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What is Bank Secrecy Act (BSA) and Its Importance in Record Keeping
21 October 2022
The financial industry is one of the most regulated industries across nations, especially in the US. These regulations are in place to protect the consumer from different kinds of financial risks. That is why the Bank Secrecy Act was enacted in 1970 to safeguard the consumer primarily.
The Bank Secrecy Act applies to all financial institutions that operate in the US financial market. These institutions include banks, credit organisations, institutional lenders, FinTech companies, cryptocurrency exchanges, etc. The primary motive of the Bank Secrecy Act was to prevent money laundering and its impact on the economy and consumers. All financial institutions in the US must adhere to the BSA compliance program. Any lapses or non-compliance with the Act could lead to severe penalties.
What is the Bank Secrecy Act (BSA)?
The Bank Secrecy Act of 1970 was enacted to prevent money laundering and safeguard consumers from financial fraud. The Act is also known as the Currency and Foreign Transaction Reporting Act. The US Government uses the clauses of the Act to ensure that the financial institutions operating in the country are not becoming mediums for fraudulent financial transactions.
The Act tries to prevent any financial crimes facilitated by a financial institution operating in the US. It ensures that all the financial institutions in the US cooperate with the Government and support all of its anti-money laundering efforts.
How Does the Bank Secrecy Act Work?
The Bank Secrecy Act includes several norms to check for fraudulent transactions. As per the Act, financial institutions must keep a note of any financial transactions that exceed the value of $10,000. If an individual or a business makes a transaction of $10,000 or more, they must duly fill the Form 8300 and submit it to the authorities. The rule applies to a real or a legal person like a company, partnership, trust, etc.
Form 8300 must be submitted within 15 days of the transaction. The rule applies to all financial transactions within the territories of the United States. However, Government bodies and the companies listed on the North American exchanges are not covered under the purview of this act. The Office of the Comptroller of the Currency (OCC) keeps a regular tab on all the banks and other financial institutions to check if they comply with the Secrecy Act.
What is the Primary Purpose of the Bank Secrecy Act?
The Bank Secrecy Act’s primary purpose is to establish a system of internal and external controls on a bank and other financial institutions.
Requirements for a Bank Secrecy Act (BSA)
All financial institutions must comply with Bank Secrecy Act requirements to avoid penalties. The three primary requirements of the Act are:
1. Customer Identity Verification
All financial institutions must verify the identity of all of their customers and clients. Different institutions follow different steps to verify the identity of their customers. The process involves the collection of basic details of the customer. These details include the name, date of birth, permanent address, social security number, etc. The customer should provide valid Government identity proof to complete the customer identity verification process.
Customer identity verification and KYC compliance became a part of the Secrecy Act in the early 1990s with the introduction of the Financial Crimes Enforcement Network.
2. Monitoring and Reporting
As per the act, the banks must report any transaction that might potentially be an act of money laundering, tax evasion or any other crime. The institutions must file several reports and submit them to the relevant authorities if they believe a financial transaction is suspicious.
Some of the reports that are mandatory under the BSA Bank Secrecy Act are:
The Currency Transaction Report stating any transactions that exceed the $10,000 limit for a particular day
Form 8300 with the cash payments made to companies in a single day. The companies here include insurance firms, art galleries, etc.
The Suspicious Activity Report for a particular account if they fail to meet the reporting requirements of the financial institution. The report should also be submitted if money laundering or terrorist funding is done through the institution.
The Foreign Bank and Financial Account Report for all individuals with at least $10,000 in a foreign bank account.
The financial institutions must comply with all the reporting requirements under the BSA banking act.
3. Internal Policies
As per the act, all banks and financial institutions should have anti-money laundering policies. This is a compulsory requirement under Section 352 of the Patriot Act. The components of AML compliance for all banks and financial institutions include:
Assigning a compliance officer
Developing internal policies to monitor suspicious activity
Develop an AML training program for all the employees
Testing and auditing the AML policy via third-party auditors
Implement a risk-based approach for customer due diligence
All banks must fulfil these requirements under the BSA banking act. The Office of the Comptroller of the Currency will conduct periodic checks to ensure that all the requirements are fulfilled.
What is BSA Compliance?
The BSA compliance program ensures that banks and financial institutions adhere to all the provisions of the BSA. Compliance is vital to safeguard the financial institution’s customers and the economy. The FinCEN is the appointed administrator of the BSA, and its primary objective is to protect the country’s financial system from all kinds of financial abuses like money laundering, terrorist financing, etc.
FinCEN conducts regular audits on banks and financial institutions to ensure they adhere to the compliance norms laid down as per BSA. They also check if the institutions are fulfilling the three main requirements of the BSA.
Why is the Bank Secrecy Act Compliance Important?
The Bank Secrecy Act compliance is crucial to the US financial system. It requires all banks and financial institutions to keep a record of all financial transactions that exceed the value of $10,000. The compliance keeps people away from engaging in any financial fraud or funding any illicit activity.
Companies use several compliance platforms to comply with the Bank Secrecy Act. If a person or an institution fails to meet the requirements listed under the BSA, they may have to pay thousands of dollars based on the severity of the case. If the offence is quite severe, the person can receive a prison sentence of up to 20 years.
What is the BSA Anti-Money Laundering Compliance Programme?
Under the BSA compliance program, financial institutions must build 5 pillars within the company to check all the financial transactions. The five pillars of the BSA AML compliance program are:
1. Internal Controls
The banks and financial institutions need to place a few internal controls based on the geography and the type of services offered to the customers. These internal controls will help keep track of financial transactions that can be an act of money laundering. The type of internal controls depends on the institution’s size and the scale and type of services it provides.
2. Designating a BSA AML Officer
All banks and financial institutions must assign a compliance officer who can help these institutions better implement compliance programs. The person might also help the company identify the current system’s loopholes and fix them.
3. Designing a BSA AML Training Program
As per the Bank Secrecy Act compliance, you need to build a training program and ensure that all the employees working at the institution are aware of the Act and its aspects.
4. Independent Testing
Once you have an AML program in place, you need to contact a third party to conduct a test on the efficiency of the program. This is an annual activity, and all banks and financial institutions must do it without fail.
5. Customer Due Diligence
All financial institutions must conduct a KYC for their customers and verify their identity. The institutions must also assess the customer’s risk profile based on their financial history and criminal records.
All of these five pillars constitute the BSA Anti-Money laundering Compliance Programme.
Importance of Reporting and Record Keeping in BSA
Reporting and record-keeping are critical components of the Bank Secrecy Act. To ensure that you comply with all the clauses of the BSA, you need to keep records of all transactions, especially the ones involving suspicion. The financial institutions must maintain a record of all instruments with a value between $3,000 and $10,000. The record should also include the customer’s profile and the aggregate value of all their transactions.
Another important aspect of reporting is filling suspicious transactions with FinCEN. All CTRs, Form 8300, SARs, and FBARs, must be duly filled so that FinCEN can track all potential financial frauds. The best part about these reports is that you can file them online, and all the relevant authorities can access them for analysis. Without proper reporting and record-keeping, the banks might not be able to implement the Bank Secrecy Act.
BSA and Cryptocurrencies
Cryptocurrencies have several regulations in place. However, there have been several cases in the past where cryptocurrencies have facilitated fraudulent financial transactions. Earlier, cryptocurrencies were not covered under the BSA. However, the FinCEN issued a certain number of guidelines bringing cryptocurrencies under the purview of the BSA.
A money transmitter who plays the role of an administrator is appointed for all crypto exchanges. The companies dealing with cryptocurrency are called money services businesses, and they must register with FinCEN and adhere to all the clauses of the Bank Secrecy Act. Even these companies will be subjected to regular checks by the FinCEN.
The BSA came into effect in 1970 and is still highly relevant to the US financial system. To ensure its relevance, the Act has made several amendments to keep up with the changing environment. All banks and financial institutions must adhere to the BSA and develop an AML program to implement the Act effectively.
Financial institutions must have adequate KYC and AML policies to safeguard the institution, other customers, and the economy. Ensure you file all the records with the details of suspicious activities to avoid heavy penalties.
FAQs on Bank Secrecy Act
Q1. When should a bank file a CTR?
Ans: A CTR or a Currency Transaction Report must be filed for all transactions that exceed $10,000.
Q2. Which companies must mandatorily file a Form 8300 if the value of transactions increases by $10,000 for a single day?
Ans: Businesses in car dealings, art selling, and insurance companies must file a Form 8300 if their total transaction value increases by $10,000 a day.
Q3. Who is responsible for the internal check of BSA compliance?
Ans: As per the five pillars of the BSA compliance program, all financial institutes must appoint a compliance officer who will keep an internal check on the institutions and ensure that they comply with the BSA.
Q4. Does the bank inform the customer before reporting the suspicious activity?
Ans: No, the bank should not inform the customer as the information is confidential. Notification to the customer in case of any suspicious activity is prohibited by Federal law.
Q5. Does the Government penalise the customer for receiving a suspicious activity report?
Ans: The Suspicious Activity Report is just an alert to the Government. The Government analyses the entire situation before taking any action against the customer.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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