Where BSA and Fraud Intersect

As we look across the Fifth Federal Reserve District, community bank credit losses remain stable, while fraud losses keep rising. Supervised institutions are facing formidable challenges maintaining robust and effective Bank Secrecy Act/Anti Money Laundering (BSA/AML) programs while identifying and preventing rampant fraud and rising bank losses. There currently is an interagency focus to combat the increasing occurrence of fraud—particularly check fraud. Vice Chair for Supervision Michelle Bowman acknowledged the challenges and cost fraud creates for both consumers and financial institutions in a recent speech. Therefore, understanding the catalyst for the increase in fraud and types of fraud with BSA/AML relevance are important. This article provides community bankers with some tools and best practices that may help address the fraud-related challenges that can facilitate money laundering and terrorist financing.

Keeping BSA/AML and Fraud Functions Communicating

Many banks initially integrate fraud risk within the BSA compliance function; however, as a bank's size, complexity and fraud risk increases, banks typically establish a separate fraud function designed to improve and strengthen oversight. However a bank chooses to structure its financial crime units, leadership must ensure robust internal controls that guarantee adherence to all BSA/AML regulations. Increases in fraud that can impact a financial institution may vary depending upon the institution's risk profile and risk management, as well as their board's risk appetite. From a fraud perspective, the institution is concerned with limiting losses to the institution itself and its customers, as well as ensuring timely recoveries. From a BSA/AML perspective, factors that impact overall risk include the bank's geographic footprint, products and services (including digital channels), and various customer types.

Financial institutions should consider the mechanisms designed to keep both the BSA/AML and fraud functions communicating on a frequent and ongoing basis. Approaches institutions use to achieve this include combining the functions, developing cross-training efforts, and/or creating a risk committee with representation from both BSA and fraud. This is important to ensure that BSA/AML matters are identified in keeping with regulatory requirements for the timely filing of Suspicious Activity Reports (SARs).

In this regard, a strong and effective internal control environment can help to mitigate risk, safeguard assets, and ensure ongoing compliance. Taking proper measures to manage these risks is critically important to limit customer losses and minimize harm, as well as strengthen overall customer trust.

Approaches for Bank Management to Consider

• Asking what information the BSA function needs from the fraud function
  • The BSA Officer is generally responsible for ensuring that SARs are filed accurately and timely; therefore, the level of the BSA Officer's involvement regarding fraud-related SAR filings is important.
  • Establishing fraud remediation timelines and notifications to the BSA function when warranted, particularly if the fraud function is separate from the BSA function.
  • Larger firms typically construct a separate Fraud Risk Assessment in addition to the BSA/AML and OFAC Risk Assessment.
• Maintaining a strong BSA/AML and Know Your Customer (KYC) program with robust exception processes
  • Understanding a customer's expected level and nature of activity helps with the proactive identification of potential fraud and BSA-related anomalies.
• Participating in 314(b) for the purpose of Fraud-Related Info Sharing
• Training for bank employees should emphasize that fraud often serves as a precursor to BSA-reportable suspicious activity. Below is a list of common fraud schemes that warrant heightened scrutiny, along with available resources to support detection and reporting efforts.
  • Account Takeover: Cyber criminals impersonate a legitimate business or employee through social engineering or phishing emails for the purpose of manipulation, resulting in the transfer of money or sensitive information. Weak security practices can be exploited; therefore, it's imperative that a bank educate its employees and maintain robust security, callbacks, and exception practices.
    • Financial Crimes Enforcement Network Advisory
  • Elder Financial Exploitation (EFE): The front line and fraud teams may identify and report on behavioral and financial red flags of elderly customers. To help law enforcement, the SAR narrative should comment on how perpetrators of EFE communicate with and target the elderly.Make sure to check the box in SAR Field 38(d) for EFE!
    • Elderly Financial Exploitation Advisory
  • New Account Fraud: It's critical for BSA/AML teams to know which fraud trends could have an impact on the bank's Customer Identification Program and Customer Due Diligence in a timely manner to adjust procedures as needed.
    • New Account Fraud and Digital Account Openings Federal Reserve Financial Services
  • Check Fraud: Check fraud is on the rise, even as the number of checks in circulation has declined. Banks can also educate their customers in these efforts.
    • Scams Mitigation Toolkit FedPayments Improvement
    • Check Fraud Mitigation Toolkit
    • Virtual Currency Investment Scam

Conclusion

Where BSA/AML and Fraud matters intersect, ongoing communication between the two functions is important for fundamentally different reasons. A strong compliance program allows for both adherence to BSA/AML regulatory reporting requirements, as well as a reduction in fraud-related losses. This communication can be achieved in several ways such as:

• Processes that allow the Fraud team to alert the BSA team in a timely manner
• A committee that meets regularly composed of both fraud and BSA functions
• A BSA review of fraud cases or SAR completion by Fraud analysts well versed in BSA matters

Bank management should ensure that both the BSA and Fraud functions are getting the needed information and communication is ongoing between the two functions to allow for timely decision making, SAR filing, and board reporting as per regulatory requirements.

We should note that since the beginning of July 2026, the Federal Reserve has announced a few initiatives aligned with BSA/AML and Fraud. On July 7, the Board announced a request for comment on the proposal to amend its requirements for banks to maintain anti-money laundering programs. Additionally, on July 9 the Board issued its latest supervision letter SR 26-3: Guidance Clarifying Fraud-Related Information Sharing Under Section 314(b) of the USA PATRIOT Act.

For more information on the information provided in this article or to connect with us, please reach out to your supervision relationship team at the Richmond Fed.