Banking Regulator Sounds Warning on BSA/AML Compliance

By Jeff Bater

July 11 — A federal regulator warned banks about complying with Bank Secrecy Act (BSA) and anti-money laundering (AML) laws, saying technological developments may create new vulnerabilities.

The Office of the Comptroller of the Currency (OCC) released its semiannual report on risk July 11. In addition to flagging BSA/AML concerns, the OCC is monitoring the effects of continued low oil prices on bank loan portfolios.

The OCC said BSA/AML risks remain high and are rising. Technological developments in enhanced delivery platforms for bank products may create new vulnerabilities to criminal activity, while more traditional concerns — such as trade-based money laundering and bulk cash smuggling, including via armored car service and funnel account activity — continue to present risks to banks.

Some banks have failed to develop or incorporate appropriate controls as products and services change, the OCC said. “In addition, some banks struggle with devoting sufficient resources and maintaining the expertise necessary to effectively manage BSA/AML risks,” the report said.

De-risking by Banks

Concern over BSA/AML risks has prompted some banks to take another look at certain customer relationships. Such re-evaluations have led some banks to terminate some of their foreign customer relationships because of concerns about the host country’s anti-money laundering regime and doubts that the potential financial benefits of the customer relationship would offset the costs of managing the associated U.S. compliance risk.

But the OCC warned displacement of customers from large banks may result in higher-risk customers moving to smaller and less sophisticated banks, which might have less experience managing the associated BSA/AML risks.

“This displacement also may result in the financial exclusion of some customers from banking services, and transactions that would have taken place subject to regulatory oversight may be undertaken with less scrutiny in a non-regulated context,” the agency said in its report.

The practice of avoiding perceived regulatory risk by indiscriminately terminating, restricting or denying services to broad classes of clients, without a case-by-case analysis or consideration of mitigation options, is known as de-risking.

Regulators have been looking at cases of banks severing relationships. In March, Comptroller of the Currency Thomas Curry said his office was gathering data to get a better picture of risk evaluation practices, and he raised the possibility of eventually issuing guidance to OCC-supervised institutions to better communicate its findings (45 BBD, 3/8/16).

OCC Analysis Continues

Asked about possible de-risking guidelines July 11, Curry said the OCC is looking at the practices of the biggest banks with respect to foreign correspondent banking and what types of risk management structures they have in place.

“That analysis is ongoing, and we may conclude in the near future,” he told reporters on a conference call.

In its risk report, the OCC said the agency does not direct banks to open, close or maintain individual accounts, nor does it encourage banks to terminate entire categories of customer accounts without regard to the risks presented by an individual customer or the bank’s ability to manage the risk.

“The OCC expects banks to assess the risks posed by individual customers on a case-by-case basis and implement controls to manage the relationships commensurate with these risks,” it said. “The decision to exit a line of business or to terminate a banking relationship with a customer resides solely with the bank, not with the OCC.”

Oil Price Exposure

In addition to BSA/AML compliance, the agency has been closely watching the substantial deterioration of certain bank loans to oil and gas businesses due to falling energy prices. The OCC sees further trouble in 2016.

“As a result of the decline in oil prices since the summer of 2014, U.S. oil companies have idled 70 percent of their rigs, reduced capital spending, and cut more than 100,000 jobs, with the greatest impact on Louisiana, North Dakota, Oklahoma, West Virginia and Wyoming,” Curry said in prepared remarks about the risk report. “And, direct bank lenders to the oil and gas industry have seen a substantial rise in problem loans that we are monitoring closely.”

The July 11 report showed classified loans in the oil and gas extraction sector increased to 15.2 percent of commitments at year-end 2015, compared with 0.7 percent a year earlier. Classified loans are those considered substandard, doubtful or a loss.

“Further downgrades and higher levels of classified loans are expected in 2016, driven by continued low commodity price levels and borrower cash flow declines that further impair liquidity and the ability to service debt,” the OCC said. “This ongoing deterioration requires further provisioning at some banks.”

To contact the reporter on this story: Jeff Bater in Washington at

To contact the editor responsible for this story: Mike Ferullo at

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