Update Your BSA/AML Strategy to Align With Growth Trajectory

By Carey Rome

A Bank Secrecy Act officer has a tough job. Stakeholders feel as though they’ve heard enough about BSA, so they rarely accept the reality that continued investment in anti-money laundering compliance is required—whether it’s related to a violation or not.

But following the global financial crisis, regulators have stepped up BSA/AML enforcement. All told, the U.S. government has levied more than $200 billion in fines against banks since the crisis for financial crimes ranging from money laundering to currency manipulation. And for the bank’s BSA officer, violations can spell career catastrophe, reputational risk and all eyes directed toward the compliance department.

BSA/AML strategy is all about decreasing risk and minimizing fraud. Fortunately, lower risk doesn’t necessarily equate decreased profits. To increase profits while decreasing risk, banks must proactively update their strategies to align with a growth trajectory.

Updating your BSA/AML strategy

Many bank executives I work with are currently dealing with a hodgepodge of regulatory policies. When regulations are issued, bank executives scramble to write a policy to respond to the rules. The result is a bank-by-bank, regulation-by-regulation patchwork of policies, akin to building additions onto a home until the structure is a barely navigable mess.

The first step to decode regulatory cobwebs into a coherent strategy is to determine your target customer. Once you’ve zeroed in on ideal customers, you can then divest riskier, less profitable relationships. This compliance strategy requires fewer risk management personnel while improving oversight, reducing risk, and improving profitability.

For example, there has been an automotive manufacturing boom in the southeastern U.S., with automakers from BMW to Nissan to Mercedes setting up shop. As a result, regional banks in the Southeast might designate automotive manufacturers as target customers.

By focusing on a customer type (manufacturing, say), bankers can better understand the nuances of their businesses, such as transaction trends and import/export activity. While the BSA officer at a bank targeting medical practitioners might sound the alarm over heavy import/export activity, the BSA officer at a bank serving automobile manufacturers would understand such activity is a business norm.

Balancing risk with growth

During an audit, regulators look to ensure that compliance specialists properly understand transaction activities and trends, particularly those associated with high-risk accounts. And as settlements have shown, enticing high-risk customers without regard to BSA compliance is an unsustainable business model that rapidly attracts regulators’ attention.

The key to avoiding this fate is to regularly screen for and divest risky lines of business that aren’t the bank’s forte. I suggest a 12-month rolling strategy with quarterly assessments to ensure you stay compliant. Don’t treat quarterly assessments as boxes to check. Instead, be diligent—shell corporations and pyramid schemes can look like real businesses and vice versa.

Refusing riskier business isn’t just a hedge against regulatory action; it’s also essential to profitability. Take JPMorgan Chase & Co., which realized that the costs of regulatory compliance rendered nearly 70 percent of accounts with less than $100,000 in deposits and investments unprofitable. After lending regulation compliance costs and weighing them against potential profits, JPMorgan decided instead to pursue high-value non-retail accounts.

Is this passing up money? Not at all. Because the bank’s strategy is to deepen existing investments rather than diversify its customer portfolio, it won’t need as many compliance specialists to manage divergent lines of business. Decreasing expenses is just as important as raising revenues to growing profits.

BSA officers must lead

Prior to opening new lines of business, everyone from the CEO to the compliance officers must fully understand the bank’s risk exposure.

But to build a serious case for maturing the BSA program, BSA officers must take the lead in developing and presenting a sound strategy. This plan should project risk and growth for the next three years, accompanied by a detailed 12-month strategy to decrease risk by homing in on target customers.

Revising your BSA/AML strategy to align with target customers is an essential and responsible part of growing while staying compliant. Banks that don’t keep up might find themselves up next in the regulatory hot seat or on the front page for the worst reasons.

Carey Rome is the founder and CEO of management consulting firm Cypress Resources.