50 YEARS OF BSA: FROM DORMANCY TO ZEAL

In terms of historical events, many things happened in 1970. The U.S. military invaded Cambodia; Americans watched in horror as the Apollo 13 mission was aborted, but the crew returned safely to Earth; members of the Ohio National Guard fired into the crowd of Kent State University demonstrators; and the Vietnam War protests reached a fever pitch. On the pop culture side, music fans received troubling news from Paul McCartney that The Beatles had disbanded.

Also in 1970―and by no means newsworthy compared to other transpiring events―the U.S. Congress enacted the Currency and Foreign Transaction Reporting Act, commonly referred to as the Bank Secrecy Act (BSA). Few laws can lay claim to engendering such paradigm shifts in the financial services industry and profoundly influencing the way enforcement combats criminal activity. With a regulatory framework now mirrored by other nations, today the BSA stands as a much relied upon sentry in protecting the nation’s financial highways from rogue actors, organized crime and terrorist financing.

However, the BSA did not begin with such ambition. The tale of the BSA in the early years can best be described as a game of cat and mouse.

Advantage, mouse

Since the takedown of Al Capone, the U.S. federal government found that using income tax laws often proved to be the only effective way well-insulated crime bosses, who used their minions to carry out their felonious acts, could be brought to justice.

As Treasury agents got better at following the money, organized criminals got better at hiding the money. Buoyed by cunning attorneys and accountants, criminal organizations eventually evolved their money laundering into seasoned best practices. This included depositing copious amounts of currency in nominee bank accounts then transferring funds to shell entities. It also included using couriers to transport suitcases of currency offshore to countries that prided themselves on absolute banking secrecy.

By the late 1960s, criminal groups began to flourish as they availed themselves of income streams from the burgeoning narcotics and marijuana trade. In 1968, a group of law enforcement officials led by U.S. Attorney Robert Morgenthau of the Southern District of New York pleaded with the Senate Committee on Banking for help “in tracking transactions that were facilitating organized crime, drug operations and tax evasion.”[1]

Advantage, cat

The enactment of the BSA in 1970 followed extensive hearings concerning the lack of records for foreign and domestic customers thought to be engaged in illegal activities. But it was not only the concerns of law enforcement that led to its passage. By 1970, the U.S. had entered a recession and the government faced mounting debt associated with the Vietnam War. Congress also had a keen interest in using the BSA to reduce deficit spending by reigning in tax evasion.   

The purpose of the BSA was to hand regulators and law enforcement a tool to obtain financial information having “a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.”[2]

The BSA required banks to file reports for currency transactions over $10,000 to the Treasury. To assist law enforcement with identifying those depositing funds of suspicious origins, the new law included a record-keeping mandate to maintain records of their customers’ identity and microfilm certain transactional documents and records. To address the money mules shuffling funds overseas, the BSA required reports for transporting currency exceeding $5,000 into or out of the country. And to identify those utilizing secret offshore accounts, the law required individuals to report ownership interest in foreign bank accounts on a tax return form.

Banks’ vocal opposition

The passage of the BSA drew fierce opposition from the banking community, leading to a lengthy legal battle that culminated in a Supreme Court showdown in 1974. The high court held that Congress properly exercised their power “to deal with the problem of crime in interstate and foreign commerce.”[3] Furthermore, the court held that, “the regulations for the reporting by financial institutions of domestic financial transactions are reasonable, and abridge no Fourth Amendment rights of such institutions, which are themselves parties to the transactions involved.” As it relates to banking patrons, the high court concluded, “a depositor plaintiff incriminated by evidence produced by a third party sustains no violation of his own Fifth Amendment rights.”[4]

When the Supreme Court finally upheld the BSA, it seemed that the cat had finally gained the upper hand. However, the cat was highly dependent on banks to set the mousetraps and banks were rather uncomfortable being rodent detectors. Banks now had to inquire with their depositors about their identity and the nature of their currency transactions.

A tradition of banking

In 1975, only a paltry 3,418 currency transaction reports (CTRs) were filed. Banks spent little effort in deploying policies and procedures to ensure they identified and reported currency transactions. Responsibility for filing the form often fell to the line teller, with no supervisor review. Bank employees, for the most part, received inadequate training, and senior banking officials did not stress to their organizations the importance of the BSA in catching the criminals.   

The BSA cut against the grain of centuries-old banking tradition―keeping their customers’ financial matters private. This pillar of banking etiquette conditioned banks not to make too much of a fuss about compliance. Bank officials were particularly sensitive to how customers and shareholders would perceive the new mandate.

However, not all those that deal in large quantities of currency are up to funny business. To reduce the number of CTRs, the BSA allowed banks to exempt certain customers from CTRs if, in their judgment, the currency was commensurate with the nature of their business. However, the original law afforded considerable latitude to banks in making this determination, which became a convenient excuse to avoid reporting on currency. And some of those exempted from CTRs were members of criminal enterprises.

Examining the mousetraps

The cat also relied on bank examiners to validate that the banks were properly calibrating the mousetraps. But the examiners, for the most part, did not even inspect the mousetraps.

The Office of the Comptroller of the Currency (OCC) had been delegated the authority to examine banks for BSA compliance. As Congress later confirmed, OCC bank examiners were not properly trained on the BSA, and in some instances, examiners were not aware of the BSA’s requirements. The OCC audit procedures did not root out material violations of the law.  

Tradition also did not serve the OCC. Understandably, government bank examiners felt their purpose in life had always been to ensure an FI’s soundness. Redirecting examiners’ time to validating BSA adherence did not fall within their perceived priorities. The BSA became just another box on a long list of “check the box” audit procedures.   

In this spirit of laissez-faire compliance, diligence to the BSA never gained a foothold in the 1970s, but noncompliance did catch the attention of the IRS Criminal Investigation (IRS-CI).  

In 1977, two former Chemical Bank officials pleaded guilty to income tax charges stemming from cash‐changing operations for narcotics dealers at two of the bank’s branches in the Bronx.  Both admitted they exchanged large denomination bills with smaller denominations, making it easier for the narcotics dealer to send the money out of the country for deposit in the Caribbean. Soon after, Chemical Bank was indicted on failure to report more than 500 cash transactions that amounted to $8.5 million.

IRS-CI began to pursue other banks that committed felonious violations of the BSA, but the penalties brought upon those financial institutions (FIs) amounted to a slap on the wrist compared to today’s consequences.

Congress takes notice

The bank examiners’ casual approach to dealing with the BSA eventually caught the eye of Congress. During hearings before the Senate Banking Committee in 1980, the enforcement efforts of the oversight agencies were described as “dismal” and “lackadaisical.” This description would comport with a U.S. Government Accountability Office report that found “the compliance monitoring of the bank regulatory agencies was inadequate, cursory or nonexistent.”[5]

In response to fractured compliance efforts noted by Congress, the Treasury updated BSA regulations to tighten up requirements on the rules on exempting customers. The only exemptions allowed were retail establishments expected to have substantial cash transactions as a normal course of business. Banks also had to document the exemption and provide a list of such exemptions to the Treasury upon demand.

In 1981, the Treasury also provided bank supervisory agencies with more robust procedures to inspect the BSA mousetrap. The Treasury believed that “if a bank examiner follows the entire set of procedures, there is a high probability that any major incident of noncompliance at a financial institution will be detected.”[6] But adoption of the revised examination procedures progressed slowly.

Operation Greenback

By 1980, America saw the rise of even bigger criminal enterprises ruled by ruthless international kingpins like Carlos Escobar, whose henchmen caused the murder rates in Miami to skyrocket.   Escobar found a very friendly FI, Bank of Credit and Commerce International (BCCI), that was more than willing to help the drug overlord Forbes had labeled one of the richest men in the world.

The Treasury made the eye-popping discovery of a surplus of $6 billion floating around in Florida banks. According to Miami IRS Special Agent Michael McDonald, “The money was coming in down here in suitcases and duffel bags to pay for the cocaine.”[7] Recounting the situation, McDonald said, “It wasn’t until the drug war hit South Florida that we looked at the Bank Secrecy Act, as we called it, and the tracing of currency to look at these reports. That’s when we realized banks aren’t filing them — not just in Miami but all over.”[8] By 1979, the total number of CTRs filed by banks amounted to a minuscule 121,000.

Along with his U.S. Customs counterparts, McDonald helped form the first money laundering task force in South Florida known as Operation Greenback. Greenback targeted attorneys, accountants, money brokers, money couriers and bankers. It documented $2.6 billion in laundered currency through 16 narcotics organizations and netted 164 arrests, 211 indictments and 63 convictions. The crème de la crème was the takedown of BCCI, which Time called, “The Dirtiest Bank of All.”

A consummate collaborator, McDonald shared his best practices with other agents throughout the country. Richard Speier―newly minted Los Angeles (LA) IRS group supervisor―recalled being so inspired by McDonald, he turned his entire group into a pure Title 31 financial investigation task force. Speier’s agents followed the influx of Columbian drug money into LA banks by smurfs, which was then converted into cashier’s checks and wire transfers all destined to Miami. It was like walking into an orchard with well-ripened, low-hanging fruit; the stats his group generated greatly pleased his boss. According to Speier, “We got our leads exclusively from bank operations officers and bank security departments.”[9] However, Speier ran into roadblocks when bank legal counsel occasionally jumped into the fray to protest the voluntary disclosures of customer information.

Miami and LA were not the only regions where banks resisted making BSA filings. One glaring example was the First National Bank of Boston (FNBOB), which audaciously failed to report $1.2 billion in currency transactions, much of which was $20 bills stuffed in bags emanating from Swiss banks. The bank also graciously granted exemptions on businesses associated with a notorious crime family.

The early 1980s marked a rapid increase in the number of FIs under criminal investigation for violations of the BSA. Though the cases got media attention, the penalties dished out for BSA violations were apparently not onerous enough to illicit corrective behavior. IRS-CI continued to identify banks with big problems and complicit employees.

1984: Making the cash connection

The work of McDonald’s Greenback certainly grabbed the attention of officials in higher places.   

In October 1984, President Ronald Reagan’s Commission on Organized Crime issued a bold report on the state of criminality in the U.S. titled, “The Cash Connection: Organized Crime, Financial Institutions and Money Laundering.”

The report acknowledged that the BSA had been a “potent weapon against money laundering activities,” so the commission concluded that there are aspects of the law that have encumbered the BSA’s effectiveness. As the report reads, “willful violations of the Act are not stringent enough to accomplish their intended purpose, and the felony provisions of the Act can be applied only in extremely limited situations.”[10]

The commission expressed a concern that the BSA did little to dissuade bank representatives from willfully providing money laundering services to bad actors. As the report stated, 

“Even though money launderers have corrupted, or attempted to corrupt, officials and employees of numerous financial institutions in conducting their money laundering activities, the Bank Secrecy Act provides neither civil nor criminal penalties for such conduct, and the penalties under the existing Federal criminal statute for bribery of bank officials are far too lenient.”[11]

A trip to the woodshed

Since early 1984, a Senate banking subcommittee had been holding hearings on offshore banking and money laundering. Not surprisingly, the plea of the FNBOB got their attention. Stewing with disappointment, the committee not only called the president of FNBOB to testify but also the head of the OCC for failing to detect odious behavior.

In his subcommittee opening remarks, Senator Fernand St. Germain said, “Fourteen years ago, the Committee on Banking attempted to draft the banking industry and its Federal regulators for a war on organized crime, drug traffickers, tax evaders, and an assortment of white collar frauds.  It is obvious that some have managed to dodge that draft.” St. German added, “If the Bank of Boston case is indicative of a cross section of compliance and enforcement, then we are seeing an industry and a regulatory structure render a major law enforcement tool a virtual nullity.”[12]

Redirecting his shellacking to bank examiners, St. Germain said, “The Office of the Comptroller of the Currency sent its examination force into the Bank of Boston every year. It never found a problem with the compliance with the Bank Secrecy Act, not a thing, all the while the unreported transactions and the outlandish list of exemptions were piling up.”[13]

On the governmental side, St. Germain’s disappointment was not limited to the OCC. He also pointed out, “the Federal Reserve also has failed to cover itself with glory in these episodes.”[14]

A mea culpa 

The chairman of FNOB, William L. Brown, told the subcommittee, “The events of the past several weeks have taught us a painful lesson; they have taught us that we must redouble our efforts to ensure that all our employees and officers, at every level, abide by both the letter and spirit of the law.” Brown further stated, “We must also recognize that financial institutions have a moral and ethical obligation to assume a greater degree of responsibility for identifying possible illegal activity.” 

The wind of media attention filled the sails of subcommittee members as they took banks to task.  As one committee member said, “barely a day passes that a leading newspaper or magazine does not have some article bringing out new charges, new allegations.” For the first of the hearings, the Wall Street Journal published an article entitled, “How the Mob Is Using Financial Institutions To Disguise its Gains.” The subtitle to the article read, “Banks Eager for the Business; Aren't Suspicious Enough Up Front.”[15]

The mousetraps to end all mousetraps 

The findings from Operation Greenback and “The Cash Connection” report, and the subcommittee hearings on the FNBOB created powerful momentum for new legislation. In 1986, First Lady Nancy Reagan and President Reagan appeared in a nationally televised event to kick off the first lady’s “Just Say No” to drugs campaign. That same year, President Reagan sent a resounding messaging of “Just Say No” to money laundering by signing into law the Money Laundering Control Act (MLCA) of 1986.

The MLCA made the act of money laundering a federal crime with significant prison time. It also prohibited structuring transactions from evading CTR filings. Anyone facilitating this money laundering, including bank employees, would suffer the same fate with a conspiracy charge. MLCA directed banks to establish and maintain procedures for complying with the reporting and record-keeping requirements of the BSA.

The MLCA brought vibrancy to BSA compliance efforts by imposing significantly more consequences on those within an FI for turning a blind eye to BSA.

In less than a decade, BSA compliance efforts went from dormancy to zeal.

Final thoughts―Part 1

In 1986, the theme song to the hit TV series “Miami Vice” was so popular, it garnered two Grammy Awards and was voted the No. 1 theme song of all time by TV Guide readers. As one of the most watched programs during the 1980s, “Miami Vice” put the sensationalism of the drug wars in America’s face each week. The violence and financial audacity of drug kingpins portrayed in the show, according to law enforcement, mostly tracked with reality.

As a newly created law, MLCA entered the world at a time when the public, Hollywood and elected officials were all in on the war on drugs. Significant enforcement resources were thrust into the enforcement of the MLCA and criminal violations of the BSA.

But the smarter criminals learned to adapt to their new environment. There were still ample opportunities to launder with nontraditional FIs to expend their felonious financial highways. These establishments rarely, if ever, got their mousetraps inspected by government examiners. 

And so, the cat and mouse game continued.

Paul Camacho, CAMS, retired special agent in charge, IRS Criminal Investigation; member of the board of directors, The Mob Museum 

[1] Subcommittee on Financial Institutions Supervision, Regulation, and Insurance April 3, 1985.

[2] “31 U.S. Code § 5311.Declaration of purpose,” Legal Information Institute,https://www.law.cornell.edu/uscode/text/31/5311#:~:text=It%20is%20the%20purpose%20of,including%20analysis%2C%20to%20protect%20against

[3] California Bankers Assn. v. Shultz, 416 U.S. 21 (1974).

[4] Ibid.

[5] U.S. Senate hearings, Permanent Subcommittee on Investigations of the Committee on Governmental Affairs, March 12, 1985.

[6] Ibid.

[7] Howard Cohen, “Mike McDonald, an IRS agent who busted Cocaine Cowboys, dies at 68,” Miami Herald, October 25, 2016, https://www.miamiherald.com/news/local/obituaries/article110462902.html

[8] Ibid.

[9] Interview with Rick Speier, July 6, 2020.

[10] Ibid.

[11] Ibid.

[12] U.S. Senate hearings, Permanent Subcommittee on Investigations of the Committee on Governmental Affairs, April 3-4, 1985.

[13] Ibid. 

[15] Ibid.