in two respects. First, they provide some specific assurance that federal bank regulators are genuinely interested in positive engagement with the financial sector, and not merely regulation and enforcement. Second, they appear not to be pressing for or insisting that financial institutions must adhere to particular types of innovative methods or technologies that regulators have previously endorsed. Financial institutions should therefore take the December 3 statement at its word and develop innovative AML/CTF approaches that they believe make sense from a risk-based perspective, and test the strength of the regulators’ professed commitment to engagement with the financial sector.