FARMERS BRANCH, Texas – With banks facing record fines over violations of the revamped Bank Secrecy Act, federal and state regulators are turning the spotlight on the nation’s credit unions. And the penalties for failing to report suspicious activity or to identify customers covered under the anti-money-laundering provisions of the BSA could be devastating, warned Robert Baxter, chief examiner of the Texas Credit Union Department. “That is going to be a major focus for state and federal examiners over the coming months,” Baxter told nearly 60 members of the Texas Credit Union League in a telephone roundtable Aug. 23. “With what’s going on in the banking industry as far as the volume of violations and the civil money penalties that have been issued, we certainly don’t want any of our credit unions to be made examples of.” Baxter and Al Brantley, supervision analyst for NCUA’s Region Four headquarters in Austin, said they are looking closest at potential BSA violations, credit unions’ use of third-party vendors and a related problem: the sector’s significant entry into sub-prime, outsourced auto loans. Originally passed to combat drug-trafficking, the BSA was substantially amended by Congress as part of the USA Patriot Act passed six weeks after the Sept. 11, 2001 terror attacks. Five federal agencies have combined to enforce provisions of the act, with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) assigned to collect data and issue monthly reports. Baxter said credit union regulators in 30 states have pledged to issue memorandums of understanding with FinCEN. Seven have done so. Federal regulators fined Riggs National Corp., the parent of Riggs Bank, $25 million last year in connection with deals involving former Chilean dictator Augusto Pinochet and cash transactions to Saudi-controlled bank accounts. Riggs was the largest money-laundering fine in the nation’s history. PNC Financial Services agreed to buy Riggs National Corp. in July 2004 for $779 million in cash and stock. On Aug. 17, FinCEN and the Office of the Comptroller of the Currency levied $24 million in fines against the New York branch of Arab Bank plc for what they termed “systemic” violations of the BSA. Baxter defined a “systemic” violation of BSA under the federal guidelines as failure to maintain a log of monetary transactions between $3,000 and $10,000 and failing to develop a process for identify cash-equivalent transactions in excess of $10,000, which requires the electronic and paper filing of a current transaction report with the feds. “Riggs is one of the most prominent banks involved in the violations. And that bank no longer exists,” Baxter said. “The extent of their civil-money penalties and the cost of going back to research their records literally bankrupted the institution.” Baxter and Brantley warned third-party actions in connection with BSA enforcement and other outsourcing activities prevalent in the sub-prime lending market won’t be a defense. In June, NCUA issued a Risk Alert 05-RISK-01, warning that the number of credit unions engaged in outsourced, indirect sub-prime auto loans has sharply increased since September 2004. NCUA examiners began contacting credit unions involved in the loans to check controls and practices in the programs. While the risk alert focuses mainly on lending controls and concentration risk, it’s a reminder to credit unions that when they contract with a third-party vendor they have to do the due diligence on all areas, including anti-money laundering requirements that would fall under BSA. “For credit unions to make the assumption that the third party managing its program is doing due diligence does not by any means take the burden off the credit union to do its due diligence,” Brantley said. “All we’re asking is that you take a careful look at your programs.” -

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