Are You Gambling with Your BSA Program?

It’s that time of the year again for your BSA/AML compliance audit.  We know how much you enjoy it when your BSA internal auditors show up with smiles as big and long as their request memos and sample sizes – from policies to procedures, risk assessments to training logs, CTRs to SARs, CIPs to EDDs, and “SMHs” to “OMGs”…  Alright, let’s face it, compliance doesn’t exactly scream excitement.  There’s a ton of activity to stay on top of and many mundane compliance tasks which all financial institutions dedicate their blood, sweat, and tears to (okay, maybe not blood).  Nevertheless, it makes sense for institutions to have a level of pride and satisfaction in their BSA process, especially if they spend solid time executing it daily. So, when the auditors show up commenting on your process, it is understandable if it is taken personally. Every financial institution files Currency Transaction Reports (“CTRs”) and Suspicious Activity Reports (“SARs”).  In addition, all have compliance policies and procedures in place.  However, are they up-to-date in our ever-changing world?  Are they still effective?

Financial threats in today’s modern world is what makes the Bank Secrecy Act (“BSA”) essential for detecting and preventing money laundering threats – hence, why the BSA came into effect in 1970 with hopes to provide insight and guidance for financial institutions operating within the United States. The BSA has set the bar or standard for financial institutions, both foreign and domestic, to aid the government and our country in policing the flow of finances by requiring adequate transaction monitoring programs and internal controls, regulatory compliance reporting, and record retention policies.  So, what exactly is a financial institution?  The term “financial institution” is an umbrella category which encompasses banks, credit unions, money service businesses, currency exchange institutions, and even casinos, like the Trump Taj Mahal, which closed in 2016.  All are subjected to the requirements of the BSA with absolutely zero exceptions.  Non-compliance with the Act is answered with regulatory consent orders, which may result in civil penalties and/or some hefty fines. 

From 2010 to 2012, the Taj Mahal admitted to violations cited by the Internal Revenue Service (“IRS”) and the Small Business/Self-Employed Division (“SB/SE”) with respect to its BSA program, compliance reporting, and recordkeeping requirements. “The Trump Taj Mahal failed to implement and maintain an effective anti-money laundering program; failed to report suspicious activity related to several financial transactions at the casino; failed to properly file CTRs; and failed to keep appropriate records as required by the BSA and its implementing regulations,” as stated in FinCEN’s Assessment of Civil Money Penalty against the casino in 2015.

These violations breach the foundations and essence of an effective monitoring process formulated to identify and avert the most basic forms of money laundering.  Surprisingly, most of these violations had been previously cited by the IRS SB/SE since 2003 – I guess we can say they were warned. That being said, I think we all know what happened next.  The Taj Mahal was hit with a $10 million civil penalty for non-compliance with the BSA.  It seems that even regulatory agencies can cash out and win big in casinos.

So why did Trump Taj Mahal get hit with a whopping $10 million penalty? The casino did not designate individuals responsible for routine compliance monitoring, a Customer Identification Program (“CIP”) for identifying and verifying a customer’s true identity, procedures for determining suspicious activity or occurrences, procedures for effectively operating an automated data-processing system, policies and internal controls to comply with recordkeeping requirements, etc. Well, on the bright side, something had to be right, considering that they managed to identify some instances of suspicious activity and file some SARs along the way.  Great! However, it was reported that the casino actually failed to file about 50% of SARs in 2010 and 2012 due to its weak internal controls and programs which they considered to be on par.  Side note – the BSA requires casinos to report ALL suspicious transactions over $5,000. One does have to wonder who was monitoring Taj Mahal’s risks and who was conducting its internal audits?

As we can all imagine, the more cash-intensive an institution is, and the more moving funds it has, the more prone or susceptible it is to potential money laundering schemes. These findings are major systematic weaknesses for a casino (a super “cash-intensive” institution) that had 2,600 slot machines, 204 table and poker tables, 18 restaurants, multiple bars and lounges, and 2,248 hotel rooms. Therefore, in 2015, FinCEN’s Director, Jennifer Shasky Calvery, stated, "Trump Taj Mahal received many warnings about its deficiencies… poor compliance practices, over many years, left the casino and our financial system unacceptably exposed."  

That being said, it could be argued that if the casino had taken the initial warnings from regulators seriously and strengthened its AML program with more effective internal controls, then maybe it would have passed its regulatory examinations and all of this could have been avoided. This would have, perhaps, given the government a little more confidence with the casino. Therefore, once again, the question is: Who was monitoring the casino’s BSA/AML risks and where was the third line of defense, internal audit? And why did they fail to detect these weaknesses? Perhaps they were aware of these deficiencies and decided not to do anything about them.  If so, was management made aware of them, and did nothing to rectify this? Who knows. 

It cannot be stressed enough how important it is for financial institutions of all types to ensure their AML programs are up-to-date and sound.  This is why the risk management function and audit exist.  It does not matter how big or small an institution is or who it’s affiliated with.  At the end of the day, all are subjected to the same requirements of the BSA and all stones will eventually be unturned by the government. So, the next time your internal auditors show up, welcome us with open arms, give us a high-five, and show us that big smile of yours, even if we show up with warming recommendations. We are all in this together.