Brandon Lee
Banks are subject to numerous federal and state laws and regulations. These laws vary depending on the type of charter a bank has and its organisational structure. The principal categories of banks in the United States include national banks, state member banks, and state non-member banks. Foreign banks operating in the United States are also subject to specific laws and regulations. Bank regulations provide protections for consumers and the economy, ensure fair competition between banks, and maintain consumer confidence in the banking system. These regulations cover a range of issues, including privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, and the promotion of lending to lower-income populations.
| Characteristics | Values |
|---|---|
| Purpose | To protect individual consumers and the economy against unfair and potentially dangerous practices |
| Scope | Federal and state laws |
| Regulatory agencies | Federal Reserve System, Office of the Comptroller of the Currency (OCC), FDIC, state banking agencies |
| Regulatory authority | Combined in the UK and Japan, separate in the US |
| Regulatory powers | Examination, enforcement, supervision, issuing orders, revoking membership, fines, appointing receivers |
| Bank charter | Required for banks engaging in activities like accepting deposits |
| Bank secrecy | Required by the Bank Secrecy Act of 1970 (BSA) |
| Money laundering | Currency and Foreign Transactions Reporting Act, Dodd-Frank, FinCEN |
| Lending limits | Restrict the total amount of loans and credits to a single borrower, usually a % of the bank's capital or assets |
| Consumer protection | Provide consumers with a reasonable amount of time to make payments |
| Data protection | Federal and state privacy and data security laws |
| Elder financial abuse | Senior Safe Act provides immunity to banks when disclosing elder financial exploitation |
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What You'll Learn
Report suspicious activity
Banks are required by law to report suspicious activity that might signal criminal activity, such as money laundering, tax evasion, fraud, or terrorist financing. This is done through the filing of a Suspicious Activity Report (SAR) with the Financial Crimes Enforcement Network (FinCEN). SARs provide valuable information to law enforcement agencies, including details about the parties involved, the nature of the activity, and any additional information that may be relevant to the investigation. Federal law provides protection from civil liability for all reports of suspicious transactions made to the appropriate authorities.
Under the Bank Secrecy Act (BSA), financial institutions are required to assist U.S. government agencies in detecting and preventing money laundering. This includes keeping records of cash purchases of negotiable instruments and filing reports of cash transactions exceeding a certain amount (typically $10,000 as a daily aggregate amount). The BSA was amended to incorporate the provisions of the USA PATRIOT Act, which requires banks to adopt a customer identification program as part of its BSA compliance program.
Banks use a number of methods to identify potentially suspicious activity, including employee observations during day-to-day operations, law enforcement inquiries, transaction monitoring systems, and surveillance. They should ensure that adequate staff is assigned to the identification, research, and reporting of suspicious activities, taking into account the bank's overall risk profile and transaction volume. Banks should also establish policies, procedures, and processes for identifying subjects of law enforcement requests, monitoring their transaction activity, and identifying unusual or potentially suspicious activity related to those subjects.
When suspicious activity is identified, banks must file a SAR within 30 calendar days of the initial detection. If no suspect is identified, the bank may delay filing for an additional 30 days to identify a suspect. However, reporting should not be delayed more than 60 calendar days after the initial detection of a reportable transaction. In situations requiring immediate attention, such as an ongoing violation, banks must also notify appropriate law enforcement authorities by telephone in addition to filing a timely SAR.
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Comply with anti-money laundering laws
Banks are required to comply with anti-money laundering laws to prevent money laundering, which involves making illegally gained proceeds ("dirty money") appear legal ("clean"). Money laundering typically involves three steps: placement, layering, and integration. Firstly, illegitimate funds are furtively introduced into the legitimate financial system. The money is then moved around to create confusion, sometimes through wiring or transferring across multiple accounts. Finally, the "dirty money" is integrated into the financial system through additional transactions until it appears "clean".
In the United States, anti-money laundering laws include the Bank Secrecy Act (BSA) and the USA PATRIOT Act. The BSA establishes program, record-keeping, and reporting requirements for banks and other financial institutions to combat money laundering and the financing of terrorism. It requires banks to establish a BSA/AML compliance program, maintain records, and report suspicious activity. The USA PATRIOT Act, enacted after the 9/11 terrorist attacks, requires banks to adopt a customer identification program as part of their BSA compliance program.
Additionally, the Anti-Money Laundering Act of 2020 subjected cryptocurrency exchanges, arts and antiquities dealers, and private companies to the same Customer Due Diligence (CDD) requirements as financial institutions. It also closed loopholes that allowed shell companies to evade anti-money laundering measures.
To assist financial institutions in complying with AML requirements, the Financial Crimes Enforcement Network (FinCEN), a U.S. Department of the Treasury bureau, issues guidance and regulations that interpret and implement the BSA and other AML laws. FinCEN also maintains a list of persons suspected of terrorist activity or money laundering, which banks can use for reference when conducting transactions.
Overall, banks must adhere to these anti-money laundering laws to detect and prevent illicit financial activities, ensuring the integrity and security of the global financial system.
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Provide loan extensions to insiders
Regulation O is a Federal Reserve regulation that places limits and stipulations on the credit extensions that member banks can offer to their insiders. The regulation applies to banks that are members of the Federal Reserve System, including national banks, state banks, savings associations, and insured branches of foreign banking organizations.
Regulation O defines "extension of credit" as making or renewing a loan, granting a line of credit, or extending credit in any manner. It sets restrictions on the amount and type of credit that may be extended to insiders, including executive officers, directors, and principal shareholders of member banks. The regulation also includes reporting and record-keeping requirements, such as the need to report any extensions provided to insiders in their quarterly reports.
In terms of loan extensions to insiders, Regulation O specifies that a member bank may not extend credit to an insider unless the extension is made on the same terms as other loans. This means that the interest rates, collateral, and underwriting standards should be similar to those applied to loans made to non-insiders. Additionally, the loan must not involve more than the normal risk of repayment or present other unfavorable terms.
There are also quantitative limits for loans to executive officers, and any loan exceeding $25,000 or 5% of the bank's unimpaired capital and surplus, whichever is higher, must be pre-approved by the bank's board of directors. Transition loans, where a borrower becomes an insider after the loan is made, are subject to different requirements and must conform to Regulation O within 14 months of the borrower becoming an insider.
Overall, Regulation O aims to prevent bank insiders from receiving more favorable terms or benefits on loans or credit than those offered to non-insiders or other customers. It ensures fair and transparent practices in the extension of credit to individuals associated with the bank.
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Disclose terms and conditions
In the United States, the Gramm-Leach-Bliley Act (GLBA) of 1999 requires financial institutions to disclose their information-sharing practices and explain consumers' right to "opt out" of having their information shared with certain nonaffiliated third parties. This includes disclosing the categories of information they collect and disclose, as well as the categories of affiliates and non-affiliates with whom they share information. The privacy notice must be clear and conspicuous, reasonably understandable, and designed to draw attention to the nature and significance of the information. Banks are prohibited from disclosing account numbers or access codes to non-affiliated third parties for marketing purposes, with some exceptions.
The GLBA also established the Fair Credit Reporting Act (FCRA), which requires clear and conspicuous disclosures regarding the sharing of certain information, such as consumer report and application information, with affiliates. The FCRA also addresses the protection of the confidentiality and security of nonpublic personal information (NPI).
In addition to federal laws, banks must also comply with state laws that provide greater consumer protection than the GLBA. For example, the Financial Privacy Act prohibits the disclosure of consumer records held by financial institutions to federal government officials or agencies without notification. Banks must also have processes in place to protect the personal information they collect, use, and share with third parties.
Overall, the Gramm-Leach-Bliley Act and other federal and state laws provide a comprehensive framework for protecting consumer privacy and ensuring that banks disclose their information-sharing practices and provide consumers with the right to opt out.
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Supervise and examine
In the United States, federal banking regulation is split into two broad categories: prudential regulators and consumer protection and market conduct regulators. The former includes financial regulatory authorities that supervise, regulate, and examine banks for compliance with relevant laws and regulations. Bank examiners are generally employed to supervise banks and ensure compliance with regulations. The Federal Reserve Board issues the procedures that Reserve Bank examiners will use to evaluate institutions' compliance. Examiners may test whether banks have enough capital to cover the risks from the loans they have made. They read bank documents, assess and test processes and activities, and meet with bank staff and management. They then provide banks with a written report of examination findings.
The Office of the Comptroller of the Currency (OCC) is the primary supervisory agency for national banks, savings associations, and federal branches of foreign banks. The OCC prescribes regulations, conducts supervisory activities, and takes enforcement actions when necessary to ensure that national banks have the necessary controls in place and provide the requisite notices to law enforcement to deter and detect money laundering, terrorist financing, and other criminal acts. The OCC conducts regular examinations of national banks, federal savings associations, federal branches, and agencies of foreign banks in the US to determine compliance with the Bank Secrecy Act (BSA). The BSA requires financial institutions to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000 (daily aggregate amount), and report suspicious activity that might indicate money laundering, tax evasion, or other criminal activities.
The Consumer Financial Protection Bureau (CFPB) has supervisory, examination, and regulatory authority over banks with over $10 billion in assets and certain other non-bank financial services companies. The US Securities and Exchange Commission (SEC) is an independent agency responsible for enforcing securities market laws, and its authority over banks is limited to securities-related activities. The Financial Crimes Enforcement Network (FinCEN) is a bureau within the Department of the Treasury responsible for enforcing certain anti-money laundering and countering the financing of terrorism (CFT) laws. FinCEN collects and analyses information required to be reported under the BSA.
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Frequently asked questions
Yes, the Bank Secrecy Act of 1970 (BSA), also known as the Currency and Foreign Transactions Reporting Act, requires banks to report suspicious activity that might indicate money laundering, tax evasion, or other criminal activities.
Yes, financial transparency laws require banks to know their customers, understand their normal transactions, and keep the necessary records. Federal and state laws also require banks to follow specific procedures for documenting transactions.
While there is no specific mention of a license, banks must obtain a bank charter before conducting business in the United States. This charter outlines the financial powers and regulations that the bank must adhere to.
Yes, the Financial Crimes Enforcement Network (FinCEN) is the primary federal regulator responsible for ensuring banks comply with anti-money laundering regulations. Additionally, the FDIC and the Federal Reserve System also supervise banks and ensure compliance with regulations.
