By Ashleigh Subramanian-Montgomery
On Dec. 16, 2021, the U.S. Government Accountability Office (GAO) released a ‘Report to Congressional Committees’ entitled the Bank Secrecy Act: Views on Proposals to Improve Banking Access for Entities Transferring Funds to High-Risk Countries. Developed from February 2021 – December 2021, this report responds to Congressional requirements under the National Defense Authorization Act for Fiscal Year 2021. The aim of the report is to address the challenges nonprofits, and nonbank financial institutions, referred to as “money transmitters,” face in transferring money to countries deemed high risk for terrorist financing and money laundering, and to identify proposals to address these challenges. These difficulties often serve as impediments to nonprofit organizations (NPOs) in delivering life-saving humanitarian aid, supporting civilians in conflict, and supporting low-income countries.
GAO produced this report within the mandated one year timeframe, and laid out three key objectives for the report:
- “banking access challenges reported by money transmitters and nonprofits transferring funds to recipients in high-risk countries and the drivers of these challenges,
- actions Treasury and the federal banking regulators have recently taken or plan to take to address these challenges, and
- stakeholder views on proposals intended to increase banks’ willingness to serve money transmitters and nonprofits transferring funds to recipients in high-risk countries.”
The main findings of the report conclude that both nonprofits and money transmitters experience challenges with banking access due to banks’ apprehensions surrounding sanctions and Bank Secrecy Act (BSA)/anti-money laundering (AML) regulations compliance. Banks cite the following as reasons they restrict and sometimes even deny funds transfers to nonprofits and money transmitters:
- Sanctions compliance;
- BSA/AML compliance costs and profitability;
- Reputational risk;
- Decrease in relationships with correspondent banks;
- Enhanced regulatory uncertainty and scrutiny.
Although these efforts are laudable, there is a strong likelihood that no significant change will happen unless the regulations themselves change.
Financial institutions and banks are historically risk averse, which largely stems from compliance demands and AML regulations within the BSA, and within U.S. sanctions regulations. Though it has been amended many times, including to add specific provisions of the Bush era USA PATRIOT Act (2001), the BSA was first established in 1970 and is known as the “U.S. anti-money laundering law”. Compliance with the BSA/AML and sanctions regulations are prerequisites for both banks and money transmitters to carry out funds transfers.
Regulations compliance is largely monitored by federal bank examiners carrying out BSA/AML bank examinations using the Federal Financial Institutions Examination Council (FFIEC) Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) Examination Manual. The manual states that examinations serve to “assess whether banks have established the appropriate policies, procedures, and processes based on their BSA/AML risk to identify and report suspicious activity and that they provide sufficient detail in reports to law enforcement agencies to make the reports useful for investigating suspicious transactions that are reported.” Money transmitters and banks must have a formal AML compliance program built around the individual risks it faces in regards to its customers and operating locations, and the services and products. These compliance programs must include: “customer identification program; customer due diligence procedures; and additional due diligence procedures”, in addition to required reporting.
In the ‘Money-Laundering and Terrorist-Financing Risks Posed by Money Transmitters and Nonprofits’ section, GAO cites the Treasury Department’s National Terrorist Financing Risk Assessment (2018) report claiming “charitable organizations—including nonprofits— implementing humanitarian assistance in high-risk areas may be vulnerable to exploitation by terrorist groups and their support networks.” It is undeniable that certain locations present higher risks, however, when operating in these high-risk areas, nonprofits implement strict due diligence mechanisms to limit vulnerability and increase transparency and accountability. The false narrative of nonprofits being “particularly vulnerable” persists despite it being refuted in several reports and in the Financial Action Task Force (FATF)’s Recommendation 8 (R8) removing this unwarranted label in June 2016.
While operating in high-risk countries to deliver humanitarian aid, nonprofits “have reported experiencing banking access challenges, including delays or denials of fund transfers, fee increases, refusal to open new accounts, and accounts closures” while money transmitters have “reported several challenges in accessing banking services, including banks closing their accounts, difficulties obtaining new accounts, and high costs in maintaining accounts.”
The GAO report highlighted findings from the Charity & Security Network’s (C&SN) Financial Access for U.S. Nonprofits (2017) report showing that of the more than 300 U.S. profits surveyed, two-thirds reported the same nonprofit banking access challenges. Nonprofits and money transmitters are often forced to find other means of getting funds into high-risk countries, such as armored vehicles or couriers, carrying cash on their person, and direct cash transfers. C&SN, among other actors, are “concerned that without additional actions, money transmitters and nonprofits will continue to face challenges accessing banking services.”
ADDRESSING BANKING ACCESS CHALLENGES
In response to these challenges, the report noted banking regulators and the Treasury Department’s work to minimize nonprofits’ and money transmitters’ banking access challenges. These past efforts include convening roundtable meetings and providing resources and guidance for nonprofits; and, due to derisking concerns, providing banks guidance on their expectations for delivering banking services to money services business (MSB) and money transmitters. Current efforts to support nonprofits and MSBs in “minimiz[ing] their terrorist finance risk” include:
- Convening stakeholder dialogues and meetings with nonprofits;
- Releasing an updated National Terrorist Financing Risk Assessment every few years;
- Conducting sanctions reviews resulting in issuing general licenses to provide “authorizations for COVID-19-related transactions and activities”, and subsequent frequently asked questions documents;
- Providing a regulatory helpline;
- Participating in a working group with federal bank regulators and the Financial Crimes Enforcement Network (FinCEN) “to identify ways to improve the efficiency and effectiveness of BSA/AML regulations, supervision, and examinations” and “improv[ing] the transparency of the risk-focused approach to bank examinations” through releasing several joint interagency statements;
- Issuing and engaging on fact sheets released for the benefit of federal banking regulators and nonprofits.
In the report, nonprofits, banks, the Association of Certified Anti-Money Laundering Specialists (ACAMS), and money transmitter associations all stated that there is no clarity yet around whether or not these actions are positively impacting banking access challenges for nonprofits and money transmitters. There is support for the risk-oriented supervisory approach in the joint statements, but concerns still linger “that examination practices do not yet reflect the guidance.”
The report did show positive progress in the federal banking regulator’s updates to the FFIEC BSA/AML examination manual. The nonprofit chapter was updated in November 2021. The goal of the updates is to enable examination work to be carried out through a risk-focused approach, and to provide clarity and transparency to the examination process. One such update was adapting the language to more clearly show that banks’ requirements come from regulations and statutes, and that these requirements are not established by the examination manual. Another key November 2021 update “reiterates the importance of financial services access for legitimate nonprofits and that the U.S. government does not view the charitable sector as a whole as presenting a uniform or unacceptably high risk of being used or exploited for money laundering or terrorist financing or sanctions violations.” This is an important contrast to the aforementioned section of the report that still used outdated and disproved language, such as “vulnerable”. Likewise, many of the key points found in the Treasury, federal bank regulators, and FinCEN working group’s fact sheets were integrated in these updates.
Federal banking regulator staff have also raised awareness of and conducted trainings on some updates to examiners and will provide further training on the most recent updates. It is anticipated that these updates will lead to changes in how examinations are carried out. Trainings were also conducted to assist the examiners in identifying risk and in integrating a risk-focused approach to their relationships with MSBs and money transmitters. According to the AML Act, examiners must receive yearly trainings on the countering terrorist financing, the AML, and the impacts to financial services provision caused by derisking.
PROPOSALS: SAME STAKEHOLDERS, DIFFERENT PERSPECTIVES
The varied stakeholders engaged for the report, including nonprofits, the Treasury Department, money transmitters, federal banking regulators, and banks, had differing ideas on effective means of addressing the most pressing banking access challenges experienced by nonprofits and money transmitters. One proposal with a lot of traction is the storing of customer information banks require for due diligence and customer identification procedures in centralized repositories, known as Know-Your-Customer (KYC) utilities. The benefits stakeholders identified for KYC utilities include: improved compliance with BSA/AML; and decreased costs for compliance. Limitations identified include: concerns surrounding data and privacy; cost; possible exclusion; and decreased scope to tackle issues with transparency. Impacts to KYC utility from an operational perspective include: regulator buy-in; and involvement and content amount and type.
The second proposal is for the U.S. government to play a facilitation role in some humanitarian fund transfers; one way this could be undertaken is through developing a U.S. intermediary that has an in-country presence to support funds distribution. The benefits identified include: accelerated transfer process; less frequent use of informal mechanisms; and decreased bank costs and risks. Limitations identified include: unintentional negative outcomes, like high-risk countries becoming disincentivized to use government reforms to reduce their risk and market distortions; and potential for misuse or misdirection of funds. Potential success factors identified include: when and how to participate depending on the nature of the humanitarian crisis; and leadership and structure, such as transferring funds through existing U.S. government agencies in crisis countries.
Proposals around educational initiatives, best practices, and codes of conduct were identified as less likely to be successful in enhancing banking access challenges facing nonprofits and money transmitters. Nevertheless, the best practices and codes of conduct identified to enhance banking access include: leadership members; type of content; showing compliance with BSA/AML requirements; and a strong level of support from federal banking regulators and the Treasury department. In regards to educational initiatives, it was deemed that education “would likely not lower banks’ BSA/AML compliance costs or address their concerns about what happens to funds once they reach their destination country.”
Reputational and financial incentives for banks were explored as a means for getting banks to support nonprofits and money transmitters in funds transfers to countries deemed high-risk. However, the identified limitations for incentives far outweighed the potential benefits. These limitations include: issues of equity among financial institutions and customers; inability to reduce overall costs; and unintentional negative outcomes, like high-risk countries becoming disincentivized to use government reforms to reduce their risk and market distortions. Considerations to operationalize these bank incentives include: what the qualifying activities and who the qualifying customers are; and structure and size.
COMMUNICATION: SAME STAKEHOLDERS, SAME PERSPECTIVES
While perspectives varied regarding proposals to address banking access challenges, nonprofit, money transmitter, and banks all agreed on communication being imperative to addressing these challenges. Frequent communication between nonprofits and banks is essential to troubleshooting issues in real time and to increasing transparency. Nonprofits also stressed the importance of federal agencies participating in multisector dialogues. The report noted that one immediate way to achieve sustained communication amongst stakeholders is through the provision in the National Defense Authorization Act for Fiscal Year 2021 that “calls for consultation with federal and state banking regulators, other public-sector stakeholders (which could include federal agencies with a potential role in the proposals discussed here), and relevant private-sector stakeholders, such as banks, money transmitters, nonprofits, and the associations that represent them.” This provisions also calls for the Treasury Department to establish a decreasing derisking strategy. The consultation will provide a space for ongoing communication, troubleshooting issues in real time, and sustaining work to address banking access challenges.
In regards to methodology, the consultations with nonprofits, money transmitters, and banks constituted a nonrandom sample, meaning the information obtained from them is not comprehensive enough to be generalized to the greater nonprofit, money transmitters, and banks population.
It is clear this report shows GAO’s effort and initiative to be a collaborative partner in addressing the bank access challenges faced by nonprofits and money transmitters. Given that the findings expose the depths of these problems, bank regulators should consider changing the stringent and arduous regulations required of nonprofits and money transmitters. The proposals suggested throughout the report, though necessary to take immediate steps forward, are not sufficient to address the root causes of the bank access challenges and derisking. C&SN urges federal authorities to continue providing open communication channels with nonprofits, financial institutions, and money transmitters, to co-create lasting solutions that enable humanitarian actors to fulfill their important mandate(s).
C&SN extends gratitude and commends GAO for the timeliness of the report’s release, and appreciates the opportunity to contribute via interviews ahead of publication.
The full report is available here.