US Small Business Loan Program Comes with BSA Risks: Sources

By Daniel Bethencourt

Compliance officers will struggle to identify fraudulent efforts to win small business loans under a new program launched by the U.S. government to address an economic downturn triggered by the coronavirus pandemic, sources told ACAMS

Under the Paycheck Protection Program, part of a $2 trillion congressional stimulus package to stabilize U.S. markets amid the COVID-19 health crisis, eligible firms could receive a total of $349 billion in low-interest loans from the Small Business Administration—debt that would largely be largely forgiven if they use the most of the funds to cover their payroll costs.

Banks that disburse SBA-approved loans to their existing clients do not automatically trigger the U.S. customer due-diligence rule and its beneficial-ownership requirements “unless otherwise indicated by the institution’s risk-based approach to BSA [Bank Secrecy Act] compliance,” the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, said Friday.

The statement was perhaps intended to reassure, but, according to Jim Richards, former chief of BSA compliance at Wells Fargo, it will leave banks scrambling to verify some of the entities they already serve because their risk-based programs require it, and because loan applicants may not automatically identify who controls their daily operations.

Banks will also have to contend with desperate companies that submit falsified tax documents to obtain loans for which they do not qualify, and firms that file for relief at multiple lenders against the program’s requirements, said Richards, now principal of RegTech Consulting in California.

Failures to catch fraudulent applications may go unnoticed, at least initially, but compliance missteps risk drawing the attention of regulators after the crisis abates, according to Richards.

“There’s so much opportunity for mischief, let alone fraud,” said Richards. “I get that everyone’s trying to do the right thing here, but two years from now we could have a lot of lenders asking: ‘What happened back in April 2020?'”

Small businesses have already submitted hundreds of thousands of applications for loans at participating lenders since the program’s formal launch on Friday, prompting U.S. Treasury Secretary Steven Mnuchin to ask lawmakers for an additional $250 billion for the initiative.

Firms must apply for the loans through banks participating in the program by June 30 and win approval from the SBA, which, according to federal data, authorized only 63,000 loans for a combined $28 billion for all of fiscal year 2019.

A compliance officer for a midsized bank on the East Coast who spoke to on condition of anonymity said that to avoid the compliance risks associated with quickly onboarding a new business, his lender has restricted its role in the loan program to serving existing customers only.

But even with those limits in place, banks can still encounter “customers with unique [beneficial ownership] structures that could pose a money laundering or sanctions risk,” said the compliance officer, whose concerns are not unique.

Lenders that impose similar restrictions have already seen pushback, including Bank of America, which is now the target of a class action lawsuit after announcing its intention to prioritize existing customers for loans. Bank of America partially modified its policy in response to the lawsuit claim, but litigation is ongoing.

An employee of a small bank in the southern U.S. that has already received thousands of applications told that his institution is concerned that a “major influx” of new clients seeking loans will overwhelm compliance staff tasked with vetting them.

The bank’s concern is not limited to potential clients. Existing customers may also require more scrutiny if they apply for a loan and the application raises new questions about their business models, the employee told “I have the feeling that this is going to be one of those things that blows up in our face.”

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Topics : Anti-money laundering , Know Your Customer , Fraud
Source: U.S.: Department of Treasury , U.S.: FinCEN
Document Date: April 8, 2020