Anti-Money Laundering: Issues Concerning Depository Institution Regulatory Oversight
Published: 2004-06-03T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The U.S. government's framework for preventing, detecting, and prosecuting money laundering has been expanding through additional pieces of legislation since its inception in 1970 with the Bank Secrecy Act (BSA). The purpose of the BSA is to prevent financial institutions from being used as intermediaries for the transfer or deposit of money derived from criminal activity and to provide a paper trail for law enforcement agencies in their investigations of possible money laundering. The most recent changes arose in October 2001 with the passage of the USA PATRIOT Act, which, among other things, extends antimoney laundering (AML) requirements to other financial service providers previously not covered under the BSA. GAO was asked to testify on its previous work and the ongoing work it is doing for the Senate Committee on Banking, Housing, and Urban Affairs on the depository institution regulators' BSA examination and enforcement process.
section_title: What GAO Found
paragraphs: In recent years, GAO has issued a number of reports dealing with regulatory oversight of anti-money laundering activities of financial institutions. In 1998, GAO issued a report regarding Treasury's Financial Crimes Enforcement Network's (FinCEN) role in administering the BSA, which updated information on civil penalties for BSA violations. One focus was the Secretary of the Treasury's 1994 mandate to delegate the authority to assess civil money penalties for BSA violations to federal banking regulatory agencies. GAO noted that this delegation had not been made and said that FinCEN was concerned that bank regulators may be less inclined to assess BSA penalties and may prefer to use their non-BSA authorities under their own statutes. Also in 1998, GAO reported on the activities of Raul Salinas, the brother of the former President of Mexico. Mr. Salinas was allegedly involved in laundering money from Mexico, through Citibank, to accounts in Citibank affiliates in Switzerland and the United Kingdom. GAO determined that Mr. Salinas was able to transfer $90 - $100 million between 1992 and 1994 by using a private banking relationship structured through Citibank New York in 1992 and effectively disguise the funds' source and destination, thus breaking the funds' paper trail. In 2001, GAO issued a report on changes in BSA examination coverage for certain securities broker-dealers. At the time, there was no requirement that all broker-dealers file Suspicious Activity Reports (SARs); however, brokerdealer subsidiaries of depository institutions and their holding companies were required to file SARs and were examined by banking regulators for compliance. GAO determined that with the passage of the 1999 Gramm-Leach-Bliley Act, these broker-dealers were no longer being examined to assess their compliance with SAR requirements. However, with the passage of the USA PATRIOT Act and the issuance of a final rule that was effective on July 31, 2002, all broker-dealers were required to report such activity. GAO is currently studying the depository institution regulators' BSA examination and enforcement process for the Senate Committee on Banking, Housing, and Urban Affairs. The objectives include determining how the regulators' risk-focused examinations assess BSA compliance, the extent to which the regulators identify BSA and AML violations and take supervisory actions, and the consistency of BSA compliance examination procedures and interpretation of violations across regulators. GAO plans to determine whether and to what extent regulators curtailed BSA compliance examinations and the bases for these decisions. GAO plans to track supervisory actions taken to correct violations identified. GAO will also examine the ramifications, if any, of the lack of delegation of authority to assess BSA compliance penalties by Treasury to the banking regulators, as mandated by statute. GAO will meet with government and industry officials to gain their perspective on the BSA compliance examination process.

section_title: Letter
paragraphs: I appreciate this opportunity to be here today to discuss a number of  issues concerning federal depository institution regulators’ oversight of  financial institutions for Bank Secrecy Act (BSA) compliance and our  ongoing work for this committee on this matter. The U.S. government’s  framework for preventing, detecting, and prosecuting money laundering  has been expanding through additional pieces of legislation since its  inception in 1970 with the Bank Secrecy Act. The purpose of the BSA is to  prevent financial institutions from being used as intermediaries for the  transfer or deposit of money derived from criminal activity and to provide  a paper trail for law enforcement agencies in their investigations of  possible money laundering. Over the years, the BSA has evolved into an  important tool to help deter money laundering, drug trafficking, terrorist  financing, and other financial crimes. The most recent changes arose in  October 2001 with the passage of the USA PATRIOT Act, which, among  other things, contains expanded provisions to prevent, detect, and  prosecute terrorist financing and international money laundering at  depository institutions and extends anti-money laundering (AML)  requirements to other financial service providers previously not covered  under the BSA.
Congress amended the BSA in 1994 to require federal financial banking  regulators to develop enhanced examination procedures and training to  improve the identification of possible money-laundering schemes at  financial institutions under their supervision. Federal banking regulators  regularly assess compliance with BSA and related AML requirements  during safety and soundness or compliance examinations using  examination procedures that are consistent with their overall risk-focused  examination approach. Under the risk-focused approach, those activities  judged to pose the highest risk to an institution are to receive the most  scrutiny by examiners. In examining depository institutions for BSA  compliance, the regulators’ examination procedures are to serve as a tool  for determining whether depository institutions (1) have developed AML  programs and procedures to adequately detect, deter, and report unusual  or suspicious activities possibly related to money laundering; and (2)  comply with the technical recordkeeping and reporting requirements of  the BSA.
The regulators also have a variety of enforcement tools to address  noncompliance. They can take increasingly formal supervisory actions  that range from moral suasion or informal discussions with the  institution’s management to written agreements, civil money penalties, and  cease and desist orders.
The recent imposition of several large civil money penalties on depository  institutions has increased concern about industry compliance with and  government enforcement of the BSA. My statement today will focus on the  banking regulators’ approach for ensuring compliance with BSA and AML  program requirements. Specifically, I will discuss (1) recent enforcement  actions taken against depository institutions for BSA violations, (2)  inspectors general reports assessing the regulators’ examination work and  enforcement activities, and (3) issues raised in some of our past work on  money laundering and ongoing work on BSA examinations and  enforcement for the Committee.
To address these objectives, we reviewed consent orders and other  documents pertaining to selected enforcement actions, recent Department  of the Treasury (Treasury) and Federal Deposit Insurance Corporation  (FDIC) Office of Inspector General reports, past GAO reports, and  documents related to our ongoing BSA work for this Committee.
subsections: section_title: Background
paragraphs: The Financial Recordkeeping and Currency and Foreign Transactions  Reporting Act, commonly referred to as the Bank Secrecy Act, passed by  Congress in 1970, requires that financial institutions file certain currency  and monetary instrument reports and maintain certain records for possible  use in criminal, tax, and regulatory proceedings. As a result, the BSA helps  to provide a paper trail of the activities of money launderers for law  enforcement officials in pursuit of criminal activities.
Congress has amended the BSA a number of times to increase the  effectiveness of the regulators’ efforts. For example, the initial BSA  reporting system did not include provisions for separate money laundering  charges against those who had not satisfied reporting requirements. Thus,  Congress enacted the Money Laundering Control Act of 1986, which made  money laundering a criminal offense separate from any BSA reporting  violations. This act created criminal liability for individuals or entities that  conduct monetary transactions knowing that the proceeds involved were  obtained from unlawful activity and made it a criminal offense to  knowingly structure transactions to avoid BSA reporting. The 1986 act also  directed the regulators (1) to issue regulations that require the financial  institutions subject to their respective jurisdiction “to establish and  maintain procedures reasonably designed to assure and monitor the  compliance of such institutions;” (2) to review such procedures during the  course of each examination of such financial institutions; (3) to issue  cease and desist orders to ensure compliance with the requirements; and  (4) to assess civil money penalties for failure to maintain such compliance  procedures.
In 1992, Congress increased the penalties for institutions and their  employees who violate the BSA and authorized the regulators to take  additional supervisory actions for such violations. More specifically, the  Annunzio-Wylie Anti-Money Laundering Act authorized the federal  banking regulators to revoke an institution’s charter if it was convicted of  money laundering and, in certain circumstances, to issue removal and  prohibition orders against individuals charged with BSA offenses. As  authorized by this act, in 1996, Treasury issued a rule requiring that banks  and other depository institutions use a Suspicious Activity Report (SAR)  form to report activities involving possible money laundering. Institutions  file these forms with the Financial Crimes Enforcement Network  (FinCEN) at Treasury.
Congress amended the BSA again in 1994, with The Money Laundering  Suppression Act, to require that financial regulators develop enhanced  examination procedures and training to improve identification of money- laundering schemes at financial institutions under their supervision.  Accordingly, the federal banking regulators adopted a core set of  examination procedures to determine whether an institution has the  necessary system of internal controls, policies, procedures, and auditing  standards to assure compliance with the BSA and implementing  regulations. The procedures also require examiners to review an  institution’s internal audit function, procedures, selected workpapers,  records, reports, and responses. Based on the results, examiners may  conclude the examination or continue with expanded procedures, which  might include transaction testing and review of related documentation.  This act also directed the Secretary of the Treasury to delegate to  appropriate federal banking regulatory agencies the authority to assess  civil penalties for BSA violations. In May 1994, the Secretary delegated this  authority to FinCEN but, to date, this delegation has not been made to the  banking regulators.
In October 2001, Congress again amended the BSA through passage of the  USA PATRIOT Act, specifically through Title III of this act. The passage of  the USA PATRIOT Act was prompted, in part, by the September 11, 2001,  terrorist attacks in Washington, D.C. and New York City, which in turn  enhanced awareness of the importance of combating terrorist financing  through the U.S. government’s AML efforts. Title III expanded the scope of  the BSA to include organizations not previously covered, such as  securities brokers, insurance companies, and credit card system  operators. Among Title III’s provisions are requirements that financial  institutions covered by the act:    Establish and maintain AML programs;  Identify and verify the identity of customers who open accounts;    Exercise due diligence and, in some cases, enhanced due diligence with  respect to all private banking and correspondent accounts;   Conduct enhanced scrutiny with respect to accounts maintained by or on  behalf of foreign political figures or their families; and   Share information relating to money laundering and terrorism with law  enforcement authorities, regulatory authorities, and financial institutions.
Title III also added activities that can be prosecuted as money laundering  crimes and increased penalties for activities that were money laundering  crimes prior to enactment of the USA PATRIOT Act. Examination  procedures of the federal banking regulators are expected to conform to  PATRIOT Act amendments to the BSA and regulations issued by the  Treasury.
section_title: Recent Actions Taken against Depository Institutions for BSA Violations Highlight Deficiencies in AML Programs at Some Institutions
paragraphs: In the last few years and as recently as last month, the federal banking  regulators and the courts have taken actions against a number of  depository institutions for significant BSA violations. In addition to  deficiencies at the institutions themselves, issues raised in these cases  included the timeliness of the identification of BSA violations and  enforcement actions taken by the regulators. To illustrate, I will discuss  three different cases at three different types of depository institutions.
subsections: section_title: Banco Popular de Puerto Rico
paragraphs: In the first case, a bank was charged with BSA violations of suspicious  activity report requirements and received a deferred prosecution. In 2000,  the U.S. Department of Justice (Justice) charged Banco Popular de Puerto  Rico, a bank subsidiary of a diversified financial services company serving  Puerto Rico, the United States, and Latin America, with failing to file SARs  in a timely and complete manner—in violation of the BSA. According to  Justice, from 1995 through 1998, an individual, who was later convicted of  money laundering offenses, deposited approximately $21.6 million in cash  into an account at Banco Popular. Justice indicated that a number of  branch employees were aware of the suspicious activity, but that the bank  failed to investigate the account for over 2 years from the date the account  was opened, and also did not report the suspicious activity to FinCEN  until 1998 as required by the BSA.
Although the Federal Reserve Bank of New York (FRBNY) conducted four  examinations of Banco Popular from 1995 through 1998, the examinations,  based on procedures used at the time, did not contain any criticism of the  bank’s BSA compliance policies or procedures. In 1999, 4 years after the  individual first began laundering an undetermined amount of money  through Banco Popular, FRBNY expanded the scope of the bank’s  regularly scheduled safety and soundness examination as a result of  information it received from a U.S. Customs Service drug investigation.  Based on AML compliance problems identified during the examination,  FRBNY developed a supervisory strategy that led to a written agreement  containing numerous remedial actions. Banco Popular also entered into a  deferred prosecution agreement with Justice, FinCEN, and the Federal  Reserve; and agreed to a civil money penalty of over $20 million.
section_title: Polish and Slavic Federal Credit Union
paragraphs: In another instance, FinCEN assessed penalties against a credit union for  currency transaction reporting violations. In January 2000, FinCEN  assessed civil money penalties of $185,000 against the Polish and Slavic  Federal Credit Union, located in Brooklyn, New York, for willful failure to  file Currency Transaction Reports (CTR) and improperly granting an  exemption from CTR filings in violation of the BSA.
FinCEN determined that between 1989 and 1997, the Polish and Slavic  Federal Credit Union willfully failed to file numerous CTRs for currency  transactions in amounts greater than $10,000. FinCEN also reported that  the credit union, through the actions of its former management and board  of directors, improperly exempted one customer from CTR filings. The  customer, the former chairman of the credit union’s board of directors and  owner of a travel agency and money remitter business, did not qualify for  the CTR filing exemption, according to FinCEN. The remitter made over  1,000 currency deposits in excess of $10,000 but no CTRs were filed.  FinCEN further reported that the credit union, through its former general  manager and former board, failed to establish and maintain (1) an  adequate level of internal controls for BSA compliance, (2) an effective  BSA compliance program, (3) BSA training for credit union employees,  and (4) an effective internal audit function.
NCUA, the regulator of the Polish and Slavic Federal Credit Union, took a  series of enforcement actions against the credit union beginning in  January 1997 to compel compliance with the BSA. However, FinCEN’s  report also indicates that NCUA’s enforcement actions began about 8  years after the violations began. In April 1999, NCUA removed the credit  union’s board of directors and imposed a conservatorship based on the  credit union’s failure to establish adequate internal controls, including  controls for BSA compliance.
section_title: Riggs Bank N.A.
paragraphs: Last month, OCC and FinCEN assessed a $25 million civil money penalty  against Riggs Bank, N.A. for numerous BSA violations, including failure to  maintain an effective BSA compliance program and to monitor and report  transactions involving millions of dollars by the embassies of Saudi Arabia  and Equatorial Guinea in Washington, D.C.
Since 1987, OCC has required each bank under its supervision to establish  and maintain an AML compliance program and specified four elements  that banks were required to satisfy. However, FinCEN reported that Riggs  was deficient in all four elements required by the AML regulation. FinCEN  found that Riggs willfully violated the suspicious activity and currency  transaction reporting requirements and the AML program requirements of  the BSA. Specifically, Riggs failed to establish and maintain an effective  BSA compliance program because it did not provide (1) an adequate  system of internal controls to ensure ongoing BSA compliance, (2) an  adequate system of independent testing for BSA compliance, (3) effective  training for monitoring and detecting suspicious activity, and (4) effective  monitoring of BSA compliance by the BSA officer.
In July 2003, OCC entered into a consent order with Riggs, in which Riggs  was directed to, among other things, correct AML internal control  deficiencies and referred the Riggs case to FinCEN. According to a Riggs’  filing with the Securities and Exchange Commission, in April 2004, OCC  classified Riggs as being in a “troubled condition” for failing to fully  comply with the July 2003 consent order. Due to additional BSA violations  by Riggs National Corporation (the bank’s holding company), in May, OCC  and the Federal Reserve, respectively, issued a supplemental consent  order and a cease and desist order, requiring extra corrective actions. OCC  and FinCEN cited the corporation for deficiencies in risk management and  internal controls. Although OCC deemed Riggs to be systemically deficient  in 2003 and the bank entered into a consent order with OCC, Riggs was not  in full compliance with the consent order in 2004 and was subsequently  assessed the penalty.
In addition to the three cases discussed above, published reports of BSA  violations at other banks have increased concerns about bank  noncompliance with the BSA and timely oversight and enforcement by the  federal banking regulators. For example, in 2003, the Department of  Homeland Security’s Bureau of Immigration and Customs Enforcement  (ICE) reported that the Delta National Bank & Trust Company pled guilty  in U.S. District Court to charges that it failed to file a SAR in connection  with a transaction made in 2000 between two accounts at the bank. As part  of the plea agreement with the government, the bank agreed to forfeit  $950,000. In 2002, Broadway National Bank pled guilty to three felony  charges for failing to report suspicious banking activity in the 1990s,  according to ICE. The prosecutors determined that more than $120 million  was illegally moved through the bank. The bank was fined $4 million.
section_title: Inspectors General Reports Highlight Areas of Improvement Needed in the BSA Examination Process
paragraphs: Recent Treasury and FDIC IG reports assessing the regulators’  examination work and enforcement activities have raised questions about  potential gaps in the consistency and timeliness of the regulators’  monitoring and follow-up on BSA violations.
subsections: section_title: Treasury’s Office of IG
paragraphs: The Treasury’s IG issued a report in 2003 on BSA violations at depository  institutions and has a number of related audits in its fiscal year 2004 work  plan. In September 2003, the Treasury IG issued a report on its review of  OTS enforcement actions taken against thrifts with substantive BSA  violations. Among its findings, the report stated that examiners found  substantive BSA violations at 180 of the 986 thrifts examined from January  2000 through October 2002. OTS had issued written enforcement actions  against 11 of the 180 thrifts; however, in 5 of these actions, the IG reported  that enforcement actions did not address all substantive violations found,  were not timely, or were ineffective in correcting the thrifts’ BSA  violations. The IG further reported that among 68 sampled cases, OTS  relied on moral suasion and thrift management assurances to comply with  the BSA. In 47 cases (69 percent), thrift management took the corrective  actions, but in the other 21 cases (31 percent), thrift management was  nonresponsive. BSA compliance worsened at some of the 21 thrifts,  according to the IG.
The IG made several recommendations including that OTS assess the need  for additional clarification or guidance for examiners on when to initiate  stronger supervisory action for substantive BSA violations and time  frames for expecting corrective actions from thrifts. OTS concurred and  stated that supplemental examiner guidance would be provided for the  first quarter of 2004.
The IG’s fiscal year 2004 annual plan lists several related audit projects  including an assessment of OTS’ BSA examinations, including the new  requirements under the USA PATRIOT Act.
I am pleased to be on a panel with the FDIC Inspector General and would  like to highlight some of his office’s work to illustrate issues recently  raised regarding BSA examinations and enforcement. For example, in  March 2001, the IG reported on its review of the FDIC Division of  Supervision and Consumer Protection assessment of financial institutions’  compliance with the BSA. Among the IG’s findings were that FDIC did not  adequately document its BSA examinations work; as a result, the IG was  unable to determine the extent to which examiners reviewed regulated  institutions’ compliance with the BSA during safety and soundness  examinations.
The IG made several recommendations, including that FDIC reemphasize  to examiners and ensure that they follow (1) specific guidance related to  the documentation requirements of scoping decisions, procedures, and  conclusions reached during the pre-examination process when risk- focusing BSA examinations; and (2) policy and instructions on how to  adequately document BSA examination decision factors and procedures.  With regard to both recommendations, FDIC stated it would reemphasize  its existing policies and guidance, specifically those policies requiring  examiner responses to all of the BSA core decision factors at each  examination. FDIC also stated that it had made revisions to its BSA  examination module.
In September 2003, the IG reported on its audit of FDIC’s implementation  of examination procedures to address financial institutions’ compliance  with provisions of Title III of the USA PATRIOT Act. The IG concluded  that FDIC’s existing BSA examination procedures covered the AML  subject areas required by the act to some degree and that its Division of  Supervision and Consumer Protection had advised FDIC-regulated  institutions of the new requirements. However, the IG reported that, for a  number of reasons, the division had not issued guidance to its examiners  on the act’s provisions that required new or revised examination  procedures. One of the report’s recommendations was that the division  issue interim examination procedures for those sections of the USA  PATRIOT Act for which Treasury had issued final rules. The division  agreed with the recommendation.
In March 2004, the IG issued a report on its work to determine whether the  FDIC adequately followed up on BSA violations reported in examinations  of FDIC-supervised financial institutions to ensure that they take  appropriate corrective action. Among the IG’s findings was that, in some  cases, BSA violations were repeatedly identified in multiple examination  reports before bank management took corrective action or FDIC took  regulatory action to address the repeat violations. The IG concluded that  FDIC needs to strengthen its follow-up processes for BSA violations and  recommended that FDIC’s Division of Supervision and Consumer  Protection (1) reevaluate and update examination guidance to strengthen  monitoring and follow-up processes for BSA violations and (2) review its  implementation process for referring violations to Treasury. The IG noted  that FDIC has initiatives underway to reassess and update its policies and  procedures. Although it did not concur with all of the IG’s findings, in its  response, FDIC concurred with the recommendations.
section_title: GAO’s BSA and AML Examinations and Enforcement Work
paragraphs: In recent years, we have done work addressing money laundering issues  within the context of different activities and financial institutions such as  securities broker-dealers, Russian entities, and private banking. We have  also reviewed FinCEN’s regulatory role.
subsections: section_title: Past Reports
paragraphs: In 1998, we issued two reports regarding FinCEN’s role in administering  the BSA. In both of these reports, we discussed the Secretary of the  Treasury’s mandate to delegate the authority to assess civil penalties for  BSA violations to federal banking regulatory agencies and noted that this  delegation had not been made. One purpose of this work was to update  information on civil penalties for BSA violations. We reported that one of  the issues under discussion at the time was whether violations would be  enforced under BSA provisions or under the banking regulators’ general  examination powers granted by Title 12 of the U.S. Code. At that time,  FinCEN officials told us that they were concerned that the banking  regulators might be less inclined to assess BSA penalties and instead use  their non-BSA authorities under their own statutes.
Also in 1998, we reported on the activities of Raul Salinas, the brother of  the former President of Mexico. Mr. Salinas was allegedly involved in  laundering money from Mexico, through Citibank, to accounts in Citibank  affiliates in Switzerland and the United Kingdom. We determined that Mr.  Salinas was able to transfer $90 - $100 million between 1992 and 1994 by  using a private banking relationship structured through Citibank New York  in 1992 and effectively disguise the funds’ source and destination, thus  breaking the funds’ paper trail. The funds were transferred through  Citibank Mexico and Citibank New York to private banking investment  accounts at Citibank London and Citibank Switzerland.
In October 2000, we reported on our work on suspicious banking activity  indicating possible money laundering conducted by certain corporations  that had been formed in the state of Delaware for unknown foreign  individuals or entities. We first identified an agent that together with a  related company created corporations for Russian brokers and established  bank accounts for those corporations. We also reviewed SARs filed by  three banks concerning transactions by corporations formed by this agent  for Russian brokers. We then determined that from 1991 through early  2000, more than $1.4 billion in wire transfer transactions was deposited  into over 230 accounts opened at two U.S. banks—Citibank and  Commercial Bank. More than half of these funds were wired from foreign  countries into accounts at Citibank and over 70 percent of the Citibank  deposits for these accounts were wire-transferred to accounts in foreign  countries. Further, both of these banks had violated BSA requirements  regarding customer identification. We concluded that these transfers  raised concerns that the U.S. banking system may have been used to  launder money.
In 2001, we issued a report on changes in BSA examination coverage for  certain securities broker-dealers. At the time, there was no requirement  that all broker-dealers file SARs; however, broker-dealer subsidiaries of  depository institutions and their holding companies were required to file  SARs and were examined by banking regulators for compliance. We  determined that with the passage of the 1999 Gramm-Leach-Bliley Act,  these broker-dealers were no longer being examined to assess their  compliance with SAR requirements, although they were being examined  for compliance with reporting currency transactions and other  requirements Treasury had specifically placed on broker-dealers.  However, with the passage of the USA PATRIOT Act and the issuance of a  final rule that became effective on July 31, 2002, all broker-dealers were  required to report such activity.
section_title: Ongoing Work
paragraphs: In December 2003, the Chairman and Ranking Member of this Committee  requested that we conduct a review of the regulators’ BSA examination  procedures and enforcement actions. In requesting this work, you cited  the Treasury and FDIC IG work that I discussed above. Among the major  questions you raised were:    How do the regulators design, target, and conduct BSA compliance  examinations, including for the added provisions of the USA PATRIOT  Act?
How many BSA violations have federal banking regulators identified and  taken action on over a several year time period?
What consequences do the regulators’ risk-focused examinations have for  identification and enforcement of BSA violations?
What differences, if any, are there between enforcement of the BSA  through the regulators’ general safety and soundness authorities and  enforcement of the BSA under the terms of the BSA itself?
Are BSA violations consistently interpreted among the regulators,  Treasury, and depository institutions?
How do BSA violations come to the attention of the regulators and what  other agencies are involved in resolving the violations?
What is the relationship between Treasury and the banking regulators in  shaping examination policy and subsequent enforcement actions?
Do the regulators have adequate resources for conducting BSA  compliance examinations, including the BSA provisions of the USA  PATRIOT Act?
We have begun doing this work for the Committee. In general, the major  objectives of our review are to determine:  1.  How do the regulators’ risk-focused examinations of depository  institutions assess BSA and AML program compliance?  2.  To what extent do the banking regulators identify BSA and AML  program violations and take supervisory actions for such violations?  3.  How consistent are BSA examination procedures and interpretation of  BSA violations across the banking regulators?  4.  What resources do the federal banking regulators have for conducting  examinations of BSA and PATRIOT Act compliance?
As part of our review, and considering the IGs’ findings, we are examining  the relevant BSA amendments and banking statutes, regulations, and  policies that address the authorities under which the regulators and  Treasury take supervisory action for BSA violations and violations of their  AML program rules. We are reviewing current examination guidance and  procedures that the regulators use for determining compliance with the  BSA, and related requirements used during their regular and targeted  examinations. We will also try to ascertain the implications of “risk- focused” examinations for BSA compliance and to determine whether and  to what extent the regulators curtail such compliance reviews in their  examinations.
We are reviewing the reliability of the data systems used by banking  regulators to track bank examinations, including BSA compliance  examinations. We plan to obtain information on the bank examinations  performed by each banking regulator over the past 4 years and then select  a random sample to determine whether and the extent to which a BSA  review was conducted or curtailed and the bases for these decisions. We  also are obtaining information from the banking regulators on the number  of BSA examinations done over the past 4 years and the number and  nature of violations they identified. We plan to select and analyze samples  of their BSA examinations and supporting workpapers to secure, in part,  information on violations identified and the areas of operation covered  during the examinations. Additionally, we plan to track supervisory  actions taken by the regulators to correct the violations they identified.  Our analyses in this area will include assessing the regulators’ examination  procedures for BSA and AML compliance and the nature of violations and  corresponding supervisory actions. We will also review the examinations  in our sample to determine the extent to which the examinations reviewed  policies and procedures and then tested transactions to see if the policies  and procedures were implemented appropriately. We will also determine  the extent to which banking regulators vary in the way they conduct their  BSA examinations, cite banks for violations, and take enforcement  actions.
Key legal issues we will be examining are the ramifications, if any, of the  lack of delegation of authority to assess BSA penalties by Treasury to the  federal banking regulators, as mandated by statute in 1994. We will  examine enforcement of the BSA through the regulators’ general safety  and soundness authority and enforcement under the terms of the BSA  itself to see whether there are differences, including circumstances under  which the regulators make referrals to Treasury and law enforcement  agencies.
In addition, we will meet with government officials at the federal and state  levels and from the banking and credit union industries to gain their  perspectives on the risk-focused BSA examination process and post- examination follow-up activities. We have finished our initial meetings  with the federal banking regulators; and officials at the Departments of  Homeland Security, Justice, and Treasury, including FinCEN. We will have  follow-on meetings with them as well as with state banking supervisors,  and representatives from depository institutions of various sizes to gain  their views on the consistency of examiner interpretation of potential  BSA-related deficiencies and the regulators’ BSA examination procedures,  and their own internal control activities.
Mr. Chairman, this concludes my prepared statement. I would be happy to  respond to any questions that you or Members of the Committee may  have.
section_title: GAO Contacts and Staff Acknowledgements
paragraphs: For questions concerning this testimony, please call Davi M. D’Agostino at  (202) 512-8678. Other key contributors to this statement were M’Baye  Diagne, Toni Gillich, Barbara Keller, Kay Kuhlman, and Elizabeth Olivarez.
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