Bank Secrecy Act: Further Actions Needed to Address Domestic and International Derisking Concerns
Released: 2018-06-26T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: In recent years, some Southwest border residents and businesses reported difficulty accessing banking services, including experiencing bank account terminations and bank branch closings in the region. In addition, the World Bank and others have reported that some money transmitters have been losing access to banking services with depository institutions.

This statement is based on findings from GAO's February 2018 report on access to banking services along the Southwest border ( GAO-18-263 ) and March 2018 report on the effects of derisking on remittance flows to fragile countries ( GAO-18-313 ). GAO discusses (1) the extent to which banks are terminating accounts and closing branches in the Southwest border region, (2) the extent to which money transmitters serving selected fragile countries are facing banking access challenges, and (3) actions relevant U.S. agencies have taken to respond to these challenges. For those reports, GAO surveyed more than 400 banks, developed an econometric model on the drivers of branch closures, and conducted case studies on four countries to assess the effects of derisking on remittances flows.

section_title: What GAO Found
paragraphs: “Derisking” is the practice of depository institutions limiting certain services or ending their relationships with customers to, among other things, avoid perceived regulatory concerns about facilitating money laundering or other criminal activity such as financing to terrorist groups. In its February 2018 report, GAO found that money laundering risk is high in the Southwest border region because of the high volume of cash transactions, the number of cross-border transactions, and foreign account holders. According to GAO's nationally representative survey of banks, an estimated 80 percent (+/- 11) of Southwest border banks limited or did not offer accounts to customers that are considered high risk for money laundering because the customers drew heightened Bank Secrecy Act/anti-money laundering (BSA/AML) oversight—behavior that could indicate derisking. Nationally, GAO's econometric analysis suggested that counties that were urban, younger, had higher income, or had higher money laundering-related risk were more likely to lose branches.

In March 2018, GAO found that money transmitters (businesses that facilitate global money transfers) serving Haiti, Liberia, Nepal, and especially Somalia— countries it identified as fragile—all reported losing bank accounts or having restrictions placed on them during the last 10 years. As a result, 9 of the 12 money transmitters GAO interviewed, including all 4 that served Somalia, reported using channels outside the banking system (hereafter referred to as nonbanking channels), such as transporting cash to transfer funds, and that this increased their operational costs and exposure to risks. Furthermore, some banks GAO interviewed reported that they closed the accounts of money transmitters because of the high cost of due diligence actions they considered necessary to minimize the risk of fines under BSA/AML regulations. Department of the Treasury (Treasury) officials noted that despite information that some money transmitters have lost bank accounts, Treasury saw no evidence that the volume of remittances was falling or that costs of sending remittances were rising.

To address concerns about derisking, Treasury and federal banking regulators (the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation), have taken actions including issuing guidance to banks and conducting some evaluations to assess the extent to which derisking is occurring. While agencies were engaged in BSA/AML regulatory reviews, these were limited in scope and had not evaluated how regulatory concerns may influence banks to engage in derisking or to close branches. Without assessing the full range of BSA/AML factors that may be influencing banks to derisk or close branches, Treasury, the federal banking regulators, and Congress do not have the information needed to determine if BSA/AML regulations and their implementation can be made more effective or less burdensome. Moreover, in March 2018 GAO reported that Treasury could not assess the effects of money transmitters' loss of banking access on remittance flows because existing data did not allow Treasury to identify remittances transferred through banking and nonbanking channels. Nonbanking channels are generally less transparent than banking channels and thus more susceptible to the risk of money laundering and terrorism financing.

section_title: What GAO Recommends
paragraphs: GAO made five recommendations in the two reports: to Treasury and the federal banking regulators to conduct a retrospective review of BSA/AML regulations and their implementation, and to Treasury to assess shifts in remittance flows to nonbanking channels. Banking regulators agreed with the recommendations. GAO requested comments from Treasury, but none were provided.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our recent work on derisking  and how it may be affecting the availability of banking services to  customers in the Southwest border region and money transmitters who  transmit money to fragile countries. Derisking is the practice of  depository institutions limiting certain services or ending their  relationships with customers to, among other things, avoid perceived  regulatory concerns about facilitating money laundering or other criminal  activity such as financing to terrorist groups. Money laundering and  terrorist financing pose threats to national security and the integrity of the  financial system and the Bank Secrecy Act (BSA) is an important tool in  federal law enforcement efforts to detect and deter the use of financial  institutions for such criminal activity. The BSA and its implementing  regulations generally require financial institutions, including banks and  money transmitters, to collect and retain various records of customer  transactions, verify customers’ identities, maintain anti-money laundering  (AML) programs, and report suspicious transactions.

However, in recent years, some Southwest border residents and  businesses reported difficulty accessing banking services, including  experiencing bank account terminations and bank branch closures in the  region. In addition, the World Bank and others have reported that some  money transmitters have been losing access to banking services with  depository institutions. Some have attributed these challenges to  derisking.

My remarks today are based on our February 2018 report on derisking  along the Southwest border and our March 2018 report on remittances to  fragile countries. My statement will focus on the extent to which (1)  banks are terminating accounts and closing branches in the Southwest  border region and their reasons for any terminations and closures, (2)  money transmitters are facing banking access challenges in remitting  funds from the United States to selected fragile countries, and (3) relevant  U.S. agencies have taken action to assess and respond to concerns  about derisking and loss of banking access.

For the report on derisking in the Southwest border region, we analyzed  data on Suspicious Activity Reports (SAR) and Currency Transaction  Reports (CTR) as well as data on national and Southwest border region  branch closures. We combined the data on branch closures with  demographic, economic, and money laundering-related risk data and  conducted an econometric analysis designed to examine the potential  drivers of branch closures. Despite the robustness of our results and our  efforts to control for relevant factors, our results are subject to a number  of caveats associated with this type of empirical work and as such we  interpret these results with some degree of caution. We also reviewed  agency documentation and guidance to banks related to derisking and  documentation on BSA/AML retrospective reviews that the Department of  the Treasury’s (Treasury) Financial Crimes Enforcement Network  (FinCEN) and the federal banking regulators— the Board of Governors of  the Federal Reserve System (Federal Reserve), Federal Deposit  Insurance Corporation (FDIC), and the Office of the Comptroller of the  Currency (OCC)—have conducted. Finally, we interviewed  representatives from 19 Southwest border banks, a variety of banking  industry groups and trade associations, and officials from FinCEN and the  federal banking regulators.

For the report on remittances to fragile countries, we identified four case- study countries: Haiti, Liberia, Nepal, and Somalia. We interviewed 12  out of 18 money transmitters that the World Bank identified as accounting  for at least 80 percent of the market transfers from the United States to  each of our case-study countries. We also interviewed officials from the  federal banking regulators, Treasury, and eight extra-large banks. The  results of our interviews are not generalizable. In addition, we analyzed  available data on remittances sent through banks as well as cash  declarations at U.S. ports of exit.

For both reports, we administered a web-based survey to a nationally  representative sample of 406 banks in the United States, including 115  Southwest border banks. Additional details on our scope and  methodology are available in our published reports.

We conducted the work on which this statement is based in accordance  with generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on  our audit objectives.
subsections: section_title: Background
subsections: section_title: BSA/AML Regulation and Enforcement for Banks and Money Transmitters
paragraphs: The BSA established reporting, recordkeeping, and other AML  requirements for financial institutions. Regulation under and enforcement  of BSA involves several federal agencies. FinCEN is responsible for  administering the BSA and has authority for enforcing compliance with its  requirements and implementing regulations, including through civil money  penalties. FinCEN issues regulations under BSA and delegated BSA/AML  examination authority for banks to the federal banking regulators. The  federal banking regulators have issued their own BSA regulations that  require banks to establish and maintain a BSA/AML compliance  program. The federal banking regulators may take enforcement actions  for violations of BSA/AML requirements. They may also assess civil  money penalties against financial institutions and individuals  independently, or concurrently with FinCEN.

Both federal and state agencies oversee money transmitters. FinCEN has  delegated examination authority for BSA compliance for money  transmitters to the Internal Revenue Service (IRS). Money transmitters  must register with FinCEN and provide information on their structure and  ownership. According to Treasury, in all states except one, money  transmitters are required to obtain licenses from states in which they are  incorporated or conducting business.

All banks and money transmitters are required to establish an AML  compliance program that includes policies, procedures, and processes  which, at a minimum, must provide for (1) a system of internal controls to  ensure ongoing compliance, (2) a designated individual or individuals  responsible for managing BSA compliance (BSA compliance officer), (3)  training for appropriate personnel, and (4) independent testing for  BSA/AML compliance. Additionally, as of May 11, 2018, banks and  certain other financial institutions are required to implement appropriate  risk-based procedures for conducting ongoing customer due diligence.  Banks must also have policies and procedures for opening accounts and  verifying the identity of each customer and monitoring transactions and  reporting suspicious activity. Finally, banks and money transmitters must  comply with certain reporting requirements, including the following:

CTR: A bank must electronically file a CTR for each transaction in  currency—such as a deposit or withdrawal—of more than $10,000

SAR: Banks are required to electronically file a SAR when a  transaction involves or aggregates at least $5,000 in funds or other  assets, and the institution knows, suspects, or has reason to suspect  that the transaction meets certain criteria qualifying as suspicious.

section_title: Remittance Transfer Methods
paragraphs: Remittances can be sent through money transmitters and banks, among  other organizations. International remittances through money transmitters  and banks may include cash-to-cash money transfers, international wire  transfers, some prepaid money card transfers, and automated  clearinghouse transactions. If a remittance sender’s bank does not have a  direct relationship with the remittance recipient’s bank, the bank-to-bank  transfer scenario becomes more complicated. In such cases, one or more  financial institutions may rely upon correspondent banking relationships to  complete the transaction. A typical remittance sent through a bank may  be in the thousands of dollars, while the typical remittance sent by money  transmitters is usually in the hundreds of dollars.

Historically, many consumers have chosen to send remittances through  money transmitters due to convenience, cost, familiarity, or tradition.  Money transmitters typically work through agents—separate business  entities generally authorized to, among other things, send and receive  money transfers. Money transmitters generally operate through their own  retail storefronts, or through grocery stores, financial services outlets,  convenience stores, and other retailers that serve as agents. Figure 1  shows one type of common money transmitter transaction known as  cash-to-cash transfer.

section_title: Remittances to Case Study Countries
paragraphs: Remittances from the United States are an important source of funds for  our case-study countries—Haiti, Liberia, Nepal, and Somalia. The  Organisation for Economic Co-operation and Development identified  these countries as fragile states because of weak capacity to carry out  basic governance functions, among other things, and their vulnerability to  internal and external shocks such as economic crises or natural  disasters.

section_title: Risks Related to Money Laundering Appeared to Be a Factor in Reduced Access to Banking Services for Southwest Border Customers
paragraphs: In our February 2018 report, we found that money laundering risk is high  in the Southwest border region because of the high volume of cash  transactions, the number of cross-border transactions, and foreign  account holders. Our nationally representative survey found that many  Southwest border banks may be engaging in derisking. Nationally, our  econometric analysis suggested that counties that were urban, younger,  had higher income, or had higher money laundering-related risk were  more likely to lose branches. Money laundering-related risks were likely to  have been relatively more important drivers of branch closures in the  Southwest border region.
subsections: section_title: Southwest Border Banks Reported Heightened BSA/AML Compliance Risks and Challenges Due to Volume of High-Risk Customers
paragraphs: In February 2018, we reported that money laundering risk is high in the  Southwest border region because of the high volume of cash  transactions, the number of cross-border transactions, and foreign  account holders, according to bank representatives, federal banking  regulators, and others we spoke with. Cash transactions increase the  BSA/AML compliance risk for banks because the greater anonymity  associated with using cash results in greater risk for money laundering or  terrorist financing. Our review of data on banks’ CTR filings confirmed  that bank branches that operate in Southwest border region counties handled more large cash transactions than bank branches elsewhere.  Specifically, in 2016, bank branches in Southwest border region counties  filed nearly 30 percent more CTRs, on average, than bank branches in  comparable counties elsewhere in their same state, and about 60 percent  more than those in other high-risk counties outside the region. Similar  differences occurred in 2014 and 2015.

We also reported that cross-border transactions are at a higher risk for  money laundering because international transfers can present an  attractive method to disguise the source of funds derived from illegal  activity. Southwest border banks cited foreign account holders as  another type of high-risk customer for money laundering and terrorist  financing. These types of customers are prevalent in the Southwest  border region, examiners said, and can create challenges for banks to  verify and authenticate their identification, source of funds, and source of  wealth.

The volume of high-risk customers and cross-border transactions can  lead to more intensive account monitoring and investigation of suspicious  transactions, Southwest border bank representatives said. Performing  effective due diligence and complying with customer identification  requirements for higher-risk customers and transactions can be more  challenging because banks might need specialized processes for higher- risk customers and transactions than for those that are lower risk.  Southwest border bank representatives we spoke with said addressing  these compliance challenges can also require more resources for  monitoring high-risk customers and investigating suspicious transactions.  For example, in 2016, bank branches in the Southwest border region  counties filed three times as many SARs, on average, as bank branches  operating in other counties within Southwest border states and about 2.5  times as many SARs, on average, as bank branches in other high-risk  financial crime or drug trafficking counties in nonborder states. These  differences in SAR filings showed a similar pattern in 2014 and 2015.

section_title: Some Account Terminations and Limitations Were Consistent with BSA/AML Purposes
paragraphs: In February 2018, we found that most Southwest border banks reported  terminating accounts for reasons related to BSA/AML risk. Based on our  survey results, from January 1, 2014, through December 31, 2016, we  estimated that almost 80 percent of Southwest border banks had  terminated personal or business accounts for reasons related to  BSA/AML risk. The most common reasons related to BSA/AML risk  Southwest border banks reported for terminating accounts were the filing  of SARs associated with the accounts, the failure of the customer to  respond adequately to requests for information as part of customer due  diligence processes, and the reputational risk associated with the  customer type (an estimated 93 percent, 80 percent, and 68 percent,  respectively). Of the high-risk businesses for money laundering and  terrorist financing that we identified in our survey, cash-intensive small  businesses (for example, retail stores, restaurants, and used car dealers)  were the most common type of business accounts that Southwest border  banks reported terminating accounts for reasons related to BSA/AML risk.

Over 70 percent of Southwest border banks reported terminating these  accounts.

A majority of Southwest border banks and banks that did not operate in  the Southwest border region (non-Southwest border banks) reported  limiting or not offering accounts to certain types of businesses considered  high risk for money laundering and terrorist financing, particularly money  services businesses and foreign businesses. The most common reason  (cited by 88 percent of Southwest border banks) for limiting, or not  offering, an account to these types of businesses was that the business  type fell outside of the bank’s risk tolerance—the acceptable level of risk  an organization is willing to accept around specific objectives. Similarly,  69 percent of Southwest border banks cited the inability to manage the  BSA/AML risk associated with the customer (for example, because of  resource constraints) as a factor for limiting, or not offering, accounts.  Similarly, the most common reason that non-Southwest border banks  reported limiting, or not offering accounts, to certain types of businesses  considered high risk for money laundering and terrorist financing was that  the customer type fell outside of the bank’s risk tolerance.

section_title: Other Account Terminations and Limitations Raised Concerns about Derisking
paragraphs: Further, in February 2018 we found that the second most common  reason—cited by 80 percent of Southwest border banks—for limiting, or  not offering, accounts to certain types of businesses considered high risk  for money laundering and terrorist financing, was that the customer type  drew heightened BSA/AML regulatory oversight—behavior that could  indicate derisking. For example, representatives from one Southwest  border bank explained that they no longer offer accounts to money  services businesses because they want to be viewed from a good  standpoint with their regulator. They added that banking for these types of  customers is very high risk for the bank with very little reward. Another  bank that operates in the Southwest border region explained that rather  than being able to focus on their own BSA/AML risk assessment and the  performance of accounts, they feel pressured to make arbitrary decisions  to close accounts based on specific concerns of their examiners.

Several Southwest border bank representatives also described how  recent BSA/AML law enforcement and regulatory enforcement actions  have caused them to become more conservative in the types of  businesses for which they offer accounts. In addition, while banks may  terminate accounts because of SAR filings as a method to manage  money laundering and terrorist financing risk and to comply with  BSA/AML requirements, some of these terminations may be related to  derisking. For example, some Southwest border bank representatives we  spoke with for our Southwest border report, as well as other banks and  credit unions we spoke with in a February 2009 review, told us that they  have filed SARs to avoid potential criticism during examinations, not  because they thought the observed activity was suspicious. Non- Southwest border banks also commonly cited the inability to manage risk  associated with the customer type and heightened regulatory oversight as  reasons for limiting, or not offering, accounts.

section_title: Southwest Border Bank Branch Closures Have Been Concentrated in a Small Number of Communities
paragraphs: Counties in the Southwest border region have been losing bank branches  since 2012, similar to national and regional trends, as well as trends in  other high-risk financial crime or drug trafficking counties that are outside  the region. In February 2018, we found that most of the 32 counties (18  counties or nearly 60 percent) comprising the Southwest border region  did not lose bank branches from 2013 through 2016, but 5 counties lost  10 percent or more of their branches over this time period (see top panel  of fig. 2). Those 5 counties are Cochise, Santa Cruz, and Yuma,  Arizona; Imperial, California; and Luna, New Mexico.

Within those counties we identified as having the largest percentage loss  of branches, sometimes those losses were concentrated in smaller  communities within the county (see bottom panel of fig. 2). For example,  Calexico in Imperial County, California, lost 5 of its 6 branches from 2013  through 2016. In Santa Cruz County in Arizona, one zip code in Nogales  accounted for all of the branch losses in the county from 2013 through  2016, losing 3 of its 9 branches. More generally, branch losses varied  substantially across different zip codes in a county (see for example  bottom panel of fig. 2). In other instances, counties that lost a relatively  small share of their branches contained communities that lost a more  substantial share—for example San Ysidro in San Diego County lost 5 of  its 12 branches (about 42 percent) while the county as a whole lost only 5  percent of its branches from 2013 through 2016.

Based on our analysis, counties losing branches in the Southwest border  region tended to have substantially higher SAR filings, on average, than  Southwest border region counties that did not lose branches. That is,  counties that lost branches from 2013 through 2016 had about 600 SAR  filings per billion dollars in deposits, on average, and counties that did not  lose branches had about 60 SAR filings per billion dollars in deposits, on  average (see fig. 3).

section_title: Empirical Evidence Suggested Demographic and Money Laundering- Related Risk Factors Are Drivers of Branch Closures
paragraphs: The econometric models we developed and estimated for our February  2018 report generally found that demographic and money laundering- related risk factors were important predictors of national bank branch  closures. In general, our results suggested that counties were more  likely to lose branches, all else equal, if they were (1) urban, had a higher  per capita personal income, and had a younger population (proportion  under 45); or (2) designated as a HIFCA or HIDTA county, or had higher  SAR filings. We termed the latter three characteristics (HIFCA, HIDTA,  and SAR filings) “money laundering-related risk factors.”

Our results were consistent with those demographic characteristics  associated with the adoption of mobile banking. As such, our results were  consistent with the hypothesis that mobile banking is among the factors  leading some banks to close branches. The most urban counties were  about 22 percentage points more likely to lose one or more branches over  the next year than the most rural counties. A county with 70 percent of the  population under 45 was about 9 percentage points more likely to lose  one or more branches over the next year than a county with half the  population under 45. A county with per capita income of $50,000 was  about 7 percentage points more likely to lose one or more branches over  the next year than a county with per capita income of $20,000.

Money laundering-related characteristics of a county were also important  predictors of branch closures in our models. HIDTA counties were about  11 percentage points more likely to lose one or more branches over the  next year than non-HIDTA counties (the effect in HIFCA counties is less  significant statistically and smaller in magnitude). A county with 200 SARs  filed per billion dollars in bank deposits was about 8 percentage points  more likely to lose one or more bank branches over the next year than a  county where no bank branch had filed a SAR.

Money laundering-related risk factors were likely to have been relatively  more important drivers of branch closures in the Southwest border region  because it had much higher SAR filings and a larger share of counties  designated as HIDTAs than the rest of the country. More generally, given  the characteristics of Southwest border counties and the rest of the  United States, our models suggested that while demographic factors have  been important drivers of branch closures in the United States overall,  risks associated with money laundering were likely to have been relatively  more important in the Southwest border region.

Southwest border bank representatives we interviewed told us they  considered a range of factors when deciding whether or not to close a  branch. Nearly half of the Southwest border bank representatives we  spoke with (4 of 10), mentioned that BSA/AML compliance costs could be  among the factors considered in determining whether or not to close a  branch.

section_title: Money Transmitters Serving Selected Fragile Countries Noted Loss of Banking Access, Although Treasury Saw No Reduction in Remittance Flows
paragraphs: In March 2018, we found that money transmitters serving Haiti, Liberia,  Nepal, and especially Somalia reported losing bank accounts or having  restrictions placed on them, which some banks confirmed. As a result,  some money transmitters relied on nonbanking channels, such as cash  couriers, to transfer remittances. All of the 12 money transmitters we  interviewed at the time reported losing some banking relationships in the  last 10 years. Some money transmitters, including all 4 that served  Somalia, said they relied on nonbanking channels, such as moving cash,  to transfer funds, which increased their operational costs and exposure to  risks. Further, in our interviews some banks reported that they had closed  the accounts of money transmitters because of the high cost of due  diligence actions they considered necessary to minimize the risk of fines  under BSA/AML regulations. Treasury officials noted that despite  information that some money transmitters have lost banking accounts,  Treasury saw no evidence that the volume of remittances was falling or  that costs of sending remittances were rising.
subsections: section_title: All Money Transmitters We Interviewed Reported They Lost Bank Accounts, Which for Many Resulted in Higher Costs and a Shift to Nonbanking Channels
paragraphs: All 12 money transmitters we interviewed for our March 2018 report  stated that they or their agents had lost accounts with banks during the  last 10 years. All 4 Somali money transmitters and many agents of the 2  Haitian money transmitters we spoke with reported they had lost some  bank accounts, and 2 of the 4 Somali money transmitters reported losing  all bank accounts. Additionally, all 4 large money transmitters that  process transfers globally (including to our case-study countries of Haiti,  Liberia, and Nepal) also reported that their agents had lost accounts.  Almost all of the money transmitters said they also faced difficulties in  getting new accounts. While some money transmitters said the banks that  closed their accounts did not provide a reason, in other cases, money  transmitters said the banks told them that they had received pressure  from regulators to terminate money transmitter accounts.

As a result of losing access to bank accounts, several money  transmitters, including all of the Somali money transmitters, reported that  they were using nonbanking channels to transfer funds. In some cases  the money transmitter was forced to conduct operations in cash, which  increased the risk of theft and forfeitures and led to increased risk for  agents and couriers. Nine of the money transmitters that we interviewed  reported they rely on couriers or armored trucks to transport cash  domestically (to the money transmitter’s main offices or bank) or, in the  case of Somalia, internationally. Money transmitters reported they use  cash couriers either because the money transmitter or their agents had  lost bank accounts or because it was cheaper to use armored trucks than  banks to move funds.

Money transmitters we interviewed reported increased costs associated  with moving cash and bank fees. Two of the money transmitters we  spoke to stated that they did not have options other than to pay any fees  the bank required due to the difficulty in finding new bank accounts.  Money transmitters with access to bank accounts reported that bank  charges for services had in some cases doubled or tripled, or were so  high that it was less expensive to use a cash courier. For example, some  money transmitters stated that their banks charged a monthly fee for  compliance-related costs that ranged from $100 a month to several  thousand dollars a month.

section_title: Some Banks Reported Closing or Denying Accounts for Money Transmitters, Citing Insufficient Profit to Offset Risks and Costs
paragraphs: Most of the banks we interviewed for our March 2018 report expressed  concerns about account holders who are money transmitters because  they tended to be low-profit, high-risk clients. Most of the banks we  interviewed that serve money transmitters stated that BSA/AML  compliance costs have significantly increased in the last 10 years  because they had to hire additional staff and upgrade information  systems to conduct electronic monitoring of all transactions processed  through their system. Some banks indicated in our survey and interviews  that the revenue from money transmitter accounts was at times not  sufficient to offset the costs of BSA/AML compliance, leading to  terminations and restrictions on money transmitter accounts. A few banks  we interviewed stated that they do not allow money transmitters to open  accounts because of the BSA/AML compliance resources they require.

Banks also expressed concerns over the adequacy of money  transmitters’ ability to conduct due diligence on the money transmitter’s  customers. A few banks we interviewed expressed concern that they  would be held responsible if, despite the bank carrying out due diligence,  authorities detected an illicit transaction had been processed through the  bank on behalf of a money transmitter.

section_title: Treasury Officials Said Remittance Flows to Fragile Countries Have Not Declined; Remittance Senders Reported No Major Difficulties
paragraphs: In our March 2018 report, we found that Treasury officials reported  remittances continue to flow to fragile countries even though money  transmitters faced challenges. Through engagement with money  transmitters and banks, Treasury found some evidence of money  transmitter bank account closures. However, according to Treasury  officials, World Bank estimates of remittance flows show that the volume  of international transfers from the United States has continued to  increase. At the same time, World Bank data indicate that the global  average cost of sending remittances has continued to decrease. Citing  these trends, and anecdotal evidence from Treasury’s engagement with  banks, the officials stated that there were no clear systemic impacts on  the flow of remittances from closures of money transmitter bank accounts  and correspondent banking relations.

Treasury officials acknowledged that such closures can be a significant  challenge for money transmitters that serve certain regions or countries,  including Somalia. Further, Treasury officials said they were aware that  some Somali money transmitters resorted to nonbanking channels by  carrying cash overseas. They noted that although physically moving cash  is risky, it is not unlawful. Additionally, Treasury officials stated that the  use of cash couriers to remit funds had not been a concern for regulators  because this practice had not increased the remittance fees that money  transmitters charge their consumers.

Remittance senders in the United States who remit to our case-study  countries reported that they frequently used money transmitters and had  not encountered major difficulties in sending remittances. Senders told us  that they generally preferred using money transmitters over other  methods because money transmitters were cheaper than banks and were  quicker in delivering the funds than other methods. In addition, money  transmitters were often more accessible for recipients collecting the  remittances because the money transmitters had more locations than  banks in recipient countries. However, some remittance senders told us  that they were unable to send large amounts of money through money  transmitters.

section_title: Regulators Have Not Evaluated All Factors Influencing Banks to Derisk and Treasury Lacks Data Needed to Assess Possible Effects on Remittance Flows
paragraphs: In February 2018 we reported that to address concerns about derisking,  FinCEN and the federal banking regulators had taken actions including  issuing guidance to banks and conducting some evaluations to assess  the extent to which derisking is occurring. However, the actions regulators  had taken to address concerns raised in their BSA/AML regulatory  reviews were limited in scope (for example, they focused primarily on the  burden resulting from the filing of CTRs and SARs) and had not evaluated  all factors that may influence banks to derisk or close branches.  Moreover, in March 2018 we found that Treasury could not assess the  effects of money transmitters’ loss of banking access on remittance flows  because existing data did not allow Treasury to identify remittances  transferred through banking and nonbanking channels.
subsections: section_title: Regulators Issued Guidance and Took Some Actions Related to Derisking
paragraphs: In February 2018, we reported that FinCEN and the federal banking  regulators responded to concerns about derisking on a national level by  issuing guidance to banks and conducting some evaluations within their  agencies to understand the extent to which derisking is occurring. The  guidance issued by regulators was aimed at clarifying BSA/AML  regulatory expectations and discouraging banks from terminating  accounts without evaluating risk presented by individual customers or  banks’ abilities to manage risks. The guidance generally encouraged  banks to use a risk-based approach to evaluate individual customer risks  and not to eliminate entire categories of customers. Some of the guidance  issued by regulators attempted to clarify their expectations specifically for  banks’ offering of services to money services businesses, including  money transmitters. For example, in March 2005, the federal banking  regulators and FinCEN issued a joint statement on providing banking  services to money services businesses to clarify the BSA requirements  and supervisory expectations as applied to accounts opened or  maintained for this type of customer. The statement acknowledged that  money services businesses were losing access to banking services as a  result of concerns about regulatory scrutiny, the risks presented by these  types of accounts, and the costs and burdens associated with maintaining  such accounts.

The agencies issuing these guidance documents told us they took some  steps to assess the effect of their guidance on bank behavior. For  example, Treasury officials said that Treasury periodically engaged with  banks and money transmitters on an ad hoc basis to learn their views and  gain insight into their concerns. According to Federal Reserve officials,  anecdotal information suggested that some money transmitters lost bank  accounts after FinCEN and federal banking agencies issued the joint  guidance in 2005, and that outcome was contrary to the regulators’ intent.  To address concerns about the guidance, according to these officials,  Treasury held several public discussions on money transmitter account  terminations.

In addition to issuing guidance, FDIC and OCC took some steps aimed at  trying to determine why banks may be terminating accounts because of  perceived regulatory concerns. For example, in January 2015, FDIC  issued a memorandum to examiners establishing a policy that examiners  document and report instances in which they recommend or require  banks to terminate accounts during examinations. From January 2015  through December 2017, FDIC officials stated that examiners had not  documented any recommendations or requirements for account  terminations. In 2016, OCC reviewed how the institutions it supervises  develop and implement policies and procedures for evaluating customer  risks as part of their BSA/AML programs and for making risk-based  determinations to close customer accounts. OCC focused its review on  certain large banks’ evaluation of risk for foreign correspondent bank  accounts. This effort resulted in OCC issuing guidance to banks on  periodic evaluation of the risks of foreign correspondent accounts. The  federal banking regulators also met with residents and businesses in the  Southwest border region to discuss concerns about derisking in the  region.

Treasury and the federal banking regulators also participated in a number  of international activities related to concerns about the decline in the  number of correspondent banking and money services business  accounts. For example, FDIC, OCC, and the Federal Reserve participate  in the Basel Committee on Banking Supervision’s Anti-Money  Laundering/Counter Financing of Terrorism Experts Group. Recent efforts  of the group involved revising guidelines to update and clarify  correspondent banking expectations. Treasury leads the U.S.  engagement with the Financial Action Task Force—an intergovernmental  body that sets standards for combating money laundering, financing of  terrorism, and other related threats to the integrity of the international  financial system—which has issued guidance on correspondent banking  and money services businesses.

section_title: BSA/AML Regulatory Reviews Had Not Evaluated All Factors Influencing Banks to Derisk and Close Branches
paragraphs: Executive orders encourage and legislation requires FinCEN and the  federal banking regulators to review existing regulations to determine  whether they should be retained, amended, or rescinded, among other  things. Retrospective reviews of existing rules help agencies evaluate  how existing regulations are working in practice. Recent presidents have  directed agencies to evaluate or reconsider existing regulations. In  addition to the executive orders, the Economic Growth and Regulatory  Paperwork Reduction Act (EGRPRA) requires federal banking regulators  to review the regulations they prescribe not less than once every 10 years  and request comments to identify outdated, unnecessary, or unduly  burdensome statutory or regulatory requirements.

In February 2018, we reported that FinCEN and the federal banking  regulators had all participated in retrospective reviews of different parts of  the BSA/AML regulations. For example, FinCEN officials told us that they  review each new or significantly amended regulation to assess its clarity  and effectiveness within 18 months of its effective date. As part of fulfilling  their requirements under EGRPRA, the federal banking regulators— through the Federal Financial Institutions Examination Council (FFIEC)— have also participated in retrospective reviews of BSA/AML regulations.

As part of the 2017 EGRPRA review, FFIEC received several public  comments on BSA/AML requirements, including increasing the threshold  for filing CTRs, the SAR threshold, and the overall increasing cost and  burden of BSA compliance. FinCEN officials and the federal banking  regulators stated that the agencies are working to address the BSA- related EGRPRA comments—particularly those related to CTR and SAR  filing requirements—through the BSA Advisory Group (BSAAG).

However, the actions FinCEN and the federal banking regulators took  related to derisking were not aimed at addressing and, if possible  ameliorating, the full range of factors that influence banks to engage in  derisking, in particular banks’ regulatory concerns and BSA/AML  compliance efforts. Further, the actions regulators took to address  concerns raised in BSA/AML retrospective reviews focused primarily on  the burden resulting from the filing of CTRs and SARs, but these actions  did not evaluate how regulatory concerns may influence banks to engage  in derisking or close branches. Federal internal control standards call for  agencies to analyze and respond to risks to achieving their objectives.  Further, guidance implementing executive orders states that agencies  should consider conducting retrospective reviews on rules that  unanticipated circumstances have overtaken. In February 2018, we  concluded that without assessing the full range of BSA/AML factors that  may be influencing banks to derisk or close branches, FinCEN, the  federal banking regulators, and Congress would not have the information  they need to determine if adjustments are needed to ensure that the  BSA/AML regulations and their implementation are achieving their  regulatory objectives in the most effective and least burdensome way.

section_title: U.S. Data on Remittances Did Not Allow Treasury to Assess the Effects of Money Transmitters’ Loss of Banking Access on Remittance Flows to Fragile Countries
paragraphs: In March 2018, we found that Treasury could not assess the effects of  money transmitters’ loss of banking access on remittance flows because  existing data did not allow Treasury to identify remittances transferred  through banking and non-banking channels.

Recent efforts to collect international remittance data from banks and  credit unions did not include transfers these institutions make on behalf of  money transmitters. Since these data collection efforts are designed to  protect U.S. consumers, the remittance data that banks and credit unions  report are limited to remittances individual consumers send directly  through these institutions. Additionally, as of the first quarter of 2018,  about half the states (24) adopted reports to collect remittance data from  money transmitters and of these, 12 states had made it mandatory to  report remittance data by destination country. However, these data do not  distinguish money transmitters’ use of banking and nonbanking channels  to transfer funds.

Finally, we found that while Treasury has a long-standing effort to collect  information on travelers transporting cash from U.S. ports of exit, this  information did not identify cash transported for remittances. We  concluded that without information on remittances sent through banking  and nonbanking channels, Treasury could not assess the effects of  money transmitter and foreign bank account closures on remittances,  especially shifts in remittance transfers from banking to nonbanking  channels for fragile countries. Nonbanking channels are generally less  transparent than banking channels and thus more susceptible to the risk of money laundering and other illicit financial transactions. Additionally,  while risks associated with shifts of remittances to nonbanking channels  may vary by country, these risks are likely greater for fragile countries,  such as Somalia, where the United States has concerns about terrorism  financing.

section_title: Conclusions and Recommendations for Executive Action
paragraphs: The collective findings from our work indicate that BSA/AML regulatory  concerns have played a role in banks’ decisions to terminate and limit  accounts and close branches. However, the actions taken to address  derisking by the federal banking regulators and FinCEN and the  retrospective reviews conducted on BSA/AML regulations had not fully  considered or addressed these effects. As a result, in our February 2018  report, we recommended that FinCEN and the three banking regulators in  our review—FDIC, the Federal Reserve, and OCC— jointly conduct a  retrospective review of BSA/AML regulations and their implementation for  banks, focusing on how banks’ regulatory concerns may be influencing  their willingness to provide services. In their written responses, the  Federal Reserve, FDIC, and OCC agreed to leverage ongoing  interagency work reviewing BSA/AML regulations and their  implementation for banks to address our recommendation. GAO  requested comments from Treasury, but none were provided.

A lack of data on remittances sent through banking and nonbanking  channels limits the ability of Treasury to assess the effects of money  transmitter and foreign bank account closures on remittances, in  particular shifts of remittances to non-banking channels for fragile  countries. Therefore, in the March 2018 report we recommended that  Treasury assess the extent to which shifts in remittance flows from  banking to non-banking channels for fragile countries may affect  Treasury’s ability to monitor for money laundering and terrorist financing  and, if necessary, should identify corrective actions. GAO requested  comments from Treasury, but none were provided.

Chairman Luetkemeyer, Ranking Member Clay, and members of the  Subcommittee, this concludes my statement. I would be pleased to  respond to any questions you may have.

section_title: GAO Contact and Staff Acknowledgments
paragraphs: If you or your staff have any questions about the issues related to access  to banking services along the Southwest border in this testimony or the  related report, please contact Michael E. Clements, Director, Financial  Markets and Community Investment, at (202) 512-8678 or  clementsm@gao.gov. For questions about the issues related to  remittance flows to fragile nations in this testimony or related report,  please contact Thomas Melito, Managing Director, International Affairs  and Trade, at (202) 512-9601, or melitot@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this statement. GAO staff who made key contributions to  this testimony are Lawrance Evans, Jr. (Managing Director), Stefanie  Jonkman (Assistant Director), Mona Sehgal (Assistant Director), Christine  McGinty (Analyst in Charge), Kyerion Printup, Madeline Messick, and  David Dayton. Other staff who made key contributions to the reports cited  in the testimony are identified in the source products.

This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.

Fast facts: We testified that 80 percent of Southwest border banks limited or did not offer services to customers that are considered high risk for money laundering. Banks may choose to limit services because they must conduct extra account monitoring of these customers to comply with Bank Secrecy Act/anti-money laundering oversight. Money transmitters serving Haiti, Liberia, Nepal, and Somalia also reported losing bank accounts for this reason.

We've recommended in our reports that federal regulators review the Bank Secrecy Act, and that Treasury Department assess the risks from money transmitters switching to non-banking channels to send funds.

Question-summary annotations: questions: question: What is "derisking"?
answer: “Derisking” is the practice of depository institutions limiting certain services or ending their relationships with customers to, among other things, avoid perceived regulatory concerns about facilitating money laundering or other criminal activity such as financing to terrorist groups.

question: What did GAO find in its February 2018 report?
answer: In its February 2018 report, GAO found that money laundering risk is high in the Southwest border region because of the high volume of cash transactions, the number of cross-border transactions, and foreign account holders.
child_questions: question: How does this risk affect Southwest banks' behavior?
answer: According to GAO's nationally representative survey of banks, an estimated 80 percent (+/- 11) of Southwest border banks limited or did not offer accounts to customers that are considered high risk for money laundering because the customers drew heightened Bank Secrecy Act/anti-money laundering (BSA/AML) oversight—behavior that could indicate derisking.

question: What factors make counties more likely to lose branches?
answer: Nationally, GAO's econometric analysis suggested that counties that were urban, younger, had higher income, or had higher money laundering-related risk were more likely to lose branches.

questions: question: What did GAO find in March 2018?
answer: In March 2018, GAO found that money transmitters (businesses that facilitate global money transfers) serving Haiti, Liberia, Nepal, and especially Somalia— countries it identified as fragile—all reported losing bank accounts or having restrictions placed on them during the last 10 years.
child_questions: question: What did this result in?
answer: As a result, 9 of the 12 money transmitters GAO interviewed, including all 4 that served Somalia, reported using channels outside the banking system (hereafter referred to as nonbanking channels), such as transporting cash to transfer funds, and that this increased their operational costs and exposure to risks.

question: Why did some banks GAO interviewed close the accounts of money transmitters?
answer: Furthermore, some banks GAO interviewed reported that they closed the accounts of money transmitters because of the high cost of due diligence actions they considered necessary to minimize the risk of fines under BSA/AML regulations.

question: What did the Treasury note in regards to the volume of remittances?
answer: Department of the Treasury (Treasury) officials noted that despite information that some money transmitters have lost bank accounts, Treasury saw no evidence that the volume of remittances was falling or that costs of sending remittances were rising.

questions: question: What have the Treasury and federal  banking regulators done to address concerns about derisking?
answer: To address concerns about derisking, Treasury and federal banking regulators (the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation), have taken actions including issuing guidance to banks and conducting some evaluations to assess the extent to which derisking is occurring.
child_questions: question: How were previously existing regulatory reviews inadequate?
answer: While agencies were engaged in BSA/AML regulatory reviews, these were limited in scope and had not evaluated how regulatory concerns may influence banks to engage in derisking or to close branches.

question: What do the Treasury and federal banking regulators need to determine how to modify BSA/AML regulations?
answer: Without assessing the full range of BSA/AML factors that may be influencing banks to derisk or close branches, Treasury, the federal banking regulators, and Congress do not have the information needed to determine if BSA/AML regulations and their implementation can be made more effective or less burdensome.

question: What did GAO report in March 2018?
answer: Moreover, in March 2018 GAO reported that Treasury could not assess the effects of money transmitters' loss of banking access on remittance flows because existing data did not allow Treasury to identify remittances transferred through banking and nonbanking channels.

question: How do nonbanking channels differ from banking channels?
answer: Nonbanking channels are generally less transparent than banking channels and thus more susceptible to the risk of money laundering and terrorism financing.