FARMERS BRANCH, Texas – With banks facing record fines overviolations of the revamped Bank Secrecy Act, federal and stateregulators are turning the spotlight on the nation's credit unions.And the penalties for failing to report suspicious activity or toidentify customers covered under the anti-money-launderingprovisions of the BSA could be devastating, warned Robert Baxter,chief examiner of the Texas Credit Union Department. “That is goingto be a major focus for state and federal examiners over the comingmonths,” Baxter told nearly 60 members of the Texas Credit UnionLeague in a telephone roundtable Aug. 23. “With what's going on inthe banking industry as far as the volume of violations and thecivil money penalties that have been issued, we certainly don'twant any of our credit unions to be made examples of.” Baxter andAl Brantley, supervision analyst for NCUA's Region Fourheadquarters in Austin, said they are looking closest at potentialBSA violations, credit unions' use of third-party vendors and arelated problem: the sector's significant entry into sub-prime,outsourced auto loans. Originally passed to combatdrug-trafficking, the BSA was substantially amended by Congress aspart of the USA Patriot Act passed six weeks after the Sept. 11,2001 terror attacks. Five federal agencies have combined to enforceprovisions of the act, with the U.S. Treasury Department'sFinancial Crimes Enforcement Network (FinCEN) assigned to collectdata and issue monthly reports. Baxter said credit union regulatorsin 30 states have pledged to issue memorandums of understandingwith FinCEN. Seven have done so. Federal regulators fined RiggsNational Corp., the parent of Riggs Bank, $25 million last year inconnection with deals involving former Chilean dictator AugustoPinochet and cash transactions to Saudi-controlled bank accounts.Riggs was the largest money-laundering fine in the nation'shistory. PNC Financial Services agreed to buy Riggs National Corp.in July 2004 for $779 million in cash and stock. On Aug. 17, FinCENand the Office of the Comptroller of the Currency levied $24million in fines against the New York branch of Arab Bank plc forwhat they termed “systemic” violations of the BSA. Baxter defined a“systemic” violation of BSA under the federal guidelines as failureto maintain a log of monetary transactions between $3,000 and$10,000 and failing to develop a process for identifycash-equivalent transactions in excess of $10,000, which requiresthe electronic and paper filing of a current transaction reportwith the feds. “Riggs is one of the most prominent banks involvedin the violations. And that bank no longer exists,” Baxter said.“The extent of their civil-money penalties and the cost of goingback to research their records literally bankrupted theinstitution.” Baxter and Brantley warned third-party actions inconnection with BSA enforcement and other outsourcing activitiesprevalent in the sub-prime lending market won't be a defense. InJune, NCUA issued a Risk Alert 05-RISK-01, warning that the numberof credit unions engaged in outsourced, indirect sub-prime autoloans has sharply increased since September 2004. NCUA examinersbegan contacting credit unions involved in the loans to checkcontrols and practices in the programs. While the risk alertfocuses mainly on lending controls and concentration risk, it's areminder to credit unions that when they contract with athird-party vendor they have to do the due diligence on all areas,including anti-money laundering requirements that would fall underBSA. “For credit unions to make the assumption that the third partymanaging its program is doing due diligence does not by any meanstake the burden off the credit union to do its due diligence,”Brantley said. “All we're asking is that you take a careful look atyour programs.” -

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