What Is the Bank Secrecy Act and Why It Matters

Table of Contents

1. What is the Bank Secrecy Act?
2. What is the purpose of the Bank Secrecy Act?
3. What does the BSA require?
4. What is a Suspicious Activity Report?
5. What are the effects of the BSA?
6. Criticism of the BSA
7. Why finance automation is the key to compliance

Key Takeaways

• The Bank Secrecy Act (BSA) was enacted in 1970 to combat money laundering and financial crimes in the U.S. by requiring financial institutions to report suspicious activity.
• The BSA aims to prevent money laundering, detect suspicious transactions, and ensure transparency in financial operations.
• Key elements of BSA compliance include appointing a compliance officer, developing internal controls, training staff, conducting audits, and performing customer due diligence.
• Financial institutions must report cash transactions over $10,000 and file Suspicious Activity Reports (SARs) to alert authorities of potential illegal activity.
• The BSA has been crucial in reducing money laundering and cybercrimes, but it faces criticism for being outdated and burdensome on institutions due to its extensive data requirements.

The Bank Secrecy Act ensures transparency and accountability in business financial management. By establishing guidelines for financial institutions to prevent and detect money laundering, fraud, and other illegal activities, the BSA has become a cornerstone of financial regulation in the U.S. But what does this mean for businesses and financial professionals today? Understanding the BSA's pillars and requirements is essential for anyone involved in financial operations, compliance, or management.

Ready to enhance your knowledge and protect your business from financial crimes? Keep reading to explore the intricacies of this landmark act and how it impacts the evolving world of finance. Let’s dive into the details.

What is the Bank Secrecy Act?

The Bank Secrecy Act (BSA) is a common name for the Currency and Foreign Transactions Reporting Act of 1970, created under President Nixon. The BSA is also called an anti-money laundering (AML) law or the BSA/AML. This act was the first set of laws designed to fight money laundering in the US, and it was put in place to prevent financial institutions from being used by criminals as vehicles for laundering money or hiding funds that were procured illegally. The BSA requires banks and financial institutions to report suspicious activity that could indicate that financial crimes are taking place.

The rules instituted through this act increase oversight of business transactions and recognize and report illicit behavior. In addition, the BSA has allowed for the creation and collection of more data around illegal financial activity, resulting in the analysis of patterns that have revealed the types of accounts involved in fraud and money laundering and how these accounts typically behave. That information has been essential to recognizing and preventing other instances of financial crime.

What is the Purpose of the Bank Secrecy Act?

The BSA aims to help the U.S. government prevent and detect money laundering, fraud, and other financial crimes, including terrorism financing. The law requires financial institutions to maintain records of significant transactions and report suspicious activities to relevant authorities.

Key goals of the BSA include:

1. Preventing money laundering: The BSA aims to curb criminals' and organized crime groups' use of the U.S. financial system for money laundering.

2. Detecting suspicious activities: Financial institutions must file reports like Suspicious Activity Reports (SARs) when they identify potentially illegal activity.

3. Ensuring transparency: The law mandates that institutions keep records of large cash transactions (over $10,000) through Currency Transaction Reports (CTRs) and retain proper documentation to ensure financial transparency.

4. Assisting law enforcement: The BSA provides valuable information to law enforcement agencies investigating financial crimes by creating a paper trail for large transactions and suspicious behaviors.

What Are the Five Pillars of the Bank Secrecy Act?

1. Designate a compliance officer. Appoint a BSA/AML Compliance Officer to oversee the institution's AML program, ensure regulatory compliance, and manage reporting of suspicious activities.

2. Develop internal controls. Implement policies and controls to monitor transactions for suspicious activities and ensure compliance with BSA requirements, regularly updating them as needed.

3. Establish an AML compliance training program. Provide ongoing training to employees on detecting and reporting suspicious activities, ensuring they stay updated on AML regulations.

4. Conduct independent audits of the program. Conduct regular independent audits to evaluate your AML program's effectiveness and identify areas for improvement.

5. Perform customer due diligence. Verify customer identities and assess transaction risks to prevent money laundering, including identifying beneficial owners of companies.

What Does the BSA Require?

The BSA requires financial institutions to help US government agencies detect and prevent money laundering and other criminal behavior of the same nature.

Cash is easier to hide illicit activity than electronic transfers since it is much more difficult to trace. As a result, money laundering tactics can be used to hide illegal cash transactions and make it seem like the cash is being used for legitimate business purposes. Because of this, the BSA specifically requires financial institutions to provide documentation to regulators if their clients are dealing with suspicious cash transactions over $10,000.

Businesses must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business if they receive over $10,000 from a single buyer in one or two related transactions. However, the law does not require documentation for every transaction over $10,000—just cash transactions over $10,000.

The rule applies to individuals, corporations, associations, trusts, estates, and partnerships. Form 8300 must be filed no later than 15 days after the cash transaction. However, some parties are exempt from this rule, including government departments or agencies and certain companies listed on major North American exchanges.

The BSA also requires financial institutions to report any suspicious activity that might indicate money laundering and other criminal activities in addition to cash transactions over $10,000.

What is a Suspicious Activity Report?

When a financial institution notices a suspicious transaction, the institution must file a suspicious activity report (SAR) to comply with the BSA. This document is the vehicle that is used to report suspicious behavior to the US authorities. In other words, the SAR alerts regulators of potential illegal activity.

If a financial institution fills out a SAR to report something suspicious, the customer being reported is not alerted. These reports are confidential, so federal laws prohibit the ability of the financial institution to notify anyone listed in the report. Any following legal actions might occur, such as subpoenas or court orders. Government agencies might also intervene to protect the institution that filed the initial SAR.

Many major banks, including JPMorgan Chase, Barclays, HSBC Bank, Deutsche Bank, Standard Chartered Bank, and Bank of New York Mellon, have collectively filed over 85% of all SARs.

What Are the Effects of the BSA?

The BSA has been instrumental in reporting and reducing money laundering and cybercrimes. It has also been very helpful in limiting the amount of crime from these situations and the exploitation of individuals exposed to this kind of illicit activity. The Financial Crimes Enforcement Network (FinCEN) recognizes agencies that have complied with the BSA in an attempt to successfully track down criminals and prosecute them to the full extent of the law.

Criticism of the BSA

Some have suggested that the BSA needs to be updated since it was written before computer use became mainstream. Today, financial institutions work with rapidly updating technology, and it would be beneficial if the tools used to fight financial criminals could be updated at the same pace as certain banking technologies.

Additionally, some have argued that the burden required to collect and maintain the volume of data required by the BSA is too great for financial institutions, and some anti-money-laundering experts say that the way this data is collected and used is currently not as effective as it could be.

Why Finance Automation is Key to Compliance

As financial operations grow more complex, ensuring compliance with regulations like the Bank Secrecy Act becomes even more challenging. With Paystand's finance automation solutions, businesses can streamline their reporting processes, reduce manual errors, and improve transparency in their business financial management. Automating tasks frees up valuable time to focus on strategic growth while staying compliant.

Download our ebook, Why Finance Automation is Good for Your Job, to learn how automation can benefit your team today.