4 Takeaways from John Court’s Testimony on Modernizing the Bank Secrecy Act

BPI Executive Vice President, General Counsel and Chief Operating Officer John Court testified today before the House Financial Services Subcommittee on National Security, Illicit Finance, and International Financial Institutions at a hearing titled "Modernizing the BSA for Financial Crime in the 21st Century." Court discussed the importance of modernizing the Bank Secrecy Act and emphasized the need to transition to a more effective, risk-based system that leverages technological innovation and focuses resources on core national security and law enforcement priorities.

Here are 4 takeaways from the hearing:

1. Reforming the examination process will stop low-value reporting and foster effective law enforcement collaboration.

Rep. Andy Barr (R-KY): Yeah, one other thing, Mr. Court, I get this feedback a lot again from constituent financial institutions in Kentucky that there's no feedback. They produce all these SARS, and I think the statistic is what - 4 million SARs annually, and FinCEN estimates that law enforcement acts on only 2% of them, but then on top of that, financial institutions get no feedback on whether what they're doing is actually helping combat illicit activity. How much feedback does FinCEN or law enforcement provide to financial institutions, so that the institutions themselves can prioritize their compliance resources?

John Court, BPI: Yeah, the reason a lot of smaller institutions, including some that might be in Kentucky, file all these SARs that get no feedback is because they're not filing the SAR to help law enforcement; they're filing the SAR because they don't want to be criticized by their examiner for some silly little thing that they might have missed. So that's what they're doing with their resources. So I'm not surprised that law enforcement doesn't follow up. I will say in larger institutions, law enforcement and FinCEN, and the larger institutions, particularly those institutions that have these financial intelligence units, this is really sort of the avant-garde of where this should be going, where resources should be allocated. It's a much more sophisticated investigation exercise inside the banks, and there's much more collaboration. So, I will give law enforcement credit there, but these wasted filings need to go away.

2. Regulatory changes that encourage banks to leverage technology and move away from outdated processes will improve the quality of the information sent to law enforcement.

Rep. Frank Lucas (R-OK): Mr. Court, can you expand on your testimony? How can banks benefit from emerging technological tools used to identify suspicious activity, and how can FinCEN recognize such benefits in their compliance regime?

John Court, BPI: So obviously the incentive inside the bank is to have the most effective financial crime-fighting apparatus as possible at the least cost, and one way to do that is to leverage technology and innovation. The proposed rule really encourages banks to do that and implies that they won't be second-guessed. Unfortunately, what we've been living with, including for the last six years, is banks trying to use technology and innovation, but examiners demanding that the banks, like, run processes in parallel, which just upends the entire incentive structure for moving to the innovative technologies. So, we're hopeful under this proposal that that will be eliminated.

3. Breaking the cycle of unread compliance reports requires real reform on the ground that shifts examiners' focus from process to stopping illicit activities.

Rep. Young Kim (R-CA): So, Mr. Court, when financial institutions transmit information to FinCEN or law enforcement, can you describe the type of feedback that they get and whether that is beneficial to those institutions?

John Court, BPI: Well, the ideal state would be that they would get feedback, but that's not the state that we have. We've talked at the hearing today already about the very, very low uptick that any of these CTR or SAR reports generate. We've also talked about how the real impetus for many of the SAR filings that are made are not that they contain information that would be useful to law enforcement, but that they're made because the bank lives in fear of its bank examiner and the criticisms and the zero tolerance for any even minute error, which can lead to sanctions.

4. The current BSA regime forces banks to dedicate resources to paperwork and box checking instead of sophisticated investigations into high-risk activities.

Rep. French Hill (R-AR): So, can you give us some, shine some light just on the cost burden of this, and I'm not equating that costs are bad. It's not about not complying, it's not about not catching bad people doing illicit structuring, but it's about, you know, are we really taking advantage of the tools. What do you have to say on that?

John Court, BPI: It's a great question. I don't have the exact quantitative average. I could, we could look into that. We do surveys of our members all the time. We'd be happy to do that. We did do an overall compliance burden survey recently, and found that north of 40% of senior management and board time, more than 15% of the IT budget of these institutions, is all devoted to regulatory compliance. I will tell you, though, it's extraordinary for the AML, right, and it's not just extraordinary in the sense of the relative amount of compliance resources that AML chews up, it's where those resources are deployed, right, and they're currently deployed in the most anachronistic, wasteful way as a general matter, and that is a function of the bank examination framework where examiners come in, in the cloak of secrecy, with no transparency, have private conversations with bankers, have private conversations with AML staff, and for all of these examiners, you know the most minor noncompliance, technical noncompliance generates the most volume of work, right? And so we have these institutions who are deploying financial crime fighting resources, and instead of devoting them to like high-risk activities where they can be effective, they end up devoting them to low-risk activities where all they're doing is trying to make their examiner happy.

Court's testimony centered on four interconnected themes.

1. Shifting from a compliance-heavy framework to a risk-based AML regime.

"We have a once-in-a-generation opportunity to rationalize this system and refocus tens of thousands of bank employees on identifying serious criminal activity rather than checking boxes."

2. Modernizing reporting thresholds to eliminate low-value data noise.

"We need to modernize SAR and CTR requirements so banks can spend less time on low-value, highly manual reporting and more time producing actionable intelligence for law enforcement."

3. Removing regulatory barriers to technical innovation and automation.

"Institutions that adopt advanced monitoring technologies should not be required to operate legacy systems in parallel absent a clear, risk-based justification, which is what is happening now."

4. Centering FinCEN's role to align BSA activities with national security priorities.

"Examinations continue to emphasize exhaustive documentation and zero-error tolerance… FinCEN or Treasury should consider publishing testing standards for AML/CFT technologies so that financial institutions know how new tools will be evaluated are not penalized for adopting and testing them in good faith."