Bank Secrecy Act: Red Flags of Money Laundering

Written by Shereefat Balogun, Regulatory Compliance Counsel

So we all know that credit unions are required to file a Suspicious Activity Report (SAR) where a member appears to be engaged in illegal or suspicious activity.  While, we all know the general SAR requirements, there are many questions about what activity is considered suspicious; or more precisely what are the “red flags” of money laundering.  In light of the looming concerns in this area and increased regulatory scrutiny around the failure to file a SAR in certain instances, this post will provide a non-exhaustive list of some of the common indicators of money laundering activity that your credit union can prepare for. 

As an initial matter, the BSA/AML regime requires credit unions to file a SAR if it involves at least $5k and the credit union has reason to suspect that the transaction: (i) involves funds derived from money laundering or any other illegal activity; (ii) is designed to evade the BSA or its implementing regulations; or (iii) has no apparent business or lawful purpose, or is not the type of transaction that the member would normally be expected to engage in.  See, 12 CFR 748.1.  Credit unions are encouraged to develop appropriate policies, procedures, and processes that monitor and identify unusual or suspicious activity.  But what is suspicious? The following are examples of possible situations that may indicate money laundering.  Two considerations should be noted: one, this list is non-exhaustive.  Two, the presence of a red flag is not conclusive evidence of criminal activity.  Rather, the presence of a red flag should prompt additional investigation and scrutiny in order to determine whether a SAR should be filed.

Avoiding Recordkeeping and Reporting Requirements

• Member asks about record-keeping or reporting requirements
• Member discourages employee from filing required reports or complying with recordkeeping requirements
• Member reluctant to proceed with cash transaction after being told it must be reported

Suspicious Customer Identification Behavior

• Member uses unusual or suspicious identification documents, or refuses to produce originals for verification
• Member refuses to provide personal background information when opening an account
• Member’s permanent address is outside of the credit union’s service area
• Member indicates that he/she does not want a statement of account or nay mail sent to his/her address
• A business member is reluctant to provide information about the nature and purpose of its business, expected account activity, or the names of its officers and directors

Suspicious Cash Transactions

• Member regularly uses ATMs to make several deposits below the reporting threshold
• Member comes in with another member and they go to different tellers to conduct currency transactions under the reporting threshold
• Member opens different accounts under different names, and then makes several cash deposits under the reporting threshold
• Member deposits cash into several accounts in amounts below the reporting threshold and subsequently transfers the funds into one account and wire transfers them overseas
• Member attempts to take back a portion of a cash deposit that exceeds the reporting threshold after being told a CTR must be filed
• Member makes numerous purchases of monetary instruments with cash in amounts less than the reporting threshold
• Member purchases a number of prepaid cards for large amounts, inconsistent with normal account activity

Suspicious Activity in Credit Transactions

• Member suddenly pays down or pays off a large loan with no credible explanation as to where the funds came from
• Member purchases certificates of deposit and uses them as loan collateral
• Loans are made for, or paid on behalf of, a third party with no plausible explanation
• Member’s loan proceeds are unexpectedly transferred offshore or member requests that loan proceeds be wired transferred

Suspicious Employee Activity

• Employee lives a lavish lifestyle that cannot be supported by his salary
• Employee fails to adhere to credit union’s internal policies, procedures, and processes and frequently overrides internal controls
• Employee is reluctant to take a vacation

Again, this post lists just some of the various transactions and activities that may indicate potential money laundering.  For a more comprehensive list, check the FFIEC’s BSA/AML Examination Manual, Appendix F. 

As an aside, our members have been letting us know that this year’s examination has focused a lot on BSA compliance.  Indeed, NCUA’s Letter to Credit Union 16-CU-01 identifies BSA as an examination priority for 2016.  Below are some resources your credit union can rely on to be prepared. 

• NCUA Examiner's Guide
• AIRES BSA Questionnaire
• NCUA Compliance Self-Assessment Guide
• Interagency Statement on Enforcement of BSA AML Requirements

As always, if you have any questions relating to this article or any other BSA issue, please contact NAFCU’s regulatory compliance team.  We’re here for you!

Wait!!! While we're on the topic of BSA, have you registered for NAFCU's upcoming BSA seminar?  We’ll be holding our first in-person, BSA Seminar in New Orleans from October 24 – 28.  You can expect a full week of everything you’ve ever wanted to know about BSA, but didn’t have time to ask. It’s designed for just credit union professionals. You’ll find no erroneous “bank” information that doesn’t apply to credit unions. Check out the full agenda and sessions.

There’s an optional, pre-conference workshop to help get you up-to-speed on BSA fundamentals – it’s perfect if you’re new to BSA or just want a refresher. And at the end of the week, you’ll have the opportunity to get certified when you sit and pass the NAFCU Certified Bank Secrecy Officer (NCBSO) exam.

This seminar, and the certification, is an excellent way to demonstrate to NCUA and FinCEN you’re dedicated to compliance and to protecting your credit union against financial crime. It was designed by NAFCU’s Director of Education Devon Lyon, former director of BSA at State Department Federal Credit Union – so the curriculum is extremely relevant at both a strategic and tactical level. You’ll walk away ready to master your AML responsibilities. And of course, it fulfills your yearly BSA training requirement!

We have limited seating – so register early!