WASHINGTON—In the wake of a report that the Financial Crimes Enforcement Network (FinCEN) has identified more than 50 credit unions at risk of serving as a conduit for money laundering activities, the CU trades and regulators alike were scrambling to respond to what NCUA suggested could be a “regulatory blind spot.”

FinCEN did not accuse any credit unions of any illicit activities, but the common denominator for those institutions named in the confidential report is that many of them serve money-services business (MSBs) such as check-cashing firms or remittances businesses—businesses that many large banks refuse to serve due to the potential compliance risk, which some have suggested may be pushing these businesses to more aggressively court credit unions.

The study, first reported by the Wall Street Journal, was completed in February, and FinCEN spokesman Steve Hudak told Credit Union Journal it “was intended for law enforcement and regulators, and not intended to be made available to the public.” Hudak emphasized that no credit unions were accused of illegal activity in the report.

“FinCEN analyzes BSA data; part of our job is to watch for trends and patterns, and watch for areas that may merit further consideration,” he said.

NCUA spokesman John Fairbanks said that the regulator received a copy of the report earlier this year.

“The report acknowledges something that people in the credit union world have already known, and that is if a financial institution like a credit union is doing a lot of business with money-services business where there’s a lot of cash moving, that presents an opportunity certainly, but it also carries with it a certain amount of risk, and that risk carries with it an obligation to put proper management and risk-mitigation controls in place,” said Fairbanks. “We’ve certainly instructed credit unions about this for a long time. We examine for BSA and AML during examinations.”

Cracking Down

Banking regulators have cracked down on big banks in recent years, probing possible money-laundering activity and doling out fines. As a result of that, the Wall Street Journal quoted the report as saying, “criminal groups and drug trafficking organizations may be actively targeting vulnerable credit unions to access the formal financial system.”

According to the Wall Street Journal, which obtained a copy of the FinCEN study, two New York-based credit unions, Actors FCU and Bethex FCU, were named in the report.

In the case of Bethex, WSJ wrote that about one-third of Bethex’s operating income in 2013 came via member businesses who were local remittances firms used by low-income New Yorkers to send money all over the world. NCUA informed the $15 million credit union that it had to shed those members, which cut sharply into the CU’s incomes.

“We’re sort of about as bad off as we can be and still be walking,” CEO Joy Cousminer told the Wall Street Journal. The credit union is still reportedly still under investigation by both FinCEN and NCUA. Bethex has not returned calls from Credit Union Journal seeking comment.

At Actors FCU, director of development Chuck Brown told CU Journal in an e-mail that his credit union had not seen the report and could not comment on its specific contents, but that it has “an entire department of employees devoted exclusively to MSB accounts,” and undergoes two independent reviews of the program per year, as well as NCUA examinations.

While the credit union has 24,000 members, Brown told WSJ that it only serves 29 MSBs, and that all of those businesses are properly vetted before membership is approved.

“In keeping with the mission of credit unions,” he told CU Journal, “we serve MSBs that, in turn, serve underserved individuals, who continue to be marginalized by the large banks.”

A Cautionary Tale

Although no CUs were accused of wrongdoing by FinCEN, NCUA’s Fairbanks pointed to the example of the recently shuttered North Dade FCU in Miami Gardens, Fla., as an example of “what happens when you don’t handle this kind of business properly.”

Late last year, FinCEN issued a $300,000 fine to North Dade for ignoring BSA reporting and record-keeping requirements—a fine totaling nearly half of the credit union’s net worth. The tiny CU had contracted with a third-party vendor that provided services to 56 businesses located in “high risk” jurisdictions such as Central America, Mexico and the Middle East—accounts that represented 90% of the credit union’s total revenues.

FinCEN warned at the time that the CU’s actions had endangered the U.S. financial system by exposing it to “significant opportunities for money laundering and terrorist financing from known high-risk jurisdictions.”

In late December NCUA issued a supervisory letter to credit unions offering guidance to institutions money services businesses, but by the end of March the regulator had liquidated North Dade FCU after determining it had violated “various provisions of its charter, bylaws and federal regulations.”

Less Than 1%

Bill Hampel, chief economist and chief policy officer at CUNA, emphasized that not only have no credit unions been accused of wrongdoing, but that the number of institutions identified in the FinCEN report represents less than 1% of all credit unions.


“What this likely means is that if a credit union showed up as being subject to greater scrutiny to be one of these 50 credit unions, it’s probably because in the last few years their filing of Suspicious Activity Reports has gone way up,” he said. “That doesn’t necessarily mean there are questionable things going on.”

Hampel said he was not aware of the report until the WSJ story surfaced, and said CUNA has written to the Treasury asking for a copy of it. “If it’s essentially public anyway, in terms of being reported in the Wall Street Journal, we think we should see it.”

Even without seeing it, however, Hampel said that he suspected that most of the credit unions included on the list are on the smaller side. Many CDCUs have been approached about getting into the MSB arena in the last few years, he said, and those tend to be smaller institutions.

Hampel emphasized that not only do most credit unions have the common sense to recognize the difference between shady businesses and those on the up-and-up, there are “pretty strong incentive structures in place for credit unions to do this at least somewhat cautiously.”

‘A Regulatory Blind Spot’?

Carrie Hunt, SVP of government affairs and general counsel at NAFCU said in a statement that while the trade group supports sensible regulation and exams tailored to actual risks, “NAFCU has expressed concern and questions to FinCEN as to circumstances of the release of confidential information—even though, based on the [Wall Street Journal] article, it does not appear that any credit union is accused of wrongdoing or an activity that would require regulatory action.”

Hunt added that NAFCU “opposes any regulation that unnecessarily impedes credit union operations,” and the association has come out against giving NCUA examination authority over third-party vendors. But NCUA’s Fairbanks cited the North Dade failure as an incident where supervisory authority over those vendors might have helped the credit union in the long run.

“This really is a reminder that NCUA has a regulatory blind spot, because we are the only regulator that does not have the authority to look at these third-party vendors, and we’ve been trying to get that,” NCUA’s Fairbanks said. “We need to be able to reach in and take a look at those vendors to help ensure the security of the system.”

In the meantime, Fairbanks said that the report had not prompted NCUA to change its AML processes in credit union examinations, but added that the agency is constantly tweaking those controls, just as it expects credit unions to do.

“We’ve made this a supervisory priority in the past, and credit unions know that we’re going to be looking for this when we come through their doors during an examination,” he said. “The FinCEN report doesn’t say anything new that we and the credit unions don’t already know.”

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