With financial crimes threatening economic stability, strong regulatory systems are key to ensuring transparency, accountability, and sovereignty
The Bank Secrecy Act (BSA) is one of the most crucial acts in the United States preventing financial crimes. The BSA passed in 1970 and heavily expanded over time, requires some businesses to help federal government agencies spot and prevent financial crimes.
A key term under the BSA is “financial institution.” Unlike the conventional notion—typically limited to commercial banks and credit unions—the BSA takes a much broader approach, adopting a more inclusive definition
The BSA and Its Purpose
The Bank Secrecy Act (BSA), also known as the Currency and Foreign Transactions Reporting Act, was, in fact, the first major U.S. anti-money laundering (AML) legislation. As such, it laid the foundation for subsequent AML laws. Enforced by the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, the BSA compels several obligations on businesses classified as financial institutions to report and keep records.
Such obligations are designed to ensure that financial institutions can detect and report potential suspicious financial activity to authorities. In doing so, they help combat crimes such as money laundering, fraud, terrorist financing, and tax evasion
Definitions of “Financial Institution” are broad enough to encompass all entities that own or control a bank or brokers of personal property. For example, this includes banks, building and loan associations, savings banks, insurance companies, stockbrokers, and so on.
Broad Definition of Financial Institution
Under 31 U.S.
Under Code § 5312(a)(2), the BSA provides a broad definition of a financial institution. Specifically, it includes not only banks but also a variety of businesses and professions that either engage in or protect businesses from financial losses, or are involved in the movement of money.
The law provides several categories to discriminate against:
1. Conventional Financial Institutions
- Banks
- Credit unions
- Banks and trust companies.xrTableCellCommercial and savings banks, and trust companies
- Savings and loan associations
- Foreign banks that do business in the U.S.
When most individuals think of financial institutions, typically, these are the ones that come to mind.Established under the BSA, they must issue Currency Transaction Reports (CTRs) and Suspicious Activity Reports (SARs), perform Customer Due Diligence (CDD), and have effective anti-money laundering (AML) controls in place.
2.MSBs
Money services businesses are a major category under the BSA and are composed of:
- Money changers or dealers
- Check cashers
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Money transmitters, for example, Western Union, also fall under the broader definition of financial institutions
- Persons engaged in the business of issuing or selling traveler’s checks, money orders, or stored value (prepaid cards)
MSBs must register with FinCEN and be subject to various reporting and recordkeeping duties like those that apply to banks, including compliance concerning AML.
3. Broker-Dealers and Securities Firms
- Securities and commodities trading firms, including:
- Broker-dealers
- Mutual funds
- Futures commission merchants
- Commodity trading advisors
These institutions are subject to unique AML regulations specific to the investment industry, which mandate that they monitor customer activity and submit SARs when they deem it appropriate
4 . Insurance Companies
The definition of “financial institution” within the BSA further includes insurance providers that offer products with investment-type characteristics, including:
- Annuities
- Whole life insurance policies. These are the products that can be used for money laundering purposes ,for adding insurers to the list of entities.
5. Unusual, High-Risk Types of Businesses
These include, perhaps surprisingly, several businesses that we don’t normally think of as “financial institutions,” but that nonetheless fall under the BSA umbrella. These include:
- Casinos and card clubs (gross revenues over a certain threshold)
- Trade in precious metals, stones, or similar items
- Pawnshops
- Real estate closing experts
- Travel agencies
- Car dealers (in certain financial situations)
Since these firms manage/transfer huge amounts of cash or very sensitive, high-value commodities, they carry the threat of misuse for crimes. As a result, they are required to implement internal controls, identify customers, and report suspicious activity.
Compliance Obligations
If a business falls within the BSA definition of a financial institution, it is subject to various regulations. Common requirements include:
- CTRs: Are applicable when cash is exchanged that exceeds $10,000.
- SAR – Suspicious Activity Report: Filed when the transaction looks suspicious compared to the customer’s typical transactions.
- Customer Identification Program (CIP): WE must obtain identification when you open an account.
- AML Program: Establishes required internal policies and procedures to prevent financial crimes.
- Non-compliance with these requirements may lead to substantial penalties, fines, and criminal charges.
Conclusion
The definition of a financial institution in the Bank Secrecy Act is broad, encompassing not only traditional banks and credit unions but also a diverse group of businesses that deal in money or with valuable assets.
This broad definition is a reflection of the modern state of finance in which money laundering and financial crimes may take place in various industries.
Businesses can strive to comply by knowing whether they are a financial institution under the BSA. Most importantly, they further the overarching objective of safeguarding the integrity of the U.S. and international financial systems from abuse.
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