AML and SARs and FinCEN, OH MY!

Bank Secrecy Act Could Soon Apply To Mortgage Bankers and Brokers

Just when you thought you had enough new regulations to keep your compliance department busy through the next presidential election, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has issued proposed rules that would extend the Anti-Money Laundering (AML) and Suspicious Activity Report (SAR) provisions in the Bank Secrecy Act (BSA) to non-depository mortgage bankers and brokers – in other words, you.
The Bank Secrecy Act has long required depository institutions and other cash-intensive businesses like casinos to aid Treasury’s efforts to prevent money laundering, reduce fraud and eliminate the funding of terrorist organizations in various ways.  Most common are requirements for these institutions to maintain and follow an “anti-money laundering” plan designed to detect transactions that are attempting to use money obtained through illegal activities in financial transactions, thereby making it appear to be legitimate, and notifying Treasury and the FBI of suspicious transactions through the filing of a standardized form called a “suspicious activity report.”

Are You At Risk?
FinCEN has determined that there is a “significant risk” of money laundering and terrorism funding occurring in residential mortgage transactions involving non-bank lenders – mortgage bankers and brokers.  In the proposed rule, which was issued on December 2, 2010, FinCEN would require all mortgage bankers and brokers to develop an anti-money laundering plan “designed to prevent the company from being used to facilitate money laundering or the financing of terrorist activities.”  To be compliant, each company’s plan must assess the ways they are at risk for being victimized and put controls in place to address those risks.  Additionally, each company would be required to designate a compliance officer that would be in charge of administering and updating the program as risks change.  Firms would also be responsible for educating and training staff in following the plan.  Finally, every mortgage bank and broker would be mandated to “independently test the program on a periodic basis” to ensure that it is adequate and functional.  This proposed rule would also require mortgage companies to file a Suspicious Activity Report on “every transaction of $5,000 or more that they determine to be suspicious.” 

Your Bottom Line Impact
While certainly a noble goal, I can see how some of these additional compliance requirements will increase operating overhead costs for mortgage companies.  Compliance with the Suspicious Activity Report requirement should not be overly difficult or time-consuming.  The vast majority of non-depository firms still operating in the mortgage market already have intensive anti-fraud measures in place.  Simply adding the additional step of formally reporting suspicious transactions should not require a lot of procedural change at these companies.  The Anti-Money Laundering requirement however, could have a direct and meaningful impact to the bottom line.  Development, maintenance and testing of an AML program will require a significant investment of both time and money.  Many of the companies in the residential mortgage industry are small businesses that need to focus on originating loans to survive this housing downturn and may not be able to afford to spend more time on compliance.  Remember, these companies have already been required to develop and maintain a data security plan under the Gramm-Leach-Bliley Act AND an identity theft prevention plan under the Red Flags Rule of the FACT Act.  If this trend continues, we’ll have plans in place to deal with every eventuality that can potentially arise in a mortgage transaction, but possibly no business to apply those plans to.

Don’t Miss Your Chance To Weigh-In
Public comment for this proposed rule will close at 11:59 PM on February 7, 2011.  If you wish to view the actual text of the rule and comment on how it will affect the industry, you may do so at  Simply search for Docket Number FINCEN-2010-0001.  Happy writing!

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