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Banking

Credit Unions: 5 Pillars Of An Effective AML Compliance Program

By Esteban Santana

Image source: Unsplash

Credit unions (like banks) accept deposits, make loans, and provide many other financial services. They have a rich history in the United States’ financial system and are part of our blog series of articles dedicated to:

  • Today’s regulatory information that is important to banks and credit unions;
  • Importance of having a robust artificial intelligence platform that identifies applicable regulations to keep an organization up to date and in compliance with regulators.

While the first two articles in this series delved into the cost of non-compliance with CFPB Fair Lending practices and Fair Credit Reporting Act, this article will explore credit unions, their history, regulatory body and the five pillars for their Anti-Money Laundering Compliance Program.

Brief History of Credit Unions

Credit unions may not be as “old” as banks - and are not as large or widespread - but the main difference between a credit union and a bank comes down to that banks are for-profit and credit unions are notnon-for-profit.

The birthplace of credit unions was in Germany, dating back to 1864, where the first cooperative lending institution was established. The National Credit Union Administration (NCUA) has an excellent historical timeline of credit unions, with the first credit union dating back to 1901 in Quebec (Canada), and 1909 in Manchester, New Hampshire (US).

The original concept of a credit union was based on the principle that members of a community would combine their resources and individuals could access those funds. It was not until the 1930s that the credit union movement would achieve federal acknowledgement and national affirmation.

Credit unions are not insured by the Federal Deposit Insurance Corporation. They are insured by the NCUA for up to $250,000 per person, per institution, and per ownership category.

The NCUA also regulates and supervises federally chartered credit unions, and the state-chartered credit unions are regulated at the state level by the corresponding regulator. Regulations affecting credit unions can be found in 12 CFR Part 700.

Anti-Money Laundering Compliance Program

An important regulation that applies to federal credit unions - as well as banks - is the Bank Secrecy Act (BSA)/Anti-Money Laundering (AML). Credit unions lacking a federal regulator (NCUA) were exempt from certain requirements, but the Financial Crimes Enforcement Network (FinCEN) passed a final rule in 2020 that changed the exemption.

Not only are all credit unions required to be BSA-compliant, but they have to establish an AML compliance program. AML rules assist a financial institution in detecting and deterring money laundering and other financial crimes.

The consequences of non-compliance can be severe and go beyond fines and penalties. It can lead to reputational damage and loss of business. AML software is available to detect suspicious activities by persons or organizations who may be trying to generate income through illegal actions.

An AML compliance program is also extremely important to avoid fines and penalties, keeping the institution up-to-date with important regulations. Credit unions, as well as banks, should consider having an AML compliance program that includes a minimum of these five (5) pillars:

  1. Internal controls to assure ongoing compliance;
  2. Independent testing of the AML program;
  3. Designated person responsible for monitoring the program;
  4. AML training;
  5. Audit or risk-based procedures to conduct ongoing due diligence.

As an example, a financial institution in Texas failed to have an adequate AML program that met some of the five pillars. In a 25-page consent order dated in December 2021, the bank was fined by FinCEN.

The order reads, in part:

“In order to guard against money laundering…, to establish and AML program that…includes at a minimum: (a) provides for a system of internal controls to ensure ongoing compliance; (b) provides for independent testing…(c) designates an individual…responsible for coordinating and monitoring day-to-day compliance; and (c) provides training…. The Bank willfully failed to implement an AML program. “To resolve this matter…agrees to and consents…to make a payment of $7,000,000…within ten (10) days…. If payment is not made…interest, penalties, and administrative cost will accrue. “...it must pay the entire $8,000,000 penalty imposed by this Consent Order.”  

This is one of many consent orders for not having a reliable AML compliance program.

Importance of a Robust Artificial Intelligence Platform to Meet Compliance

In today’s digital world, regulatory compliance is growing more complex.

Financial institutions are struggling to keep pace with the ever-growing number of new regulations. Given the fines associated with non-compliance, it is imperative for an organization to have a solid regulatory compliance platform to assist them along the way.

Poor data quality can be seen as inadequate controls, which may carry a fine by the regulators. Artificial intelligence is becoming increasingly pertinent in regulatory compliance because it addresses common operationals challenges and systemic issues that organizations face on a daily basis.

Financial regulators require compliance officers to track, manage, and analyze detailed data, but the sheer volume increases the chances for human error and inaccurate reporting with regards to the incoming updates.

These are some of the reasons why having a software platform like Regology with a proven track record to assist with regulatory compliance is invaluable.

  • It provides an applicable law library and a risk register controls catalog;
  • It enhances controls review cycle;
  • It improves the accuracy of information for up-to-date regulatory reporting;
  • It reduces risk without adding new resources.

Speak to one of Regology’s dedicated specialists to get an overview of the platform and how it can be implemented within your organization by filling out this form.

Other blogs in the series:

Cost of Not Being in Compliance with CFPB Fair Lending Practices

Fair Credit Reporting Act: Could Your Financial Institution Be Considered A Consumer Reporting Agency?

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