Compliance Insights: Money Laundering and Financial Crime Risks at Community Financial Institutions

“The only thing that is constant is change.” We’ve all heard some version of this famous quote by Greek philosopher Heraclitus. The same can be said about financial crimes affecting the banking industry. It continuously evolves, becoming more complex and sophisticated. When law enforcement and financial institutions uncover new schemes and create controls and detection tools, the criminal networks behind them swiftly adapt.

Similarly, over the last decade we have seen incredible changes in the way we conduct banking. Not only do traditional financial institutions offer new products not seen in past decades, we have witnessed the creation of entirely new services and methodologies. Think mobile banking, remote deposits, internet banking, and digital and online currencies. All these advances have provided numerous conveniences to legitimate customers – but they have also enabled criminals to move money quickly and easily, with the added benefits of anonymity and invisibility.

Community banks and credit unions have done an outstanding job of adapting to and implementing new technology, with many at the forefront of innovation and change. But this means many financial crimes, such as money laundering, can no longer be dismissed as “big bank” problems.

Money laundering provides illicit proceeds to the multibillion dollar drug trafficking and human trafficking industries, and the reality is, a portion of this money is being moved through smaller, community banks and credit unions. As community financial institutions continue to rise to the challenge of financial crime prevention and detection, it’s important to continue to understand how illicit funds could be laundered through your institution.

Don’t Overlook Established Accounts

Financial crimes are not limited to just new customers and new accounts. Existing customers can also pose risks to financial institutions. Criminal rings have learned that there may be less scrutiny on accounts that have an established transaction history on record.

One known case involves members of an entire family opening accounts at several financial institutions, establishing a pattern of legitimate and low-risk transaction activity, becoming acquainted with bank employees, and striking when the timing was right. None of the branch tellers could believe that the “sweet, elderly couple” that brought in chocolates was part of the con.

A new trend on the rise involves existing customers, both business and retail, selling their established bank accounts to the highest bidder. In addition, there is always the risk of a family member or an acquaintance/associate taking control of an existing account and using it for unauthorized transactions. The best controls for this activity include continuous employee training, the BSA/AML Risk Assessment, and ongoing account monitoring and review.

Avoid the “Good Customer” Trap

Too often we hear this vague term of “good customer,” yet frequently this term is completely undefined. Is this customer a “good” one because of the balances he keeps? Is it because of how long she has had accounts at your institution? It’s important to foster a culture of compliance where employees don’t feel discouraged from questioning a transaction or reporting unusual activity just because of a “good customer” tag. Relationship managers and loan officers should be careful not to inadvertently shut down inquiries from other employees due to fear of offending the customer.

Not everyone feels comfortable questioning customers directly, so a possible solution would be to create a process for employees to report questionable activity directly to the compliance department or another designee. As my long-time AML mentor once told me, “If you find suspicious activity, report it – even if I or anyone else tells you not to.” It is crucial to train and encourage all employees that it’s not only acceptable – but expected – to question suspicious transactions.

Position Your Institution for Compliance Success

With the onslaught of new and changing regulations and increased regulatory scrutiny on AML programs, it’s important to continuously evaluate the compliance structure at your institution. In many places, the compliance officer wears multiple hats: lending and deposits compliance, BSA/AML compliance, risk, operations, or branch management. While this may have worked in the past, it’s important to reevaluate whether the compliance structure in place can continue to be successful going forward. This doesn’t necessarily mean hiring new employees – sometimes it’s about assigning the right responsibilities to the people who have the knowledge and skill set, and readiness to manage compliance successfully.

One of the best defenses against financial crime is to have a strong BSA/AML program – and the strength of this program depends on the strength of the person in charge of it. Your institution is filled with talented people. Right now is a great time to make sure they are positioned for success.

Questions? Please contact FHLBI's Compliance Director Agata Maurer at