Bank regulators call for enhanced customer oversight in illicit finance update

Tierney L. Cross/Bloomberg

Federal regulators are weighing changes to their oversight regimes to combat illicit finance.

The Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, National Credit Union Administration and Treasury Department initiated a joint rulemaking Friday related to the compliance oversight programs for the Bank Secrecy Act, or BSA, and Anti-Money Laundering/Countering the Financing of Terrorism, or AML/CFT.

The proposed rule largely mirrors existing policies on the books today, the agencies note, either through supervisory expectations or through the Financial Crimes Enforcement Network’s current AML/CFT framework. 

The network, also known as Fincen, is a bureau of the Treasury Department. It was required to update its AML/CFT rules by the Anti-Money Laundering Act of 2020. The agencies say they are running their own notice and comment rulemaking process to ensure financial institutions are subject to the same requirements regardless of their primary supervisor.

“In that way, banks would comply with one standard rather than differing program rule requirements between FinCEN and the agencies,” the regulators said in a joint statement. “The amendments also would incorporate certain long-standing supervisory expectations and technical amendments.”

Key changes include enhanced customer due diligence expectations, including the collecting of beneficial ownership information. This is currently part of Fincen’s AML program, so the agencies say its impact on banks should be minimal. 

The proposal also notes that financial institutions should have a presence in the U.S. and employees responsible for overseeing their illicit finance prevention programs who are “accessible to, and subject to oversight and supervision by, FinCEN and the appropriate Federal functional regulator.”

The agencies also outlined their expectations for bank oversight programs, noting that they should have processes for identifying, evaluating and documenting illicit financial activities. The proposal notes that these should be done in accordance with the priorities established by Fincen.

Regulators also affirmed their commitments to meeting their AML Act obligations, including supervising institutions for compliance and improving their so-called “feedback loops” with banks. 

The proposal also notes that banks should make use of technological innovations whenever appropriate to improve illicit financial oversight practices. The document states that financial institutions will have some liberty to identify and implement innovative approaches and, where possible, the agencies will assist in this process. 

“In support of this objective, FinCEN and the Agencies intend to build on existing partnerships with the private sector and to engage with the private sector on innovation, including through the BSA Advisory Group Subcommittee on Innovation and Technology,” the joint statement reads.

The proposal was not unanimously supported by agency officials. Fed Gov. Michelle Bowman voted against issuing notice of proposed rulemaking on the grounds that the standards being considered would apply to all banks, including small community banks, which she said present smaller money laundering and terrorism finance risks.

“While I support efforts to reduce duplicative regulations and the burden that would be associated with our regulated institutions being required to comply with multiple overlapping requirements, I would have preferred that compliance expectations for this new rule be expressly tailored to the size, business model, complexity, and risks presented by institutions, particularly for community banks, and those with assets below $10 billion,” Bowman said in a written statement. “Therefore, I am not able to support the proposal in its current form.”