AML Rules Create Undue 'Suspicion' of Customers, B of A Exec Says

The way federal agencies are enforcing anti-money-laundering rules is pushing bankers to be overly suspicious of their customers, a Bank of America executive said Wednesday.

Speaking at an industry conference in New York, Jaikumar Ramaswamy discussed the widespread concern over de-risking — when banks close the accounts of customers who might have ties to financial crimes or other illegal activities.

Bankers are often quick to close down accounts if there is "uncertainty" about transactions, out of a growing fear about enforcement penalties, he said. Ramaswamy compared the current financial regulatory environment to air travel following the 9/11 terrorist attacks.

"It's sort of like the worst days of the no-fly list," said Ramaswamy, global AML risk management executive at B of A and an ex-federal prosecutor, though he acknowledged that some of the concern about risk is legitimate. "Suspicion is becoming the guiding principle as to whether people get access to an account."

The no-fly list was created by the Department of Homeland Security in the years following the 9/11 attacks to address security concerns involving commercial airlines. The list has been widely criticized by privacy advocates and human rights groups for including the names of U.S. citizens that have no connection to terrorism.

Similarly, commercial and retail banking customers in some cases are being "marginalized" from the financial system, he said, describing it as a pressing social-policy issue facing the industry.

The comments by Ramaswamy -- who joined B of A in January from the Justice Department, where he had been chief of the asset forfeiture and money laundering section in the criminal division -- coincide with a growing focus on the impact of de-risking. He made them during a panel discussion about AML and related regulatory issues at a conference sponsored by the Clearing House, a trade group that represents about two dozen of the country's largest banks.

In speeches over the past few weeks, regulators have said that de-risking can hurt low-income consumers.

But regulators have also said it is the job of the nation's banks — not the federal agencies — to fix the problem.

A fear of penalties "should not color the decision-making approach of banks that are carrying out good-faith efforts to abide by the law," said Nathan Sheets, undersecretary for international affairs in a speech last week.

Still, it is up to the industry to come up with a response, Sheets said. "Ultimately, it will require some investment on the sake of institutions."

Customers from a wide range of industries and ethnic backgrounds have seen their accounts closed in recent years over concerns about money laundering. Some banks have cut ties with businesses that focus on bitcoin and marijuana.

Additionally, certain banks have also stopped providing money transfers to Somalia, over concerns about terrorist financing. Others have closed branches along the U.S.-Mexico border, to avoid being used as conduits for drug financing.

There is a growing discussion about the extent of bankers' personal liability in anti-laundering cases.

The New York State Department of Financial Services said in February that it could soon start holding executives personally responsible for AML controls.

Speakers at the Clearing House conference downplayed such concerns.

Cases involving criminal liability involve high "evidentiary hurdles," said M. Kendall Day, chief of the asset forfeiture and money laundering section at the Justice Department.

"It's an incredibly high standard," Ramaswamy said.

Rather, the bigger concern among banks is how to manage uncertainty about how to enforce AML rules at the corporate level — and respond to increasing pressure from regulators, panelists said.

"What professionals are saying is, 'The risk I can't manage is [that of] being second-guessed about why I did what I did,'" said Richard Small, an attorney at Ernst & Young.

Banks are now being encouraged to extensively document cases where they have cut ties with particular industries, Small said, describing that as a recent change.

"My personal opinion is, if you don't want to do business with somebody, don't do business with somebody," he said.

When one bank closes down accounts with a particular line of business, it can create a "collective effect" across the industry, Suzanne Williams, an assistant director for bank supervision at the Federal Reserve, said at the conference.

For instance, if five money center banks stopped serving a certain customer, an examiner likely would quiz any other banks still serving that customer about whey they are comfortable with that client, she said.

"If your examiner is looking in the system" and sees other banks ditching a high-risk client, it "could lead to those types of questions," she said.