Why anti-money laundering controls matter


As concerns about the criminal misuse of banking services grow, so does the importance of anti-money laundering transaction monitoring. But what is the specific threat to community banks, and how can they address it?

By Karen Epper Hoffman

With daily headlines trumpeting the growing pervasiveness of cybercrime, terrorist attacks and other malfeasance coming from foreign and domestic sources, it’s no surprise that banks of all sizes are turning their attention to their anti-money laundering (AML) controls.

Community banks used to be considered much less at risk for illegal money laundering than larger institutions. But bankers and regulators alike are realizing that many criminals see community banks as an easier platform to manipulate. Money launderers are counting on the fact that smaller community institutions, struggling with a hefty compliance burden, might be less apt to spot illegal activities, according to Joe Soniat, Bank Secrecy Act officer at $13.1 billion-asset Union Bank & Trust of Richmond, Va.

“The number of threats is definitely increasing,” Soniat says. “[Community bankers] get that this is happening, but they can’t keep up with it. It takes a lot of knowledge and focus to track this activity, and at some of the smaller or more rural community banks, they don’t have the people or the technology or the knowledge base.”

Quick stat

$4.5 million

Amount the FDIC fined Bank of Mingo for not managing its AML policies as required

In turn, this has forced many community banks to “de-risk” products or customers that might attract more scrutiny from auditors or regulators, which can affect their business, he adds.

But community bankers have already experienced the real-world consequences of disregarding AML guidance. In October 2017, the U.S. Financial Crimes Enforcement Network (FinCEN) set a $2 million fine against Lone Star National Bank for “willfully violating” anti-money laundering requirements of the Bank Secrecy Act. The Texas bank accepted a Mexican bank as a customer without conducting any significant due diligence on the bank or its owner. FinCEN maintained that if Lone Star had conducted proper AML controls, it would have discovered the Mexican bank owner’s involvement in securities fraud.

Before this, in June 2015, FinCEN and fellow regulator FDIC fined tiny $95 million-asset Bank of Mingo in West Virginia a hefty $4.5 million for not managing its AML policies or filing suspicious activity reports as required.

Dan Stipano, partner at Buckley Sandler, says that while there is “a growing bipartisan recognition [among lawmakers] that compliance costs are out of control,” particularly for community banks, they’re still taking AML regulation and enforcement “very seriously.”

Real-world impact

Chris Cook, executive vice president and chief administrative officer of $200 million-asset Farmers Bank and Trust Company in Marion, Ky., says that while his community bank is making headway in keeping up with AML monitoring and compliance demands, “we know we can’t relax.”

Cook considers training staff the most critical priority in weeding out potentially suspicious activity. He says his bank is also working more closely with its core data processor, using that vendor’s new monitoring product to do initial reviews on all transactions and sending potential outliers for human review.

Although most core banking processors have some type of transaction monitoring system, Cook says some of these systems are being revamped. The aim is to make them easier to use, better able to link to other systems and data files, and better at detecting false positives or negatives. Despite adding efficiency, Cook says his bank still spends roughly 10 percent of its net income on BSA/AML issues. “As a community bank,” he adds, “trying to maintain profitability and offer new products and services is challenging when you immediately take 10 percent off the top.”

Despite the growing costs, Soniat says it’s critical to have strong people, processes and technologies in this area. He adds that if you’re a bank with a couple hundred million in assets, it’s best to keep everything centralized. But aside from the talent shortage in AML, many community banks have long been dealing with monitoring technology that is outdated or inaccessible to this market.

However, industry insiders point out that the market does seem to be evolving, as pressure from regulators and bankers has pushed banking vendors and startups to offer new services and tools that are more affordable and manageable for the average community bank.

“You’re always going to be behind the eight ball. Whenever we have a new product or service, someone out there will always ask, ‘How can I use this to launder money?’”
—Joe Soniat, Union Bank & Trust

Just as the bank and payments market is evolving, so is the related cybercrime. “You’re always going to be behind the eight ball,” Soniat admits. “Whenever we have a new product or service, someone out there will always ask, ‘How can I use this to launder money?’”

Karen Epper Hoffman is a writer in Washington state.