AML and UDAAP: Secrecy vs. Transparency

The regulatory “no man’s land” where banks must distinguish between abnormal behavior and take appropriate action without “tipping off” the authorized user and where customers must engage with banks in a fair manner is a place where both banks and their clients occasionally find themselves. The CFPB’s capacity to define what counts as an unfair, abusive, or deceptive behavior or practice magnifies this anticipation; the possibility of getting it wrong.

Recent regulatory attention on major banks’ customer service practices leads one to believe that a shortage of timeliness and openness in handling customer service complaints may have consequences for UDAAP. This worry is not brand-new. A cornerstone of the CFPB has always been consumer complaints. But as demands for transparency rise, so do the depth and scope of responding to scrutiny. Will this make it more difficult for banks to deal with customers who complain when their accounts are restricted or closed “because it no longer fits within strategy”—a justification frequently given when the closure is related to behavior that the bank believes is increasing the risk of money laundering? Even the OCC might be taking a fresh look at this problem after recently highlighting the fairness issues involved in refusing cash to poor customers.

How can a bank make sure that customers who may have provoked “suspicious” or “unusual” activity alert messages are fairly represented considering the number of alerts that must be handled as conventional AML management reporting programs are based more on automation, assisted by machine learning and artificial intelligence? How “ethical” or “fair” is it to terminate a client’s account based only on a computer-generated alert that indicates that activity is “unusual” without making an intentional effort to find out whether the customer has a reason for the action?

However, the repercussions of “tipping” or disclosing the filing of an unusual activity report, in addition to the frequently huge quantities of advisories and the utilization of guidelines for account suspension (such as automatic shutdown after two SAR filings), cause massive cases leading for a bank dedicated to preserving SAR confidentiality while dealing with clients upset over an account closure warning, perplexed by the bank’s position, or dejected over their inability to access their accounts.

To reduce the risk of employee or tip disclosure and uphold SAR privacy, AML-related systems, procedures, and decisions must be effectively separated and secured. However, if a customer disputes a bank’s account restriction or closure actions through the standard customer complaint procedure—or if there are other conflicting regulatory problems addressed in a bank procedure outside the point of view of the AML team—new risks and obstacles may appear.

Consider a typical situation

Think about the circumstance of a customer. This customer has been a satisfied client of XYZ Bank for 25 years; neither party has ever filed a grievance. The client has a stepbrother in another state with the same last name who was just found guilty of fraud and failed a connected lawsuit. The only overlap between the brothers’ personal and financial life is their participation at funerals and ceremonies. But years before, at his father’s urging, the client had provided loans to his step-brother, and he had paid it back. When compared to the client’s account and routine activities, the transaction’s magnitude was noteworthy.

Media and other data streams are sensibly incorporated into XYZ Bank’s AML activity surveillance procedure. An alert was raised following a news story on the brother’s issue. The “strange” actions between the client and his brother were noted during a subsequent review. The client and his bank branch received a closure warning after the client’s account was marked as a “significant risk.” The letter adds that the client’s accounts will be terminated in 30 days because they no longer align with the bank’s policy. The bank is within its rights to take this action, and in the event of serious financial fraud, it may even have a responsibility to do so. Because his personal and professional life would suffer and a new bank will want to understand why his account was closed, the client is puzzled and in a panic. The manager of the XYZ Bank branch, who has known the client for a long time, is empathetic but says he has no control over it. Despite the fact that these take time to settle and that closure choices, in his experience, typically stay, he advocates submitting a consumer complaint to corporate headquarters.

The client doesn’t even remember giving his step-brother a loan, but since there are no other plausible explanations for the account suspension, the client begins to question if XYZ Bank was concerned because of the attention surrounding his step-brother.

He is concerned that a new bank may inquire as to why he is switching banks, and he urgently wants an existing banking relationship. After sending a formal complaint, he waits 10 days before receiving a letter confirming that his account no longer meets the XYZ Bank’s business plan.

From the viewpoint of Local Bank’s AML review panel and management company, a ruling to instantly close accounts that have participated in specific types of transactions—with known fraudsters, or those triggering multiple SARs, or accounts categorized as high risk—is based on a risk tolerance perseverance that would seem both plausible and convenient and has likely carried assembly with investigators and accountants for decades.

The client and XYZ Bank are unaware of the fact that a disproportionate amount of the termination warnings created in this identical way went to clients in lower socioeconomic zip codes who speak Spanish as a first language (per bank records and IP addresses). If the bank has not tested for imbalances and has not provided documentation of the strategic plan for using methodologies that have a discriminatory effect on protected groups, this may posit some further possible risks as the implementation of UDAAP and reasonable borrowing safeguards broaden.

So, what follows in a situation like the clients’? Many customers could surrender and accept the termination of their accounts. In order to study financial records and pressure the bank to reconsider its judgment, savvy customers may hire attorneys or other professionals. Other irate customers might post on social media or get in touch with a state or federal regulatory body. Some people might give up on the bank and file a complaint with a regulator. In each of these situations, the customer’s circumstance is still documented in the financial documents and is always accessible to an examiner who may wonder whether concerns like the clients’ were sufficiently taken into account and addressed and hunt for pertinent paperwork.

Safeguarding both the bank and the customers

Even while these complaint circumstances may continue to be somewhat singular, they raise difficult problems that might only grow more difficult when the CFPB raises queries about bank service levels. In order to reconcile conflicting dangers, there is a chance for collaboration between the CFPB and other authorities. What strategies, however, may bank take in the lack of such cooperation to responsibly handle AML risk without increasing consumer fairness risk? There is no definitive solution, but the following advice might be useful:

  • Create a strategy and assign certain people to handle it. While preserving internal and external secrecy regarding the AML and SAR process, record this kind of allegation.
  • Inform the appropriate employees of conflicting issues and how to proceed if necessary.
  • Examine group or auto-account closing procedures and associated consumer interactions through the perspectives of AML risk and customer fairness.
  • Test every so often to see if SAR and separation procedures might unfairly harm consumers who belong to anti-discrimination laws.
  • Record or otherwise respond to events that generate questions in an appropriate manner.
  • Ensure that concerns about account suspensions are promptly addressed, and keep a record of the critical evaluation. Examine account behavior, any associated warnings, any auto- or other judgments and notifications, as well as the reasonableness of the actions the bank took to find out why the account activity occurred and the consumer’s reaction (or failure to respond). Controlled collaboration between the AML and consumer complaints management staff will probably be necessary for this.
  • Investigate the possibility of taking a sensible course of action to safeguard the bank and lessen annoyance or humiliation to the client while a petition opposing closure is underway.
  • Whatever the result, keep an eye out for reputation problems that could appear in social media or other public forums and be ready with a consistent response.

Although there is no way to totally eradicate unclear risks, adhering to a written approach that takes into account the aforementioned factors may boost regulatory and bank trust in the ability to accurately and responsibly balance AML and consumer fairness threats.

Information from American Bankers Association: Business Journal

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