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Avoiding AML compliance penalties – Tips from a former regulator

Abrigo
September 21, 2023
Read Time: 0 min

Understanding AML compliance and regulatory expectations

AML compliance is not for the faint of heart. Understanding and dedication are necessary for success. Here are a few tips to help along the way.

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AML compliance

Three tips for avoiding AML compliance penalties

Having a solid culture of compliance is critical to avoiding AML penalties. Regulators take risk seriously, and knowing just how much risk your institution can take while remaining compliant is essential. Significant risk doesn't always mean a big reward for financial institutions.

A few years ago, a small credit union in Miami Gardens, FL, shut its doors due to a $300,000 civil money penalty assessed for their anti-money laundering (AML) failures. With only $4 million in assets and five employees, this fine was detrimental to the viability of the small credit union. Despite their size, this Miami credit union still took on giant risks that, according to FinCEN, exposed the United States financial system to significant opportunities for money laundering and terrorist financing.

One of the significant risks it took on was a contract with a third-party money services business (MSB) to provide services and sub-accounts to other MSBs. These MSBs were located in high-risk jurisdictions outside the Miami credit union’s field of membership and outside the United States. In one year, the credit union facilitated over $1 billion in outgoing wires and $984 million in remotely captured deposits with this third-party relationship. The revenue generated from this relationship made up over 90% of the credit union's annual income.

FinCEN said this was done with little to no risk management program. The credit union was not reviewing 314(a) requests, not conducting independent testing, and could not provide regulators with a meaningful risk assessment. This story offers several examples of pillar violations and systemic failure to meet the requirements of AML compliance. Although this is an extreme example of a willful violation of regulatory requirements, the thought of AML penalties is a fear amongst many institutions.

Regardless of your institution's asset size or risk tolerance, it is essential to have a strong culture of compliance across your institution and the BSA program. Remember to:

  • Know Your Customer and know your customer’s customer: Evaluate a business's business model and principles before entering a third-party relationship. Assess how entering into this third-party relationship will impact your institution’s risk profile and ensure that your institution has the resources to appropriately mitigate the risks presented by the connection.
  • Avoid concentrations: This Miami credit union received 90% of its annual income from a third-party relationship, creating significant concentration risk! Along with the massive compliance risk, the credit union was likely only financially viable with this third-party relationship. This does not make for a safe and sound institution.
  • Fight for compliance: As a BSA officer, you must educate the board and senior leadership about potential compliance concerns from risky third-party relationships. Remind the decision-makers that compliance is critical. The cost of an AML violation fine from FinCEN will outweigh the income from a high-risk/high-reward money-making opportunity. Make your voice heard and document your disagreement.

The amount of risk this credit union takes in relation to its size is astounding and leaves no room to question the actions taken by FinCEN. Short-term financial gains proved not worth it when the institution was forced to close its doors. We can all learn several lessons from this occurrence– appropriately manage third-party risks, avoid concentrations, and voice any compliance concerns you may have about third-party relationships your financial institution may be considering.

Ultimately, it is essential to remember that FinCEN stresses a Culture of Compliance and mandates that financial institutions have a solid, efficient, risk-based BSA/AML program, regardless of using BSA/AML software. Understanding your institution’s risk profile enables you to apply appropriate risk management processes to your BSA/AML compliance program.

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About the Author

Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo’s platform centralizes the institution’s data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth. Make Big Things Happen.

Full Bio

About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

Make Big Things Happen.