On December 3, 2018, the Federal Banking Agencies, including the Federal Reserve Board, Federal Deposit Insurance Corporation, Financial Crimes Enforcement Network, National Credit Union Administration, and Office of the Comptroller of the Currency, issued a joint statement to encourage banks to consider, in appropriate circumstances, implementing innovation in complying with the Bank Secrecy Act/anti-money laundering (BSA/AML) requirements. The Agencies noted such innovation (e.g. new ways of using existing tools, adopting new technologies, etc.), where appropriate, may “…further strengthen the financial system against illicit financial activity.”
The ultimate goal of the Agencies is to ensure banks maintain effective BSA/AML compliance programs to combat money laundering and terrorist financing; the use of innovation may provide effective enhancement tools. While the Agencies did not specify particular methods or technologies, they did identify areas in which innovation would be most beneficial including risk identification, transaction monitoring, and suspicious activity monitoring. Examples of innovation included in the statement are artificial intelligence and digital identity.
Engaging with banks and technology providers is a priority for the Agencies to learn and discuss innovative approaches. In addition, pilot programs are important in validating the effectiveness of such approaches. Banks undertaking pilot programs, while expected to maintain compliance with the BSA/AML requirements and evaluate associated risks (e.g. information security, third-party providers, privacy, consumer compliance), will not be subjected to increased regulatory criticism resulting from responsibly testing innovative approaches. Banks are encouraged to consult with their regulators early in the process of innovative change.
Financial institutions should be aware that while the Agencies are encouraging use of innovative approaches, they will not penalize or criticize banks that maintain effective BSA/AML compliance programs commensurate with their risk profiles but choose not to pursue innovative approaches. This is encouraging for smaller, community-based institutions with lower risk profiles who have fewer resources. These lower risk institutions should consider the Agencies’ other recent statement, related to resource sharing, and evaluate how both statements may impact the expectations of their examiners and the resources available to their institution.