susan schmidt bies : bank secrecy act and capital compliance issues remarks by ms susan schmidt bies, member of the board of governors of the us federal reserve system, at the institute of international bankers annual washington conference, washington, dc, 14 march 2005. * * * good morning. i want to thank you for the invitation to speak at the institute's annual washington conference. international banking organizations are playing an increasingly important role in the u. s. financial sector. foreign banking organizations hold more than $ 3. 5 trillion in banking and nonbanking financial assets in the united states - making these organizations some of the biggest financial holding companies operating in this country. for two broad reasons, u. s. banking supervisors give a great deal of thought to the foreign banking organizations here. first, the management of complex international banking businesses creates inherent risks, which must be mitigated through sophisticated enterprise - wide risk management and internal controls. international organizations face difficult questions of management and control across their geographically dispersed offices. they often operate in new and unfamiliar financial terrain, which poses strategic challenges. and they are vulnerable to terrorist financing, money laundering, and other customer fraud issues that tend to involve cross - border transactions. second, international banking organizations are regulated by supervisors in various national jurisdictions that have different legal, regulatory, and supervisory frameworks. thus, the supervision and regulation of these organizations requires the continuous coordination and cooperation of hostand home - country supervisors. while banks operate globally, supervisory and regulatory responsibility for the various operating units of the organizations is still based on laws and regulations of sovereign states. complying with diverse laws and regulations can be complex and costly for global banking organizations. today, i want to touch on two regulatory issues that are currently high on the list of both bankers and supervisors : bank secrecy act compliance and basel ii implementation. compliance with the bank secrecy act since the passage of the usa patriot act in 2001, which significantly amended the bank secrecy act, compliance in this area has been a major concern for the banking industry. in large part, bankers'concerns center on the increased burden of complying with the amended bank secrecy act, the apparent lack of consistency in oversight and supervision, and law enforcement issues. the federal reserve recognizes that banking organizations have devoted significant resources to helping the government identify and prosecute those who are involved with money laundering, the funding of terrorist activities, and other crimes. but some recent events are affecting bankers'perceptions about their role in this critical area, and have raised

serious questions about what bank regulators and other government authorities - most notably law enforcement agencies - expect of bankers. today, i want to provide some background information and describe what the federal reserve is doing, in coordination with the justice and treasury departments, to clarify expectations and dispel misconceptions about compliance with the bank secrecy act. but first i want to emphasize an important point about the bank secrecy act : implementation of the act has traditionally been accomplished through a partnership among banks, supervisors, and law enforcement authorities. the law requires reports and recordkeeping that is useful to all these entities. further, the law capitalizes on the role of banks in payment systems. as collectors of financial information, banks are in a good position to identify questionable or suspicious payments or activities. for the past decade, the key obligation of banks within this partnership has been the filing of suspicious activity reports, or sars, in accordance with regulations issued by the u. s. department of the treasury and all of the federal banking and thrift regulators. the agencies'rules require banking organizations to file sars to alert law enforcement authorities and federal bank supervisors about a known or suspected violation of law, or about any suspicious activity being conducted at, by, or through a bank, thrift, or credit union. by filing sars, banking organizations put critical information into the hands of the proper law enforcement authorities in a timely and effective manner. since the sar system was started in 1996, banking organizations have filed more than 1. 7 million sars. that is an enormous amount of cooperation and information sharing. however, recent criminal investigations and prosecutions based on bank secrecy act and sar reporting violations have attracted significant industry attention. most importantly, these cases have generated complaints from the financial industry about the increased burden of bank secrecy act compliance, as well as the uncertainty of future requirements - particularly for the filing of sars. believing that regulators and law enforcement authorities have set a zero - tolerance level for sar - filing deficiencies, banking organizations are concerned that in certain situations failing to file a sar could result in a criminal prosecution. bankers are telling us that regulatory criticism and criminal prosecutions based on sar - filing deficiencies can produce collateral consequences. for example, banks are tending to avoid customers, such as money transmitters and check cashers, who present perceived heightened risks. yet the closing of accounts for these types of businesses is effectively a denial of banking services to many categories of legitimate customers. banking organizations have also begun to file "