Catching the Bad Guys: Credit Unions Look Out for Members' Safety

by Kathleen Thompson

Terrorists, money launderers, computer hackers, counterfeiters--it's enough to make you stay up nights worrying if you and your money are safe.

Credit unions play a role in helping the government bring these types of bad guys to justice. Law enforcement agencies often need to see a pattern of financial activity before prosecutors can bring criminal charges, so laws have been passed over the years that require credit unions, banks, and other financial institutions to keep certain records and report certain activities. Some of your credit union's actions to help law enforcement may be apparent, but credit unions take other "behind-the-scenes" steps to help protect you and our nation.

When anyone walks into a credit union today to become a member, he or she needs to be prepared not only to provide name, date of birth, a street address, and an identification number (the Social Security number for U.S. citizens), but also to verify his or her identity. Credit unions always have taken steps to protect against fraud, but Congress passed the USA PATRIOT Act within weeks of Sept. 11, 2001, to require every financial institution to follow specific procedures in opening accounts.

Most often, identity verification is simply done by showing some current form of government-issued identification that includes a photograph, such as a driver's license or a passport. If someone can't produce such a document to verify his identity, the credit union can use other "nondocumentary" methods to verify identity such as relying on a credit report or by checking references from another financial institution. What if someone wants to open a membership account for a toddler or an incapacitated parent? No problem--the credit union will get the required information about the person actually opening the account.

A "bad guy" should be worried about being tracked by these monitoring and reporting requirements.

Behind-the-scene actions

The USA PATRIOT Act's "customer identification program" requirements are part of the comprehensive Bank Secrecy Act (BSA). This law was first enacted in 1970 to help law enforcement "follow the money." Originally, BSA only had one facet, the currency transaction report (CTR). You probably won't ever walk into the credit union and deposit, or withdraw, more than $10,000 in cash. But the credit union is required to file a report with the (IRS) Internal Revenue Service for anyone who does so in the same day. This certainly doesn't mean all large-dollar transactions are illegal. Numerous types of legitimate businesses, such as the local movie theatre and pizza parlor, have large flows of cash every day. But drug rings also need to move large amounts of cash through the financial system.

This currency transaction report is not a secret report. To fill out the form, the credit union must get information from the person doing the transaction. A credit union is, however, prohibited by law from telling anyone when it files a suspicious activity report (SAR).

Suspicious activity reporting requirements were added to the BSA law in the early 1990s to help in criminal financial investigations. The SAR form identifies 20 possible suspicious activities, including structuring of cash deposits and withdrawals to avoid currency transaction reporting; check fraud; loan fraud; credit card or debit card fraud; counterfeiting; wire transfer fraud; terrorist financing; and identity theft. Although dollar thresholds exist on when the credit union must file a SAR, the credit union can file a SAR regardless of the dollars involved. The credit union must file a SAR whenever it believes it has been a victim of a crime by any employee or official, regardless of the amount of money involved.

Credit unions take "behind-the-scenes" steps to help protect you and our nation.

All financial institutions are required to have systems in place to generally track if there are unusual flows of funds into or out of both personal and business accounts. A financial institution will have to have some idea of what a person does or how the person normally uses the account to assess what is unusual. The Federal Bureau of Investigation (FBI) likes to give the example of the doctor's wife who had an account with a large amount of funds flowing into and out of the account on a weekly basis. After tracking the SARs filed on the account, the FBI determined that the woman was running an unregistered money service business, helping local businesses pay workers in cash.

Checking government lists

The 2001 USA PATRIOT Act also requires credit unions and other financial institutions to periodically look through their membership and customer names for matches against a list of names under federal investigation. This confidential list is sent to financial institutions by the Financial Crimes Enforcement Network (FinCEN), an agency of the U.S. Department of the Treasury.

Credit unions also must comply with "OFAC." OFAC isn't a law but rather stands for the Office of Foreign Assets Control, also part of the Treasury Department. OFAC is responsible for making sure that Americans comply with about 10 laws involving foreign trade sanctions, money laundering, and terrorism financing. OFAC maintains a list of people, organizations, and countries that are prohibited from receiving or sending funds or from opening accounts. All financial institutions must check the names of people who want to open accounts, take out loans, wire money, purchase money orders, and conduct other transactions against the OFAC list. If there is a match, a financial institution must block or freeze property and payment of any funds, and report the action to OFAC. The "OFAC list" is publicly available on the Treasury's Web site.

All financial institutions are required to have systems to track unusual flows of funds into or out of accounts.

Privacy concerns

A "bad guy" should be worried about being tracked by these monitoring and reporting requirements. A "good guy" might understandably be worried about a loss of financial privacy. Although the federal "Right to Financial Privacy Act" limits the federal government's ability to examine your financial affairs without a subpoena served on both the financial institution and the accountholder, there are exceptions to that law beyond even what is described here. The exceptions are intended to have some administrative safeguards and exist to help build a case against the bad guys without alerting them to the investigation before it's completed.

Your credit union is committed to complying with all these laws designed to help assure that America's financial sector remains safe, sound, and serving the financial needs of families and businesses.

Kathleen Thompson is the Credit Union National Association senior vice president for compliance.

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