Bank Secrecy Act: Derisking along the Southwest Border Highlights Need for Regulators to Enhance Retrospective Reviews

Some Southwest border residents and businesses have reported difficulties accessing banking services in the region. GAO was asked to review if Southwest border residents and businesses were losing access to banking services because of derisking and branch closures.

This report (1) describes the types of heightened BSA/AML compliance risks that Southwest border banks may face and the BSA/AML compliance challenges they may experience; (2) determines the extent to which banks have terminated accounts and closed branches in the region and the reasons for any terminations and closures; and (3) evaluates how regulators have assessed and responded to concerns about derisking in the region and elsewhere, and how effective their efforts have been; among other objectives. GAO surveyed a nationally representative sample of 406 banks, which included the 115 banks that operate in the Southwest border region; analyzed Suspicious Activity Report filings; developed an econometric model on the drivers of branch closures; and interviewed banks that operate in the region.

“Derisking” is the practice of banks limiting certain services or ending their relationships with customers to, among other things, avoid perceived regulatory concerns about facilitating money laundering. The Southwest border region is a high-risk area for money laundering activity, in part, because of a high volume of cash and cross-border transactions, according to bank representatives and others. These types of transactions may create challenges for Southwest border banks in complying with Bank Secrecy Act/anti-money laundering (BSA/AML) requirements because they can lead to more intensive account monitoring and investigation of suspicious activity. GAO found that, in 2016, bank branches in the Southwest border region filed 2-1/2 times as many reports identifying potential money laundering or other suspicious activity (Suspicious Activity Reports), on average, as bank branches in other high-risk counties outside the region (see figure).

According to GAO's survey, an estimated 80 percent (+/- 11 percent margin of error) of Southwest border banks terminated accounts for BSA/AML risk reasons. Further, according to the survey, an estimated 80 percent (+/- 11) limited or did not offer accounts to customers that are considered high risk for money laundering because the customers drew heightened regulatory oversight—behavior that could indicate derisking. Counties in the Southwest border region have been losing bank branches since 2012, similar to national and regional trends. Nationally, GAO's econometric analysis generally found that counties that were urban, younger, had higher income or had higher money laundering-related risk were more likely to lose branches. Money laundering-related risks were likely to have been relatively more important drivers of branch closures in the Southwest border region.

Regulators have not fully assessed the BSA/AML factors influencing banks to derisk. Executive orders and legislation task the Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) and the federal banking regulators with reviewing existing regulations through retrospective reviews to determine whether they should be retained or amended, among other things. FinCEN and federal banking regulators have conducted retrospective reviews of parts of BSA/AML regulations. The reviews, however, have not evaluated how banks' BSA/AML regulatory concerns may influence them to derisk or close branches. GAO's findings indicate that banks do consider BSA/AML regulatory concerns in providing services. Without assessing the full range of BSA/AML factors that may be influencing banks to derisk or close branches, FinCEN, the federal banking regulators, and Congress do not have the information needed to determine if BSA/AML regulations and their implementation can be made more effective or less burdensome.

GAO recommends that FinCEN and the federal banking regulators conduct a retrospective review of BSA regulations and their implementation for banks. The review should focus on how banks' regulatory concerns may be influencing their willingness to provide services. The federal banking regulators agreed to the recommendation. FinCEN did not provide written comments.

Money laundering and terrorist financing pose threats to national security  and the integrity of the financial system. The Bank Secrecy Act (BSA) is  an important tool in federal law enforcement efforts to detect and deter  the use of financial institutions for criminal activity, including money  laundering and terrorist financing. The BSA and its implementing  regulations generally require financial institutions, including banks, to  collect and retain various records of customer transactions, verify  customers’ identities, maintain anti-money laundering (AML) programs,  and report suspicious transactions.

In recent years, some Southwest border residents and businesses  reported difficulty accessing banking services, including experiencing  bank account terminations. In addition, reports of bank branch closings in  the region added to questions about the ability of residents to access  banking services. You and others have raised questions about whether  some banks may be engaging in “derisking”—the practice of banks  limiting certain services or ending their relationships with customers to,  among other things, avoid perceived regulatory concerns about facilitating  money laundering.

This report (1) describes the types of heightened BSA/AML compliance  risks that Southwest border banks may face and the BSA/AML  compliance challenges they may experience; (2) determines the extent to  which banks are terminating accounts and are closing bank branches in  the Southwest border region and their reasons for any terminations and  closures; (3) describes what Southwest border banking customers and  others told us about any effects of account terminations and branch  closures on Southwest border communities; and (4) evaluates how the  Department of the Treasury’s (Treasury) Financial Crimes Enforcement  Network (FinCEN) and the federal banking regulators—the Board of  Governors of the Federal Reserve System (Federal Reserve), Federal  Deposit Insurance Corporation (FDIC), and the Office of the Comptroller  of the Currency (OCC)—have assessed and responded to concerns  about derisking in the Southwest border region and elsewhere, and the  effectiveness of those efforts.

We defined the Southwest border region as all counties that have at least  25 percent of their landmass within 50 miles of the U.S.-Mexico border.  Thirty-three counties in Arizona, California, New Mexico, and Texas fell  within this definition. To describe the types of heightened BSA/AML  compliance risks that Southwest border banks may face and the  BSA/AML compliance challenges they may experience, we interviewed  19 Southwest border banks, a variety of banking industry groups and  trade associations, and officials from the federal banking regulators. In  addition, we analyzed data on Suspicious Activity Reports (SAR),  Currency Transaction Reports (CTR), and BSA/AML enforcement actions  and violations identified during bank examinations. We also reviewed  documentation from BSA/AML examinations of selected Southwest  border banks to gain additional context about BSA/AML violations.

To determine the extent to which banks are terminating accounts and  their reasons why, we administered a web-based survey to a nationally  representative sample of banks in the United States, which includes 115  Southwest border banks, for a total survey sample of 406 banks. In the  survey, we asked banks about terminations of accounts and limitations on account offerings related to BSA/AML risk, the types of customers for  which the banks terminate or limit account offerings, and the reasons for  these decisions for the period January 1, 2014, to December 31, 2016.  We obtained a weighted survey response rate of 46.5 percent. See  appendix I for additional information about our survey methodology and  appendix II for information on survey results. To assess the extent to  which banks have closed branches in the Southwest border region and  the reasons why, we analyzed trends in bank branch closures by  comparing trends in branch closures in the Southwest border region to  national and regional trends, as well as trends in high-risk areas  elsewhere. We also combined the data on branch closures with  demographic, economic, and money laundering-related risk data and  conducted an econometric analysis designed to examine the potential  drivers of branch closures (see app. III for information on the econometric  analysis). We also interviewed representatives from Southwest border  banks about the time and resources required to file SARs and how they  approached the decision to close a branch.

To describe what Southwest border banking customers and others said  about any effects of account terminations and branch closures on  Southwest border communities, we conducted site visits to three  communities: Nogales, Arizona; San Ysidro, California; and McAllen,  Texas. We selected these communities to achieve a sample of locations  that collectively satisfied the following criteria: (1) counties with different  classifications of how rural or urban they are, (2) counties that  experienced different rates of branch closures from 2013 through 2016,  and (3) counties that had received different designations by the federal  banking regulators as distressed or underserved. We conducted a total of  five discussion groups across the three locations and summarized  participants’ responses about how they were affected by account  terminations and branch closures in their communities. Three of the five  discussion group sessions included business banking customers and the  other two sessions included nonbusiness retail banking customers. We  also interviewed economic development specialists, industry and trade  organizations that focus on border trade and commerce, and chambers of  commerce and municipal officials representing Southwest border  communities.

To evaluate how FinCEN and the federal banking regulators have  assessed and responded to concerns about derisking and the  effectiveness of those efforts, we reviewed agency documentation and  guidance the agencies issued to banks related to derisking. We also  reviewed documentation on BSA/AML retrospective reviews that FinCEN  and the federal banking regulators have conducted. In addition, we  reviewed various executive orders that, among other things, require most  executive branch agencies, and encourage independent agencies, to  develop a plan to conduct retrospective analyses, and Office of  Management and Budget guidance implementing those executive  orders. Finally, we interviewed officials from FinCEN and the federal  banking regulators about the actions they have taken related to derisking,  as well as retrospective reviews they had conducted on BSA regulations.

To assess the reliability of the data we used, we reviewed related  documentation; conducted electronic testing of the data for missing data,  outliers, or any obvious errors; and interviewed knowledgeable officials  about the data. We concluded that all applicable data were sufficiently  reliable for the purposes of describing BSA/AML compliance risks and  challenges for Southwest border banks; identifying banks to survey on  account terminations and limitations; evaluating branch closure trends in  the Southwest border region and elsewhere, and the factors driving those  closures; and describing the effects for Southwest border communities  experiencing branch closures and account terminations. Appendix I  provides more information on our scope and methodology.

We conducted this performance audit from March 2016 to February 2018  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

The BSA established reporting, recordkeeping, and other AML  requirements for financial institutions. By complying with BSA/AML  requirements, U.S. financial institutions assist government agencies in the  detection and prevention of money laundering and terrorist financing by,  among other things, maintaining compliance policies, conducting ongoing  monitoring of customers and transactions, and reporting suspicious  financial activity. Regulation under and enforcement of BSA involves  several federal agencies. FinCEN is responsible for administering the  BSA, has authority for enforcing compliance with its requirements and  implementing regulations, and also has the authority to enforce the act,  including through civil money penalties. FinCEN issues regulations under  BSA and relies on the examination functions performed by other federal  regulators, including the federal banking regulators. FinCEN also collects,  analyzes, and maintains the reports and information filed by financial  institutions under BSA and makes those reports available to law  enforcement and regulators.

FinCEN has delegated BSA/AML examination authority for banks to the  federal banking regulators. The federal banking regulators have issued  their own BSA regulations that require banks to establish and maintain a  BSA compliance program which, among other things, requires banks to  identify and report suspicious activity. The banking regulators are also  required to review compliance with BSA/AML requirements and  regulations which they generally do every 12 to 18 months as a part of  their routine safety and soundness examinations. Federal banking  regulators take a risk-based approach to BSA examinations—that is, they  review key customers of risk or specific problems identified by the bank.  Among other things, examiners review whether banks have an adequate  system of internal controls to ensure ongoing compliance with BSA/AML  regulations. The federal banking regulators may take enforcement actions  using their prudential authorities for violations of BSA/AML requirements.  They may also assess civil money penalties against financial institutions  and individuals independently, or concurrently with FinCEN.

Components of Banks’ BSA/AML Compliance Programs

All banks are required to establish an AML compliance program that  includes policies, procedures, and processes which, at a minimum, must  provide for: a system of internal controls to ensure ongoing compliance, a designated individual or individuals responsible for managing BSA  compliance (BSA compliance officer),  training for appropriate personnel,  independent testing for BSA/AML compliance, and appropriate risk-based procedures for conducting ongoing customer  due diligence.

BSA/AML regulations require that each bank tailor a compliance program  that is specific to its size and own risks based on factors such as the  products and services offered, customers, types of transactions  processed, and locations served. BSA/AML compliance programs may  include the following components:

Customer Identification Program (CIP)—Banks must have written  procedures for opening accounts and, at a minimum, must obtain from  each customer their name, date of birth, address, and identification  number before opening an account. In addition, banks’ CIPs must  include risk-based procedures for verifying the identity of each  customer to the extent reasonable and practicable. Banks must also  collect information on individuals who are beneficial owners of a legal  entity customer in addition to the information they are required to  collect on the customer under the CIP requirement.

Customer Due Diligence (CDD)—CDD procedures enable banks to  predict with relative certainty the types of transactions in which a  customer is likely to engage, which assists banks in determining when  transactions are potentially suspicious. Banks must document their  process for performing CDD and implement and maintain appropriate  risk-based procedures for conducting ongoing customer due  diligence. These procedures include, but are not limited to,  understanding the nature and purpose of customer relationships for  the purpose of developing a customer risk profile, and conducting  ongoing monitoring to identify and report suspicious transactions and,  on a risk basis, to maintain and update customer information.

Enhanced Due Diligence (EDD)—Customers who banks determine  pose a higher money laundering or terrorist financing risk are subject  to EDD procedures. EDD for higher-risk customers helps banks  understand these customers’ anticipated transactions and implement  an appropriate suspicious activity monitoring system. Banks review  higher-risk customers and their transactions more closely at account  opening and more frequently throughout the term of their relationship  with the bank.

Suspicious Activity Monitoring—Banks must also have policies and  procedures in place to monitor transactions and report suspicious  activity. Banks use different types of monitoring systems to identify  or alert staff of unusual activity. A manual transaction monitoring  system typically targets specific types of transactions (for example,  those involving large amounts of cash and those to or from foreign  areas) and includes a manual review of various reports generated by  the bank’s information systems in order to identify unusual activity. An  automated monitoring system can cover multiple types of transactions  and use various rules, thresholds, and scenarios to identify potentially  suspicious activity. These systems typically use computer programs to  identify individual transactions, patterns of unusual activity, or  deviations from expected activity. Banks that are large, operate in  many locations, or have a large volume of higher-risk customers  typically use automated monitoring systems.

Banks also must comply with certain reporting requirements, including:

CTR: A bank must electronically file a CTR for each transaction in  currency—such as a deposit or withdrawal—of more than $10,000.

SAR: Banks are required to electronically file a SAR when a  transaction involves or aggregates at least $5,000 in funds or other  assets, and the institution knows, suspects, or has reason to suspect  that the transaction meets certain criteria qualifying as suspicious.

Regulatory Requirements Related to Account Terminations and Branch Closures

Generally, the federal banking regulators do not direct banks to open,  close, or maintain individual accounts. However, banks generally include  policies and procedures to describe criteria for not opening, or closing, an  account in their BSA/AML compliance program. For example, although  there is no requirement for a bank to close an account that is the subject  of a SAR filing, a bank should develop policies and procedures that  indicate when it will escalate issues identified as the result of repeat SAR  filings on accounts, including criteria on when to close an account.  Additionally, a bank’s CIP should contain procedures for circumstances  when a bank cannot verify the customer’s identity, including procedures  that include circumstances in which the bank should not open an account  and when the bank should close an account.

Federal banking regulators also cannot prohibit banks from closing  branches. However, FDIC-insured banks are required to submit a notice  of any proposed branch closing to their primary banking regulator no later  than 90 days prior to the date of the proposed branch closing. The  notice must include a detailed statement of the reasons for closing the  branch and statistical or other information in support of the reasons.  Banks are also required to mail a notice to the customers of the branch  proposed to be closed at least 90 days prior to the proposed closing and  must post a notice to customers in the branch proposed to be closed at  least 30 days prior to the proposed closing. The notice should state the  proposed date of closing and either identify where branch customers may  obtain service following that date or provide a telephone number for  customers to call to determine such alternative sites.

Characteristics and Money Laundering-Related Risks of the Southwest Border Region

In October 2017, Mexico was the second largest goods trading partner of  the United States in terms of both imports and exports, according to U.S.  Census trade data. Trade with Mexico is an important component of  Southwest border states’ economies, which benefit from their proximity to  the international border and the related seaports and inland ports for the  exportation and importation of goods. The fresh produce industry is an  example of a key industry in the border region. The fresh produce  industry encompasses several activities involved with importation,  inspection, transportation, warehousing, and distribution of Mexican- grown produce to North American markets, all of which provide  employment opportunities and revenues to local economies. Another key  industry in the region is manufacturing. The Southwest border has played  a role in a growing trend known as production sharing, in which  companies—predominantly based in the United States—locate some  operations in Mexico, thus achieving lower costs in the overall production  process. Local Southwest border communities also benefit from  pedestrians crossing into the United States from Mexico to visit and shop  in their communities. For example, Department of Transportation border  crossing data show that in September 2017, nearly 750,000 pedestrians  entered the United States at the San Ysidro, California, border crossing— the busiest pedestrian port of entry into the country.

The Department of State has identified Mexico as a major money  laundering country. As a result of its proximity to Mexico, the Southwest  border region faces high money laundering and related financial crime  risks. The U.S.-Mexico border includes major population centers,  transportation hubs, and large tracts of uninhabited desert. According to  Treasury’s 2015 National Money Laundering Risk Assessment, criminal  organizations have used the vast border to engage in cross-border drug  trafficking, human smuggling, and money laundering. The 2015  assessment also states that bulk cash smuggling remains the primary  method Mexican drug trafficking organizations use to move illicit proceeds  across the Southwest border into Mexico. Some cash collected  domestically to pay the drug trafficking organizations for drugs is  channeled from distribution cells across the United States to cities and  towns along the Southwest border, and from there is smuggled into  Mexico. All counties within the Southwest border region have been  identified as either a High Intensity Financial Crime Area (HIFCA) or a  High Intensity Drug Trafficking Area (HIDTA) with the vast majority being  identified as both (see fig. 1). HIFCAs and HIDTAs aim to concentrate  law enforcement efforts at the federal, state, and local levels to combat  money laundering and drug trafficking in designated high-intensity money  laundering zones and in areas determined to be critical drug-trafficking  regions of the United States, respectively.

Southwest Border Banks Report Heightened BSA/AML Compliance Risks and Challenges Due to Volume of High- Risk Customers

Several characteristics of the Southwest border region make the region a  high-risk area for money laundering activity. These characteristics, which  require additional efforts for Southwest border banks to comply with  BSA/AML requirements, include high volumes of cash transactions,  cross-border transactions, and foreign accountholders. Bank  representatives we spoke with said that they manage these added  BSA/AML compliance challenges through activities such as more  frequent monitoring and investigating of suspicious activities, but that  these efforts require an investment of resources.

Volume of Cash Transactions and Cross- Border Trade Increases Risk for Money Laundering and Terrorist Financing

Money laundering risk is high in the Southwest border region because of  the high volume of cash transactions, the number of cross-border  transactions, and foreign accountholders, according to bank  representatives, federal banking regulators, and others. Cash  transactions increase the BSA/AML compliance risk for banks because  the greater anonymity associated with using cash results in greater risk  for money laundering or terrorist financing. A regional economic  development specialist noted, for example, that Mexican nationals who  shop in border communities typically use cash as a payment form.  Further, representatives from a regional trade group told us that border  businesses prefer payment in cash over checks from Mexican banks  because of potential variations in the exchange rate before a peso- denominated check clears. The trade group representatives we spoke  with also noted that currency exchanges also add to the volume of cash  transactions in the region. In June 2010, the Mexican finance ministry  published new AML regulations that restricted the amounts of physical  cash denominated in U.S. dollars that Mexican financial institutions could  receive. According to FinCEN officials and some of the federal bank  examiners we spoke with, these regulations altered the BSA/AML risk  profile of some U.S. banks, particularly those in the Southwest border  region. For example, U.S. banks started receiving bulk shipments of  currency directly from Mexican nationals and businesses, rather than  from Mexican banks. This increased BSA/AML compliance risk for the  U.S. banks because they now had to assess the risk of each individual  customer shipping them currency, rather than the collective risk from their  Mexican banking counterparts. In addition, according to FinCEN, the  regulations added to the level of cash in the Southwest border region  because businesses in the region saw higher levels of cash payments  from Mexican customers. This also created additional risk for U.S. banks  when these businesses deposited the cash payments.

Our review of data on banks’ CTR filings confirmed that bank branches  that operate in Southwest border region counties handle more large cash  transactions than bank branches elsewhere. For example, our analysis  found that bank branches in Southwest border region counties generally  file more CTRs than bank branches in comparable counties in the same  border states or in other high-risk financial crime or drug trafficking  counties that are not in border states. Specifically, in 2016, bank  branches in Southwest border region counties filed nearly 30 percent  more CTRs, on average, than bank branches in comparable counties  elsewhere in their same state, and about 60 percent more than those in  other high-risk counties outside the region. Similar differences occurred in  2014 and 2015 (see fig. 2).

Cross-border transactions are also higher risk for money laundering  because international transfers can present an attractive method to  disguise the source of funds derived from illegal activity. Certain  industries, such as agriculture, that are prevalent in the Southwest border  region have legitimate business practices that could appear suspicious  without sufficient context, regional representatives said. For example,  representatives of one produce industry association we spoke with said  produce distributors often import produce from Mexican farmers and pay  them via wire transfer, which the farmers may then immediately withdraw  in cash to pay laborers. Transactions that involve cross-border wire  transfers and immediate withdrawals of cash may raise suspicion of  money laundering that requires further scrutiny by the bank. BSA/AML  regulations generally require banks to keep additional documentation for  domestic and international fund transfers of $3,000 or more, including  specific identifying information about the originator and beneficiary of the  transaction. If the bank sends or receives funds transfers to or from  institutions in other countries, especially those with strict privacy and  secrecy laws, the bank should have policies and procedures to determine  whether the amounts, the frequency of the transfer, and countries of  origin or destination are consistent with the nature of the business or  occupation of the customer.

Southwest border banks cited foreign accountholders as another type of  high-risk customer for money laundering and terrorist financing. These  types of customers are prevalent in the Southwest border region,  examiners said, and can create challenges for banks to verify and  authenticate their identification, source of funds, and source of wealth.  Southwest border banks and others cited these types of customers as  adding BSA/AML compliance risk for banks, particularly if the  accountholders do not reside in the United States. These customers may  also have more frequent funds transfers to other countries. Foreign  accountholders who are “senior foreign political figures” also create  additional money laundering and terrorist financing risk because of the  potential for their transactions to involve the proceeds from foreign-official  corruption. Some Southwest border banks told us they provide accounts  to senior foreign political figures, but may limit the number of those types  of accounts.

Southwest Border Banks’ High-Risk Customers Require More Intensive Due Diligence and Monitoring

The volume of high-risk customers and cross-border transactions can  lead to more intensive account monitoring and investigation of suspicious  transactions, Southwest border bank representatives said. Performing  effective due diligence and complying with CIP requirements for higher- risk customers and transactions can be more challenging because banks  might need specialized processes for higher-risk customers and  transactions than for those that are lower-risk. For example,  representatives from some Southwest border banks told us their  BSA/AML compliance staff travel to Mexico or collect information from  sources in Mexico to establish the legitimacy of businesses across the  border. Another bank said they ask to see 3 months of some high-risk  businesses’ previous bank statements to determine the typical volume of  cash and wire transfers and that this type of due diligence is very time- consuming. The bank also collects details about the recipients of the  wired funds in an effort to determine the legitimacy of the payments.  Some Southwest border banks also described using special processes to  evaluate BSA/AML compliance risks for foreign customers and said they  used extra caution before accepting them as customers. These special  processes included translating business documents from Spanish to  English to certify the legitimacy of business customers and developing  internal expertise on currently acceptable identity documents issued by  foreign governments.

Southwest border bank representatives we spoke with said addressing  these compliance challenges also can require more resources for  monitoring high-risk customers and investigating suspicious transactions.  High-risk customers require additional detail to be collected when  accounts are opened and on an ongoing basis. Representatives of one  Southwest border bank explained that they monitor high-risk customers’  transactions more frequently—every 3 months, compared to every 6  months for medium-risk customers. Further, high volumes of cash activity  can generate substantial numbers of alerts in bank monitoring systems,  and these alerts are evaluated by banks to determine whether SARs  should be filed. Transaction structuring, which involves attempts to evade  the $10,000 CTR filing requirement by, for example, making several  smaller transactions, is a common source of alerts, some bank  representatives said. Several banks we interviewed cited the investigation  of potential structuring as one of their common BSA/AML compliance  activities. Although many banks have monitoring software to generate  suspicious activity alerts, representatives said the flagged transactions  generally are investigated manually and can be a labor-intensive part of  banks’ overall BSA/AML compliance programs. Southwest border bank  representatives we spoke with also told us that their suspicious activity  monitoring systems often generate “false positives”—meaning further  investigation leads to a determination that no SAR filing is warranted. As  a result, the total number of SAR filings can actually understate banks’  total BSA/AML compliance efforts associated with suspicious transaction  monitoring.

We found that bank branches in Southwest border region counties filed  more SARs, on average, from 2014 through 2016 than bank branches in  comparable counties in the same border states or in other high-risk  financial crime or drug trafficking counties that are not in border states.  For example, in 2016, bank branches in Southwest border region  counties filed three times as many SARs, on average, as bank branches  operating in other counties within Southwest border states and about 2.5  times as many SARs, on average, as bank branches in other high-risk  financial crime or drug trafficking counties in nonborder states. These  differences in SAR filings showed a similar pattern in 2014 and 2015 (see  fig. 3).

Federal banking regulators cited some Southwest border banks for  noncompliance with BSA/AML requirements from January 2009 through  June 2016. Those citations included 41 formal or informal enforcement  actions taken against Southwest border banks. FinCEN also took two  formal enforcement actions during that period. As part of the bank  examination process, the federal banking regulators also cited Southwest  border banks for 229 BSA/AML violations from January 2009 through  June 2016. Of these, SAR-related violations were the most common  type of violation (33 percent). This was followed closely by violations  related to BSA/AML monitoring and compliance (31 percent)—a category  we defined to include competencies such as having an adequate system  of BSA/AML internal controls and providing adequate BSA/AML training  (see fig. 4).

Risks Related to Money Laundering Appear to Be a Factor in Reduced Access to Banking Services for Southwest Border Customers

Our nationally representative survey found that most Southwest border  banks terminated accounts for reasons related to BSA/AML risk from  January 2014 through December 2016 and limited, or did not offer,  accounts to certain customer types, consistent with BSA/AML purposes.  However, our survey also found that many Southwest border banks may  also be engaging in derisking. Nationally, our econometric analysis  suggests that counties that were urban, younger, had higher income, or  had higher money laundering-related risk were more likely to lose  branches. Money laundering-related risks were likely to have been  relatively more important drivers of branch closures in the Southwest  border region.

Some Account Terminations and Limitations Are Consistent with BSA/AML Purposes

Most Southwest Border Banks Terminated Accounts Because of Suspicious Activity

Most Southwest border banks reported terminating accounts for reasons  related to BSA/AML risk. Based on our survey results, from January 1,  2014, through December 31, 2016, we estimate that almost 80 percent of  Southwest border banks had terminated personal or business accounts  for reasons related to BSA/AML risk. For the subset of Southwest  border banks whose operations extend outside of the Southwest border  region, we estimate that almost 60 percent reported that they terminated  business or personal accounts domiciled in their Southwest border  branches. For banks that did not operate in the Southwest border region  (non-Southwest border banks), account terminations related to BSA/AML  risk varied by the size of the bank. For example, an estimated 93 percent  of medium banks and an estimated 95 percent of large banks terminated  accounts for reasons related to BSA/AML risk, compared to an estimated  26 percent of small banks. Among the five types of businesses we  identified for our survey as high risk for money laundering and terrorist  financing, cash-intensive small businesses (for example, retail stores,  restaurants, and used car dealers) were the most common types of  business accounts that Southwest border banks reported terminating for  reasons related to BSA/AML risk. For example, over 70 percent of  Southwest border banks reported terminating cash-intensive small  business accounts. Between 45 percent and 58 percent of Southwest  border banks cited terminating accounts for the remaining four categories  of high-risk business accounts we identified: money services businesses,  domestic businesses engaged in cross-border trade, nontrade-related  foreign businesses, and foreign businesses engaged in cross-border  trade.

Bank-Reported Data on Accounts  Terminated in 2016 for BSA/AML Reasons  In response to our survey, several banks  provided data on the number of accounts they  terminated in 2016 for reasons related to  BSA/AML risk. We found that two extra-large  banks (those banks with $50 billion or greater  in assets) were responsible for the majority of  these account terminations for both business  and personal accounts. These terminations  accounted for less than half a percent of the  extra-large banks’ overall accounts. These  numbers only represent account terminations  for the banks that provided data and are not  generalizable to the population of banks.

The most common reason related to BSA/AML risk banks reported for  terminating accounts from January 2014 through December 2016 was the  filing of SARs associated with the accounts. Based upon our survey, we  estimate that 93 percent of Southwest border banks terminated accounts  because of the filing of SARs. Through discussions with Southwest  border bank representatives, we found that banks vary the level of  internal investigations they conduct into the suspicious activity before  deciding to terminate an account as a result of a certain number of SAR  filings. Representatives from 3 of the 19 Southwest border banks we  spoke with told us that their account closure policies generally required  the automatic termination of an account when a certain number of  SARs—ranging from 1 to 4—were filed for an account. Representatives  from two other Southwest border banks said a certain number of SARs  filed for one account would lead to an automatic review of the account  that would determine whether or not the account should be closed. Other  Southwest border bank representatives we interviewed did not indicate  having a specific policy for terminating accounts related to the number of  SAR filings, but some of these representatives said that SAR filings were  one of the factors that could lead to account terminations.

Figure 5 shows the survey estimates for the other BSA/AML reasons  Southwest border banks cited for terminating accounts. Some commonly  cited reasons were the failure of the customer to respond adequately to  requests for information as part of customer due diligence processes and  the reputational risk associated with the customer type. For example, an  estimated 80 percent of Southwest border banks cited the failure of the  customer to respond adequately to requests for information as part of  customer due diligence processes. Some Southwest border bank  representatives told us that sometimes customers do not provide  adequate documentation in response to their due diligence inquiries.  These representatives said that after a certain number of attempts to  obtain the documentation, the lack of customer responsiveness results in  them terminating the account. A bank may also terminate an account if  the activity of the customer could risk the reputation of the bank. About 68  percent of Southwest border banks that terminated accounts cited the  reputational risk associated with the customer type as a reason for  terminating an account. Some Southwest border bank representatives we spoke with said they have closed accounts due to the nature of the  business. For example, some bank representatives said they have closed  accounts for gambling and marijuana businesses. In addition, law  enforcement officials from the Southwest Border Anti-Money Laundering  Alliance told us that they thought that some of the accounts terminated by  Southwest border banks were a result of the information the banks were  given from local law enforcement and other federal agencies. For  example, when funnel accounts—accounts in one geographic area that  receive multiple cash deposits and from which funds are withdrawn in a  different geographic area with little time elapsing between the deposits  and withdrawals—were first identified by law enforcement as a money  laundering method, banks responded by closing these types of accounts.  Non-Southwest border banks generally reported the same primary  reasons for terminating accounts as Southwest border banks. The top two  reasons for terminating accounts cited by non-Southwest border banks  that responded to the survey was the filing of SARs associated with the  accounts and the failure of the customer to respond adequately to  requests for information as part of customer due diligence processes.

A majority of Southwest border banks and non-Southwest border banks  reported limiting or not offering accounts to certain types of businesses  considered high risk for money laundering and terrorist financing,  particularly money services businesses and foreign businesses. For  example, the estimates for Southwest border banks that have limited, or  not offered, accounts to nontrade-related foreign businesses is 76  percent, money service businesses is 75 percent, and foreign businesses  engaged in cross-border trade is 72 percent. The most common reason  (cited by 88 percent of Southwest border banks) for limiting, or not  offering, an account to these types of businesses was that the business  type fell outside of the bank’s risk tolerance—the acceptable level of risk  an organization is willing to accept around specific objectives. Similarly,  69 percent of Southwest border banks cited the inability to manage the  BSA/AML risk associated with the customer (for example, because of  resource constraints) as a factor for limiting, or not offering, accounts.  Representatives from some Southwest border banks we spoke with  explained that they do not have the resources needed to conduct  adequate due diligence and monitoring for some of the business types  considered high risk for money laundering and terrorist financing. As a  result, they told us that they no longer offer accounts for certain business  lines. For example, a representative from one Southwest border bank told  us that the bank no longer offers accounts to money services businesses  because of the BSA/AML compliance requirements and monitoring  needed to service those types of accounts. In particular, they stated they  do not have the resources to monitor whether the business has the  appropriate BSA/AML compliance policies and procedures in place and to  conduct site visits to ensure it is operating in compliance with BSA/AML  requirements. Another Southwest border bank representative told us they  have stopped banking services for used clothing wholesalers who export  their product to Mexico because they were unable to mitigate the risk  associated with these types of businesses. They explained that these  companies’ business models involve many individuals crossing the U.S.- Mexico border to purchase with cash pallets of clothing to import to  Mexico. The bank representative explained that the business model for  this industry made it very hard to identify the source of the large volumes  of cash.

Other reasons Southwest border banks reported for limiting, or not  offering, certain types of business accounts are shown in figure 6. Similar  to the reasons given by Southwest border banks, the most common  reason that non-Southwest border banks reported limiting, or not offering  accounts, to certain types of businesses considered high risk for money  laundering and terrorist financing was that the customer type fell outside  of the bank’s risk tolerance.

Other Account Terminations and Limitations Raise Concerns about Derisking

The second most common reason—cited by 80 percent of Southwest  border banks—for limiting, or not offering, accounts to certain types of  businesses considered high risk for money laundering and terrorist  financing, was that the customer type drew heightened BSA/AML  regulatory oversight—behavior that could indicate derisking. For  example, representatives from one Southwest border bank explained that  they no longer offer accounts to money services businesses because  they want to be viewed from a good standpoint with their regulator. They  added that banking for these types of customers is very high risk for the  bank with very little reward. Another bank that operates in the Southwest  border region explained that rather than being able to focus on their own  BSA/AML risk assessment and the performance of accounts, they feel  pressured to make arbitrary decisions to close accounts based on specific  concerns of their examiners. Several Southwest border bank  representatives also described how recent BSA/AML law enforcement  and regulatory enforcement actions have caused them to become more  conservative in the types of businesses for which they offer accounts. For  example, representatives from one Southwest border bank we spoke with  stated that many of the banks that do business in the Southwest border  region have stopped servicing cross-border businesses due to a large  enforcement action in which the allegations against the bank cited an  ineffective AML program that exposed it to illicit United States/Mexico  cross-border cash transactions. A representative from another  Southwest border bank explained that his bank could have a large  banking business in one of the state’s border towns, but the bank has  chosen not to provide services there because if BSA/AML compliance  deficiencies are identified from servicing that area, the penalties could be  high enough to shut down the whole bank. In addition, while banks may  terminate accounts because of SAR filings as a method to manage  money laundering and terrorist financing risk and to comply with  BSA/AML requirements, some of these terminations may be related to  derisking. For example, some Southwest border bank representatives we  spoke with as part of this review, as well as other banks and credit unions  we spoke with in a previous review, told us that they have filed SARs to  avoid potential criticism during examinations, not because they thought  the observed activity was suspicious. Non-Southwest border banks also  commonly cited the inability to manage risk associated with the customer  type and heightened regulatory oversight as reasons for limiting, or not  offering, accounts.

Our survey results and discussions with Southwest border bank  representatives are consistent with what a senior Treasury official  identified in a 2015 speech as causing correspondent banking and money  services business account terminations. The speech noted that a  number of interrelated factors may be resulting in the terminations, but  that the most frequently mentioned reason related to efforts to comply with AML and terrorist financing requirements. In particular, banks raised  concerns about (1) the cost of complying with AML and terrorist financing  regulations, (2) uncertainty about supervisors’ expectations regarding  what is appropriate due diligence, and (3) the nature of the enforcement  and supervisory response if they get it wrong. The speech noted that  banks said that they made decisions to close accounts not so much  because they were unable to manage the illicit finance risks but because  the costs associated with taking on those risks had become too high. It  further stated that there is a gap between what supervisory agencies  have said about the standards they hold banks to and banks’ assessment  of those standards, and that there was still a perception among banks  that supervisory and enforcement expectations lack transparency,  predictability, and consistency. The senior Treasury official noted this  perception feeds into higher anticipated compliance costs and when  banks input this perceived risk into their cost-benefit analysis, it may  eclipse the potential economic gain of taking on a new relationship.

Southwest Border Bank Branch Closures Have Been Concentrated in a Small Number of Communities

Counties in the Southwest border region have been losing bank branches  since 2012, similar to national and regional trends, as well as trends in  other high-risk financial crime or drug trafficking counties that are outside  the region. Most of the 32 counties (18 counties or nearly 60 percent)  comprising the Southwest border region did not lose bank branches from  2013 through 2016, but 5 counties lost 10 percent or more of their  branches over this time period (see top panel of fig. 7). Those 5  counties are Cochise, Santa Cruz, and Yuma, Arizona; Imperial,  California; and Luna, New Mexico.

Within those counties we identified as having the largest percentage loss  of branches, sometimes those losses were concentrated in smaller  communities within the county (see bottom panel of fig. 7). For example,  Calexico in Imperial County, California, lost 5 of its 6 branches from 2013  through 2016. In Santa Cruz County in Arizona, one zip code in Nogales  accounted for all of the branch losses in the county from 2013 through  2016, losing 3 of its 9 branches. More generally, branch losses can vary  substantially across different zip codes in a county (see for example  bottom panel of fig. 7). In other instances, counties that lost a relatively  small share of their branches can contain communities that lost a more  substantial share—for example San Ysidro in San Diego County lost 5 of  its 12 branches (about 42 percent) while the county as a whole lost only 5  percent of its branches from 2013 through 2016.

Based on our analysis, counties losing branches in the Southwest border  region tended to have substantially higher SAR filings, on average, than  Southwest border region counties that did not lose branches. That is,  counties that lost branches from 2013 through 2016 had about 600 SAR  filings per billion dollars in deposits, on average, and counties that did not  lose branches had about 60 SAR filings per billion dollars in deposits, on  average (see fig. 8).

Empirical Evidence Suggests Demographic and Money Laundering- Related Risk Factors Are Drivers of Branch Closures

The econometric models we developed and estimated generally found  that demographic and money laundering-related risk factors were  important predictors of national bank branch closures. These models are  subject to certain limitations, some of which we detail later in this section  as well as appendix III, and as such, we interpret the results with some  degree of caution. In general, our results suggest that counties were  more likely to lose branches, all else equal, if they were (1) urban, had a  higher per capita personal income, and had a younger population  (proportion under 45); or (2) designated as a HIFCA or HIDTA county, or  had higher SAR filings. We term the latter three characteristics (HIFCA,  HIDTA, and SAR filings) “money laundering-related risk factors.” While  our models are unable to definitively identify the causal effect of  BSA/AML regulation on branch closures from these money laundering- related risk factors, the impact of the SAR variables, in particular, could  reflect a combination of BSA/AML compliance effort and the underlying  level of suspicious or money laundering-related activity in a county.

Our econometric models are based on all counties with bank branches in  the United States and are designed to predict whether a county will lose a  branch the following year based on the characteristics of the county. The  models included demographic, economic, and money laundering-related  risk factors that might have influenced branch closures nationally since  2010 (see app. III for additional information on our models). The  demographic factors included in our models are Rural-Urban Continuum  Codes, age profile (proportion of the county over 45), and the level of per  capita income. We chose these demographic factors, in particular,  because they are associated with the adoption of mobile banking, which  may explain the propensity to close branches in a community. The  economic factors included in our models—intended to reflect temporary  or cyclical economic changes affecting the county—are the growth of per  capita income, growth in building permits (a measure of residential housing conditions), and growth of the population. The money laundering- related risk factors, as described previously, are whether a county has  been designated a HIFCA or a HIDTA and the level of suspicious or  possible money laundering-related activity reported by bank branches in  the county, as represented by SAR filings.

Demographic characteristics of counties were important predictors of  branch closures. Our results were consistent with those demographic  characteristics associated with the adoption of mobile banking. As such,  our results are consistent with the hypothesis that mobile banking is  among the factors leading some banks to close branches. The most  urban counties were about 22 percentage points more likely to lose one  or more branches over the next year than the most rural counties. A  county with 70 percent of the population under 45 was about 9  percentage points more likely to lose one or more branches over the next  year than a county with half the population under 45. A county with per  capita income of $50,000 was about 7 percentage points more likely to  lose one or more branches over the next year than a county with per  capita income of $20,000.

Money laundering-related characteristics of a county were also important  predictors of branch closures in our models. HIDTA counties were about  11 percentage points more likely to lose one or more branches over the  next year than non-HIDTA counties (the effect in HIFCA counties is less  significant statistically and smaller in magnitude). A county with 200  SARs filed per billion dollars in bank deposits was about 8 percentage  points more likely to lose one or more bank branches over the next year  than a county where no bank branch had filed a SAR. Southwest border  bank officials we spoke with generally said that SAR filings were a time-  and resource-intensive process, and that the number of SARs filings—to  some extent—reflected the level of effort, and overall BSA compliance  risk, faced by the bank. That said, the impact of SAR variables in our  models could reflect a combination of (1) the extent of BSA/AML  compliance effort and risk faced by the bank, as expressed by bank  officials, and (2) the underlying level of suspicious or money laundering- related activity in a county.

Money laundering-related risk factors were likely to have been relatively  more important drivers of branch closures in the Southwest border region  because it had much higher SAR filings and a larger share of counties  designated as HIDTAs than the rest of the country. More generally, given  the characteristics of Southwest border counties and the rest of the  United States, our models suggest that while demographic factors have  been important drivers of branch closures in the United States overall,  risks associated with money laundering were likely to have been relatively  more important in the Southwest border region. Specifically, the  Southwest border region is roughly as urban as the rest of the country,  has a somewhat lower per capita income (about $35,000 in the  Southwest border region versus about $41,000 elsewhere) and is  somewhat younger on average (about 40 percent 45 and over in the  Southwest border region versus about 45 percent elsewhere), but money  laundering-related risk factors were relatively more prevalent, based on  our measures, in the Southwest border region.

Southwest border bank representatives we interviewed told us they  considered a range of factors when deciding whether or not to close a  branch. For example, most Southwest border bank representatives that  we spoke with about the reasons for branch closures (6 of 10) told us that  BSA/AML compliance challenges were not part of the decision to close a  branch. However, most Southwest border bank representatives said  that the financial performance of the branch is one of the most important  factors they consider when deciding to close a branch, and as described  previously, BSA/AML compliance can be resource intensive, which may  affect the financial performance of a branch. Further, nearly half of the  Southwest border bank representatives we spoke with (4 of 10), did  mention that BSA/AML compliance costs could be among the factors  considered in determining whether or not to close a branch. In addition, at  least one bank identified closing a branch as one option to address  considerable BSA/AML compliance challenges. Finally, some Southwest  border bank representatives (3 of 10) also mentioned customer traffic in  the branch or the availability of mobile banking as relevant to their  decision to close a branch.

Select Border Communities Raised Concerns That Branch Closures and Account Terminations Reduced Economic Growth and Access to Banking Services

Communities we visited in Arizona, California, and Texas experienced  multiple bank branch closures from 2013 through 2016. Some local  banking customers that participated in the discussion groups we held in  these communities also reported experiencing account terminations.  While perspectives gathered from our visits to the selected cities cannot  be generalized to all locations in Southwest border counties, stakeholders  we spoke with noted that these closures affected key businesses and  local economies and raised concerns about economic growth.

Border Communities We Visited Experienced Account Terminations and Branch Closures

According to some discussion group participants, local businesses,  economic development specialists, and other stakeholders (border  stakeholders) in the three Southwest border communities we visited,  banks in their communities terminated the accounts of longtime  established customers, sometimes without notice or explanation. They  acknowledged that, because of their proximity to the U.S.-Mexico border,  their communities were susceptible to money laundering-related activity  and described how banks’ increased efforts to comply with BSA/AML  requirements may have influenced banks’ decisions to terminate  accounts. Each of the three Southwest border communities we visited— Nogales, Arizona; San Ysidro, California; and McAllen, Texas—also  experienced multiple bank branch closures from 2013 through 2016 (see  fig. 9).

Our analysis shows that from 2013 through 2016, these communities lost  a total of 12 bank branches, 9 of which were branches of large or extra- large banks, based on asset size. But the percentage of branch closures  in some communities was more significant in locations where there were  already a limited number of branch options. For instance, Nogales (3 of  its 9 branches closed) and San Ysidro (5 of its 12 branches closed) both  lost a third or more of all their bank branches compared to McAllen where  approximately 6 percent of its branches were closed (4 of its 63 branches  closed).

Account Terminations and Branch Closures Affected Key Southwest Border Businesses and Customers and Concerns about Limited Economic Growth Were Reported

According to border stakeholders we spoke with, businesses engaged in  cross-border trade, cash-intensive businesses, and Mexican nationals— all significant parts of the border economy—were affected by account  terminations and branch closures in the three communities we visited. For  example, the cross-border produce industry accounts for almost 25  percent of jobs and wages in Nogales, according to a 2013 study  prepared for Nogales Community Development. One produce business  owner who had an account terminated told us that she was told that the  volume of funds deposited into the account from her affiliated Mexican  business created security risks that the bank was no longer willing to  sustain, and she was unable to negotiate with the bank to keep it open.  She said that it took almost 7 months to open a new account and that it  involved coordination among bankers in multiple cities on both sides of  the border. While some produce businesses and economic development  specialists we spoke with explained that some regional banks in their  communities have opened accounts for some small- to medium-sized  produce businesses, they still have concerns about the long-term effects  of limited access to banking services on smaller produce firms. One  economic development specialist explained that these small companies  often rely on local banks for funding, which enables them to develop and  bring innovation to the produce industry.

Some discussion group participants who we spoke with also described  challenges related to account terminations that cash-intensive businesses  face in operating in the Southwest border region because of banks’  increased emphasis on BSA/AML compliance. They explained that cash  transactions raised suspicions for banks because of their associated  money laundering risk; however, cash is a prevalent payment source for  legitimate businesses in the region. For example, one money services  business owner who participated in our discussion group in San Ysidro  said that because his business generates large volumes of cash, he  struggles to keep a bank account as a result of banks’ oversight of and  caution regarding cash transactions. He said his business account has  been closed three times over the past 35 years and that banks have  declined his requests to open an account at least half a dozen times.  Similarly, another discussion group participant explained that companies  that import automobiles into Mexico use cash to pay for cars in the United  States and that trying to make these large cash deposits raised  suspicions for U.S. banks.

Border stakeholders we spoke with also described how challenges  associated with branch closures and terminations of accounts of Mexican  nationals affected the Southwest border communities we visited. Border  communities like San Ysidro are home to retail businesses, such as  restaurants and clothing stores. According to our analysis of Bureau of  Transportation Statistics data, an average of almost 69,000 personal  vehicle passengers and 25,000 pedestrians entered the United States  daily in September 2017 through the San Ysidro land port of entry.  Economic development specialists told us that these visitors spend  money on goods and services in local border communities. For example,  one economic development specialist in Arizona estimated that Mexican  nationals spend about $1 billion in Pima County alone each year, and  another one estimated that 70 percent of the sales taxes collected in  Nogales are paid by Mexican customers who cross the border to shop.  One of the specialists explained that Mexicans—both Mexican day  travelers to Tucson, as well as those who own U.S. real estate and travel  to the United States for other investment business—used to visit the  region and withdraw money from their U.S. bank accounts and  subsequently spend money in border communities. He explained that  Mexican nationals find it easier to have U.S. bank accounts to use while  visiting and shopping on the U.S. side of the border. However, some  discussion group participants said that because Mexican nationals have  faced difficulties maintaining U.S. bank accounts, they have made fewer  trips across the border and engaged in less commerce, which has  affected the economies in their communities. Some participants also said  that branch closures have affected businesses’ sales volumes in their  communities. For example, one participant said that when branches  closed in the San Ysidro Boulevard area—which is at the base of the  pedestrian border crossing—businesses have had difficulty thriving due to  reduced foot traffic by customers.

According to border stakeholders we spoke with, branch closures also  resulted in fewer borrowing options and limited investment in the  communities, which they thought hindered business growth. For example,  one discussion group participant explained that middle-sized businesses,  such as those with revenues of approximately $2 million–$25 million,  have fewer borrowing options when branches closed in the community  because the remaining regional and smaller banks may not have the  capital to support the lending needs of businesses that size. One  economic development specialist and some discussion group participants  also suggested that branch closures limited opportunities for local  business expansion when banks outside the community are reluctant to  lend to them. For example, in Tucson, Arizona, one specialist said that  small businesses are having difficulty getting loans, which affects the  ability of businesses to grow. To fill the void, some local businesses have  turned to alternative lending options, such as title loan companies,  accounts receivable lending companies, and family members as  alternative funding sources. Rigorous academic research we reviewed  suggests that branch closures reduce small business lending and  employment growth in the area immediately around the branch. Our  analysis of branch closure data based on estimates from this research  suggests closed branches in the communities we visited could have  amounted to millions of dollars in reduced lending and hundreds of fewer  jobs. For example, in McAllen, Texas, this research suggests that the loss  of four bank branches could have reduced employment growth by over  400 jobs and small business lending by nearly $3.5 million.

Discussion Group Participants in Communities We Visited Reported Reduced Access to Banking Services

Some discussion group participants said that as a result of branch  closures and account terminations in the Southwest border communities  we visited, they traveled further to conduct banking activities, paid higher  fees for new banking alternatives, and experienced difficulty completing  banking transactions. Some participants told us that they had to travel  further to their new banking location, which resulted in additional costs  and inconvenience for customers. For instance, some participants in  Nogales and San Ysidro said they had to travel 20 to 40 minutes further  to the next closest bank branch, with one participant noting that this  especially created difficulty for elderly bank customers. One discussion  group participant said that when their local bank branch closed, they kept  their account with that bank and traveled more than 70 miles to the next  closest branch because they were afraid that they would not be able to  open an account with another bank. Another participant also noted the  additional cost of gas and time lost for other important matters as a result  of traveling further to a branch. Other participants also noted that they  experienced longer lines at their new branches because of the higher  volume of customers from closed branches. Some participants also found  that some banking alternatives were more expensive than their previous  banking options when their accounts were terminated or a local branch  closed. For instance, some discussion group participants said they paid  higher fees at their new bank and one participant mentioned that she  received a lower interest rate on her deposits at her new bank. Some  participants also mentioned that some banking alternatives they used,  such as currency exchanges, were more expensive than their previous  banking options.

Some discussion group participants also told us that they experienced  difficulty completing banking transactions in their communities as a result  of branch closures or banks’ increased efforts to comply with BSA/AML  requirements. For example, some participants from one discussion group  session said that only an automated teller machine (ATM) was available  in their community after their branch closed and it was not appropriate for  all types of banking transactions. Further, some participants were  unsatisfied with not being able to get in-person assistance from bank staff  when their branch closed. For instance, one participant said that without a  local branch, there was no nearby bank personnel to help her when the  local ATM malfunctioned. Further, while acknowledging banks’ need to  comply with BSA/AML requirements, some discussion group participants  explained that some banking transactions have become more difficult,  such as banks requiring additional forms of identification and limitations  placed on cash transactions. Some participants, many who were longtime  customers with their bank, also noted their disapproval with banks’  additional questioning and documentation requirements, and that there  was little acknowledgment by the bank of their value as a legitimate  customer or of their knowledge about them as a customer. Some  participants acknowledged that they did not experience this challenge  because of the increasing availability of mobile banking options, which  allow customers to complete some transactions without going to a  physical branch location. As another example, one business owner said  she mostly used online banking and has a check reader in her office that  she uses to deposit checks directly into her business accounts.

Regulators Have Not Fully Assessed the BSA/AML Factors Influencing Banks to Reduce Services

The results of our survey (for both Southwest border banks and non- Southwest border banks) and discussions with Southwest border bank  representatives indicate that banks are terminating accounts and limiting  services, in part, as a way to manage perceived regulatory concerns  about facilitating money laundering. In addition, the econometric models  we developed and estimated also generally found that money laundering- related risk factors that could be reflective, in part, of BSA/AML  compliance effort and risks, were an important predictor of national bank  branch closures, and likely to have been relatively more important in the  Southwest border region. Regulators have taken some actions in  response to derisking, including issuing guidance and conducting some  agency reviews. Regulators have also conducted retrospective reviews  on some BSA/AML requirements. However, regulators have taken limited  steps aimed at addressing how banks’ regulatory concerns and BSA/AML  compliance efforts may be influencing banks to engage in derisking or  close branches.

Regulators Have Issued Guidance and Taken Some Actions Related to Derisking

FinCEN and the federal banking regulators have responded to concerns  about derisking on a national level by issuing guidance to banks and  conducting some evaluations within their agencies to understand the  extent to which derisking is occurring. The guidance issued by regulators  has been aimed at clarifying BSA/AML regulatory expectations and  discouraging banks from terminating accounts without evaluating risk  presented by individual customers or banks’ abilities to manage risks. The  guidance has generally encouraged banks to use a risk-based approach  to evaluate individual customer risks and not to eliminate entire  categories of customers. Some of the guidance issued by regulators  attempted to clarify their expectations specifically for banks’ offering of  services to money services businesses. For example, in March 2005, the  federal banking regulators and FinCEN issued a joint statement on  providing banking services to money services businesses to clarify the  BSA requirements and supervisory expectations as applied to accounts  opened or maintained for this type of customer. The statement  acknowledged that money services businesses were losing access to  banking services as a result of concerns about regulatory scrutiny, the  risks presented by these types of accounts, and the costs and burdens  associated with maintaining such accounts. In addition, in November  2014, OCC issued a bulletin which explained that OCC-supervised banks  are expected to assess the risks posed by an individual money services  business customer on a case-by-case basis and to implement controls to  manage the relationship commensurate with the risks associated with  each customer. More recently, Treasury and the federal banking  regulators issued a joint fact sheet on foreign correspondent banking  which summarized key aspects of federal supervisory and enforcement  strategy and practices in the area of correspondent banking.

In addition to issuing guidance, FDIC and OCC have taken some steps  aimed at trying to determine why banks may be terminating accounts  because of perceived regulatory concerns. For example, in January  2015, FDIC issued a memorandum to examiners establishing a policy  that examiners document and report instances in which they recommend  or require banks to terminate accounts during examinations. The  memorandum noted that recommendations or requirements to terminate  accounts must be made and approved in writing by the Regional Director  before being provided to and discussed with bank management and the  board of directors. As of December 2017, FDIC officials stated that there  were no instances of recommendations or requirements for account  terminations being documented by examiners. In 2016, OCC reviewed  how the institutions it supervises develop and implement policies and  procedures for evaluating customer risks as part of their BSA/AML  programs and for making risk-based determinations to close customer  accounts. OCC focused its review on certain large banks’ evaluation of  risk for foreign correspondent bank accounts. This effort resulted in  OCC issuing guidance to banks on periodic evaluation of the risks of  foreign correspondent accounts. The guidance describes corporate  governance best practices for banks’ consideration when conducting  these periodic evaluations of risk and making account retention or  termination decisions on their foreign correspondent accounts. Further,  OCC’s Fiscal Year 2018 Bank Supervision Operating Plan noted that  examiners should be alert to banks’ BSA/AML strategies that may  inadvertently impair financial inclusion. However, as of September 2017,  OCC officials stated that the agency has not identified any concerns  related to financial inclusion.

Treasury and the federal banking regulators have also participated in a  number of international activities related to concerns about the decline in  the number of correspondent banking and money services business  accounts. For example, FDIC, OCC, and the Federal Reserve participate  in the Basel Committee on Banking Supervision’s Anti-Money  Laundering/Counter Financing of Terrorism Experts Group. Recent efforts  of the group involved revising guidelines to update and clarify  correspondent banking expectations. Treasury leads the U.S.  engagement to the Financial Action Task Force (FATF)—an inter- governmental body that sets standards for combating money laundering,  financing of terrorism, and other related threats to the integrity of the  international financial system—which has issued guidance on  correspondent banking and money services businesses. Treasury also  participates in the efforts to combat derisking that are occurring through   the Financial Stability Board’s Correspondent Banking Coordination  Group, the Global Partnership for Financial Inclusion, and the  International Monetary Fund.

The federal banking regulators also met with residents and businesses in  the Southwest border region to discuss concerns related to derisking in  the region. For example, FDIC officials hosted a BSA/AML workshop in  Nogales, Arizona, in 2015 for banks, businesses, trade organizations, and  others. Officials from the Federal Reserve and OCC also participated in  the workshop during which the regulators tried to clarify BSA/AML  regulatory requirements and expectations. In addition, OCC officials told  us that they met with representatives of the Fresh Produce Association of  the Americas, who had concerns about banks not providing services in  the region. OCC officials spoke to the produce industry representatives  about various money laundering schemes and the role of the agency’s  examiners during the meeting.

BSA/AML Regulatory Reviews Have Not Evaluated All Factors Influencing Banks to Derisk and Close Branches

Evaluation of BSA/AML regulations and their implementation is essential  to ensuring the integrity of the financial system while facilitating financial  inclusion. Without oversight of regulations after implementation, they  might prove to be less effective than expected in achieving their intended  goals, become outdated, or create unnecessary burdens. Regulations  may also change the behaviors of regulated entities and the public in  ways that cannot be predicted prior to implementation. Some regulators  and international standard setters recognize that establishing a balanced  BSA/AML regulatory regime is challenging. For example, in a 2016  speech, the then Comptroller of the Currency Curry stated that preventing  money laundering and terrorist financing are important goals, but that a  banking system that is truly safe and sound must also meet the legitimate  needs of its customers and communities. FinCEN officials also told us  that while the agency’s mission is to safeguard the financial system from  illicit use and combat money laundering, they also must be cautious that  their efforts do not prevent people from using the system. Further, FATF  acknowledged that AML and counter-terrorism financing safeguards can  affect financial inclusion efforts. FATF explained that applying an overly  cautious approach to safeguards for money laundering and terrorist  financing can have the unintended consequence of excluding legitimate  businesses and consumers from the formal financial system.

Executive orders encourage and legislation requires agencies to review  existing regulations to determine whether they should be retained,  amended, or rescinded, among other things. Retrospective reviews of  existing rules help agencies evaluate how existing regulations are  working in practice. A retrospective review is an important tool that may  reveal that an existing rule—while needed—has not operated as well as  expected, and that changes may be warranted. Retrospective reviews  seek to make regulatory programs more effective or less burdensome in  achieving their regulatory objectives. Many recent presidents have  directed agencies to evaluate or reconsider existing regulations. For  example, in 2011 President Obama issued Executive Orders 13563 and  13579. Among other provisions, Executive Orders 13563 and 13579  require executive branch agencies and encourage independent regulatory  agencies, such as the federal banking regulators, respectively, to develop  and implement retrospective review plans for existing significant  regulations. Further, the Trump Administration has continued to focus  on the need for agencies to improve regulatory effectiveness while  reducing regulatory burdens. Executive Order 13777, issued by President  Trump in February 2017, also reaffirms the objectives of previous  executive orders and directs agency task forces to identify regulations  which, among other criteria, are outdated, unnecessary, or ineffective.  In addition to the executive orders, the Economic Growth and Regulatory  Paperwork Reduction Act (EGRPRA) requires federal banking regulators  to review the regulations they prescribe not less than once every 10 years  and request comments to identify outdated, unnecessary, or unduly  burdensome statutory or regulatory requirements.

FinCEN and Federal Banking Regulators’ BSA/AML Retrospective Reviews

FinCEN and the federal banking regulators have all participated in  retrospective reviews of different parts of the BSA/AML regulations. For  example, FinCEN officials told us that they review each new or  significantly amended regulation to assess its clarity and effectiveness  within 18 months of its effective date. Each assessment is targeted to the  specific new regulation, or significant change to existing regulations, and  a determination is made on how best to evaluate its effectiveness.  FinCEN officials explained that the agency consistently receives feedback  from all of the relevant stakeholders, including law enforcement, regulated  entities, relevant federal agencies, and the public, which informs their  retrospective reviews. Based on the specific findings of an assessment,  FinCEN considers whether to publish guidance or whether additional rule  making is required. For example, FinCEN officials explained that they  revised the money services business definitions to adapt to evolving  industry practice as part of the regulatory review process.

As part of fulfilling their requirements under EGRPRA, the federal banking  regulators—through the Federal Financial Institutions Examination  Council (FFIEC)—have also participated in retrospective reviews of  BSA/AML regulations. As part of the 2017 EGRPRA review, FFIEC  received several public comments on BSA/AML requirements, including  increasing the threshold for filing CTRs, the SAR threshold, and the  overall increasing cost and burden of BSA compliance. The federal  banking regulators referred the comments to FinCEN. FinCEN is not a  part of the EGRPRA review and is not required to consider the  comments; however, in its response in the 2017 EGRPRA report, the  agency stated that it finds the information helpful when assessing BSA  requirements. FinCEN officials and the federal banking regulators stated  that the agencies are working to address the BSA-related EGRPRA  comments—particularly those related to CTR and SAR filing  requirements—through the BSA Advisory Group (BSAAG), which  established three subcommittees to address some of the concerns raised  during the EGRPRA process. One subcommittee is reviewing the  metrics used by industry, law enforcement, and FinCEN to assess the  value and effectiveness of BSA reporting. Another subcommittee is  focusing on how SAR filing requirements could be streamlined or reduced  while maintaining the value of the data, and the third subcommittee is  focusing on issues related to the filing of CTRs. FinCEN and the federal  banking regulators are also considering, through the advisory group, the  EGRPRA comments that involve the supervisory process and  expectations related to BSA examinations of financial institutions. FinCEN  officials stated that there have been significant discussions during two  BSAAG meetings since the 2017 EGRPRA report was issued and that, as  of November 2017, all of these efforts are ongoing. In addition to the  BSAAG, regulators also told us that that the FFIEC BSA/AML working  group has discussed EGRPRA and other compliance burden issues at its  recent meetings and is trying to promote BSA examination consistency  through its monthly meetings and with the interagency FFIEC BSA/AML  examination manual.

The actions FinCEN and the federal banking regulators have taken  related to derisking—issuing guidance, conducting internal agency  reviews, and meeting with affected Southwest border residents—have not  been aimed at addressing and, if possible ameliorating, the full range of  factors that influence banks to engage in derisking, in particular banks’  regulatory concerns and BSA/AML compliance efforts. Further, the  actions regulators have taken to address concerns raised in BSA/AML  retrospective reviews have focused primarily on the burden resulting from  the filing of CTRs and SARs, but again, these actions have not evaluated  how regulatory concerns may influence banks to engage in derisking or  close branches. Federal internal control standards call for agencies to  analyze and respond to risks to achieving their objectives. Further,  guidance implementing Executive Orders 13563 and 13579 states that  agencies should consider conducting retrospective reviews on rules that  unanticipated circumstances have overtaken.

Our evidence shows that derisking may be an unanticipated response  from the banking industry to BSA/AML regulations and their  implementation. For example, our evidence demonstrates that banks not  only terminate or limit customer accounts as a way to address legitimate  money laundering and terrorist financing threats, but also, in part, as a  way to manage regulatory concerns. Further, our econometric models  and discussions with bank representatives suggest that BSA/AML  compliance costs and risks can play a role in the decision to close a  branch. The actions FinCEN and the federal banking regulators have  taken to address derisking and the retrospective reviews that have been  conducted have not been broad enough to evaluate all of the BSA/AML  factors banks consider when they derisk or close branches, including  banks’ regulatory concerns which may influence their willingness to  provide services. Without assessing the full range of BSA/AML factors  that may be influencing banks to derisk or close branches, FinCEN, the  federal banking regulators, and Congress do not have the information  they need to determine if adjustments are needed to ensure that the  BSA/AML regulations and their implementation are achieving their  regulatory objectives in the most effective and least burdensome way.

BSA/AML regulations promote the integrity of the financial system by  helping a number of regulatory and law enforcement agencies detect  money laundering, drug trafficking, terrorist financing, and other financial  crimes. As with any regulation, oversight after implementation is needed  to ensure the goals are being achieved and that unnecessary burdens are  identified and ameliorated. The collective findings from our work indicate  that BSA/AML regulatory concerns have played a role in banks’ decisions  to terminate and limit accounts and close branches. However, the actions  taken to address derisking by the federal banking regulators and FinCEN  and the retrospective reviews conducted on BSA/AML regulations have  not fully considered or addressed these effects. Retrospective reviews  help agencies evaluate how existing regulations are working in practice  and can assist to make regulatory programs more effective or less  burdensome in achieving their regulatory objectives. BSA/AML  regulations have helped to detect money laundering and other financial  crimes, but there are also real concerns about the unintended effects,  such as derisking, that these regulations and their implementation may be  having. While it is important to evaluate how effective BSA/AML  regulations are in helping to identify money laundering, terrorist financing,  and other financial crimes, it is also important to identify and attempt to  address any unintended outcomes. We have found that reduced access  to banking services can have consequential effects on local communities.  However, without evaluating how banks’ regulatory concerns may be  affecting their decisions to provide services, the federal banking  regulators, FinCEN, and Congress do not have the information to  determine if BSA/AML regulations and their implementation can be made  more effective or less burdensome in achieving their regulatory  objectives.

We are making four recommendations to FinCEN and the three federal  banking regulators in our review—FDIC, the Federal Reserve, and  OCC—to jointly conduct a retrospective review of BSA/AML regulations  and their implementation for banks.

The Director of FinCEN should jointly conduct a retrospective review of  BSA/AML regulations and their implementation for banks with FDIC, the  Federal Reserve, and OCC. This review should focus on how banks’  regulatory concerns may be influencing their willingness to provide  services. In conducting the review, FDIC, the Federal Reserve, OCC, and  FinCEN should take steps, as appropriate, to revise the BSA regulations  or the way they are being implemented to help ensure that BSA/AML  regulatory objectives are being met in the most effective and least  burdensome way. (Recommendation 1)

The Chairman of FDIC should jointly conduct a retrospective review of  BSA/AML regulations and their implementation for banks with the Federal  Reserve, OCC, and FinCEN. This review should focus on how banks’  regulatory concerns may be influencing their willingness to provide  services. In conducting the review, FDIC, the Federal Reserve, OCC, and  FinCEN should take steps, as appropriate, to revise the BSA regulations  or the way they are being implemented to help ensure that BSA/AML  regulatory objectives are being met in the most effective and least  burdensome way. (Recommendation 2)

The Chair of the Federal Reserve should jointly conduct a retrospective  review of BSA/AML regulations and their implementation for banks with  FDIC, OCC, and FinCEN. This review should focus on how banks’  regulatory concerns may be influencing their willingness to provide  services. In conducting the review, FDIC, the Federal Reserve, OCC, and  FinCEN should take steps, as appropriate, to revise the BSA regulations  or the way they are being implemented to help ensure that BSA/AML  regulatory objectives are being met in the most effective and least  burdensome way. (Recommendation 3)

The Comptroller of the Currency should jointly conduct a retrospective  review of BSA/AML regulations and their implementation for banks with  FDIC, the Federal Reserve, and FinCEN. This review should focus on  how banks’ regulatory concerns may be influencing their willingness to  provide services. In conducting the review, FDIC, the Federal Reserve,  OCC and FinCEN should take steps, as appropriate, to revise the BSA  regulations or the way they are being implemented to help ensure that  BSA/AML regulatory objectives are being met in the most effective and  least burdensome way. (Recommendation 4)

We provided a draft of this report to CFPB, the Department of Justice, the  Federal Reserve, FDIC, Treasury/FinCEN, and OCC. The Federal  Reserve, FDIC, and OCC provided written comments that have been  reproduced in appendixes IV–VI, respectively. Treasury/FinCEN did not  provide a written response to the report. FDIC, Treasury/FinCEN, and  OCC provided technical comments on the draft report, which we have  incorporated, as appropriate. CFPB and the Department of Justice did not  have any comments on the draft of this report.

In their written responses, the Federal Reserve, FDIC, and OCC agreed  to leverage ongoing interagency work reviewing BSA/AML regulations  and their implementation for banks to address our recommendation. We  agree that using existing interagency efforts is an appropriate means for  conducting a retrospective review of BSA/AML regulations that focuses  on evaluating how banks’ BSA/AML regulatory concerns may be  influencing their willingness to provide services.

The Federal Reserve, FDIC, and OCC also raised concerns with some of  the findings of our report and the methodologies we used. For example, in  their responses, each agency discussed that the report did not take into  consideration the extent to which law enforcement activities may be a  driver of account terminations and branch closures in the Southwest  border region. In response to this comment, we added some information  to the report that we received from law enforcement officials about  instances in which some account terminations were the result of law  enforcement’s identification of suspicious accounts. This type of account  termination, however, is not included in our definition of the term  “derisking,” because such terminations are consistent with BSA/AML  purposes. In addition, when we discuss the role that enforcement actions  have played in making Southwest border banks more conservative in  their account offerings, we’ve clarified the language to ensure it  encompasses both regulatory enforcement actions taken by the federal  banking regulators and criminal enforcement actions taken by law  enforcement agencies. Treasury/FinCEN’s technical comments also  noted that the report did not take into consideration the 2010 Mexican  exchange control regulations and their subsequent changes, which it  considers to be the most important catalyst of changes to BSA risk  profiles for banks in the Southwest border region. To address this  comment, we added language describing these regulations and their  potential effects on Southwest border banks.

In its written response, the Federal Reserve stated that the report does  not find a causal linkage between the agency’s regulatory oversight and  derisking decisions made by some banks that operate along the  Southwest border (see app. IV). OCC made a similar comment in its  technical comments on the draft report. While the methodologies used in  our report included a nationally representative survey of banks,  econometric modeling of potential drivers of branch closures, and  discussions with bank representatives, do not on their own allow us to  make a definitive causal linkage between regulation and derisking, the  collective evidence we gathered indicates that banks’ BSA/AML  regulatory concerns have played a role in their decisions to terminate and  limit accounts and close branches. We believe that, based on this  evidence, further examination by the federal banking regulators and  FinCEN into how banks’ perceived regulatory concerns are affecting their  offering of services is warranted.

OCC’s written response noted that the definition of derisking we used is  inconsistent with definitions used by other regulatory bodies and that our  definition encompasses a wide range of situations in which banks limit  certain services or end customer relationships (see app. VI).  Treasury/FinCEN also made a similar comment in its technical comments  on the draft report. OCC’s letter notes that FATF and the World Bank  define derisking as situations in which financial institutions terminate or  restrict business relationships with entire countries or classes of  customers in order to avoid, rather than to manage, AML-related risks.  We, however, defined derisking for the purposes of our report as the  practice of banks limiting certain services or ending their relationships  with customers to, among other things, avoid perceived regulatory  concerns about facilitating money laundering because it best described  the bank behavior we wanted to examine. While we recognize that there  are narrower definitions of derisking that focus solely on the treatment of  entire countries or classes of customers, we chose to focus on banks’  perceived regulatory concerns because these concerns could influence  banks’ decisions to provide services in a variety of ways. Moreover,  including perceived regulatory concerns as a factor enabled us to  examine whether there were ways the federal regulators may be able to  improve the implementation of BSA/AML to reduce the effects of  derisking on different populations of banking customers. Furthermore, our  definition is broader and allows us to include individual decisions banks  make to terminate or limit accounts, as well as whole categories of  customer accounts. Our decision to define derisking in this manner was  based on, among other things, discussions we had with representatives  of Southwest border banks who indicated such behavior was occurring.  We added additional information on the definition of derisking we chose to  our scope and methodology section (see app. I).

OCC’s response letter also notes that because we focus exclusively on  BSA/AML regulatory issues, the report does not take into consideration  other reasons that banks terminate account relationships. We recognize  that banks may terminate accounts for a variety of reasons, some of  which are not related to BSA/AML regulatory issues. However, because  the focus of our review was to determine why banks are terminating  accounts for BSA/AML regulatory reasons, we did not seek to identify all  the potential reasons banks may terminate accounts.

Finally, OCC’s letter states that the agency has concerns regarding our  econometric analysis and the conclusions that can be drawn from it. FDIC  made similar comments in its technical comments on the draft report. In  response to these comments, we have clarified how we interpret the  effect of money laundering-related risk in our models. We agree that the  econometric results on their own do not provide definitive evidence that  regulatory burden is causing branch closures, but our econometric  models and discussions with bank representatives together suggest that  BSA/AML compliance costs and risks can play a role in the decision to  close a branch.

FDIC’s written letter states that the report does not distinguish account or  branch closures resulting from suspected money laundering or other illicit  financial transactions from closures that may have resulted from  ineffective or burdensome regulations. In response to this concern, we  revised language in the report to ensure that we do not imply that  instances in which banks limit services or terminate relationships based  on credible evidence of suspicious or illegal activity reflects derisking  behavior. As noted above, we also clarified how we interpret the effect of  money laundering-related risk on branch closures in our models and  recognize that our econometric results alone do not provide definitive  evidence that regulatory burden is causing branch closures. However, our  econometric models coupled with discussions we had with bank  representatives suggest that BSA/AML compliance costs and risks can  play a role in the decision to close a branch. FDIC’s letter also stated that  our report highlighted that 1 in 10 branch closures may be due to  “compliance challenges.” This statement is incorrect. The report states  that nearly half of the Southwest border bank representatives (4 of 10) we  spoke with mentioned that BSA/AML compliance costs could be among  the factors considered in whether or not to close a branch. Further, we  identified one bank that considered closing a branch as an option to  address considerable BSA/AML compliance challenges. In addition, most  Southwest border bank representatives we spoke with said that the  financial performance of the branch is one of the most important factors  they consider when deciding to close a branch, and as we describe in the  report, BSA/AML compliance can be resource intensive, which may affect  the financial performance of a branch.

We are sending copies of this report to the appropriate congressional  committees, the Director of Financial Crimes Enforcement Network, the  Chairman of the Federal Deposit Insurance Corporation, the Chair of the  Board of Governors of the Federal Reserve System, the Comptroller of  the Currency, the Attorney General, the Acting Director of the Bureau of  Consumer Financial Protection, and other interested parties. The report  will also be available at no charge on our website at http://www.gao.gov.

If you or your staffs have any questions about this report, please contact  me at (202) 512-8678 or evansl@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs are listed on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix VII.

Appendix I: Objectives, Scope, and Methodology

The objectives of this report were to (1) describe the types of heightened  Bank Secrecy Act/anti-money laundering (BSA/AML) compliance risks  that Southwest border banks may face and the BSA/AML compliance  challenges they may experience; (2) determine the extent to which banks  are terminating accounts and closing bank branches in the Southwest  border region and their reasons for any terminations or closures; (3)  describe what Southwest border banking customers and others told us  about any effects of account terminations and branch closures on  Southwest border communities; and (4) evaluate how the Department of  the Treasury’s (Treasury) Financial Crimes Enforcement Network  (FinCEN) and the federal banking regulators—the Board of Governors of  the Federal Reserve System (Federal Reserve), Federal Deposit  Insurance Corporation (FDIC), and Office of the Comptroller of the  Currency (OCC)—have assessed and responded to concerns about  derisking in the Southwest border region and elsewhere, and the  effectiveness of those efforts.

We defined “derisking” to mean the practice of banks limiting certain  services or ending their relationships with customers to, among other  things, avoid perceived regulatory concerns about facilitating money  laundering. We developed this definition by reviewing various existing  definitions used by international banking industry standard setters and  others, including the Financial Action Task Force (FATF)—an  intergovernmental body that, among other things, sets standards for  combating money laundering; the Bank for International Settlements; the  World Bank; and the Global Partnership for Financial Inclusion. We also  reviewed guidance and other documentation issued by the federal  banking regulators, Treasury, and FinCEN; research reports on derisking;  an industry survey; and testimonial evidence from several banks we  interviewed. The methodologies we used allowed us to gather information  on a variety of factors that may be causing banks to limit services, while  our definition of derisking allowed us to focus on the role played by the  federal regulators in implementing BSA/AML requirements.

We defined the Southwest border region as all counties that have at least  25 percent of their landmass within 50 miles of the U.S.-Mexico border.  Thirty-three counties fell within this definition. They are: Cochise, Pima,  Santa Cruz, and Yuma, Arizona; Imperial and San Diego, California;  Dona Ana, Hidalgo, and Luna, New Mexico; and Brewster, Brooks,  Cameron, Culberson, Dimmit, Edwards, El Paso, Hidalgo, Hudspeth, Jeff  Davis, Jim Hogg, Kenedy, Kinney, La Salle, Maverick, Presidio, Starr,  Terrell, Uvalde, Val Verde, Webb, Willacy, Zapata, and Zavala, Texas.  We excluded credit unions from the scope of our review based on  discussions with and information received from the National Credit Union  Administration (NCUA)—which oversees credit unions for compliance  with BSA/AML requirements—and two regional credit union groups that  cover the Southwest border states. These groups noted that neither  branch closures nor account terminations by credit unions were prevalent  in the Southwest border region.

To describe the types of heightened BSA/AML compliance risks that  Southwest border banks may face and the BSA/AML compliance  challenges they may experience, we analyzed data from FinCEN on the  volume of Suspicious Activity Reports (SAR) and Currency Transaction  Reports (CTR) filed by bank branches in Southwest border counties and  compared the volume of those filings to filings in similar geographic areas  outside the Southwest border region from 2014 through 2016. To adjust  for variances in the size of counties, which may be reflected in the  number of SAR and CTR filings by counties, we standardized the quantity  of SARs and CTRs filed by county by calculating the number of SAR and  CTR filings per billion dollars in bank branch deposits. We used data from  FDIC’s Summary of Deposits database for information on bank branch  deposits. To construct comparison groups that were comparable along  some key dimensions, we matched Southwest border counties to  counties with the same 2013 Rural-Urban Continuum Code (RUCC),  which measures how urban or rural a county is, and by population if there  was more than one potential matching county. We undertook this  process for two comparison groups, one for counties in Southwest border  states, but not directly on the U.S.-Mexico border, and one for counties  outside the Southwest border states that were designated as High  Intensity Financial Crimes Areas (HIFCA) or High Intensity Drug  Trafficking Areas (HIDTA). In addition, we analyzed data on BSA/AML  bank examination violations using nonpublic data provided by FDIC,  OCC, and the Federal Reserve from January 2009 through June 2016.  We obtained data for all Southwest border banks (if they had been cited  for a BSA/AML compliance violation during the period we reviewed), as  well as aggregated data for all banks in the United States that received a  BSA/AML compliance violation during the period we reviewed. Because  each regulator categorized violations differently, we developed a set of  categories to apply to violations across all three regulators. We analyzed  the distribution of violations by category. In addition, we analyzed data on  BSA/AML informal enforcement actions provided by the federal banking  regulators and formal BSA/AML enforcement actions taken by the federal  banking regulators and FinCEN from January 2009 through June 2016.  We also reviewed documentation from BSA/AML examinations of  selected Southwest border banks to gain additional context about  BSA/AML violations.

We also interviewed representatives from 19 Southwest border banks.  Using data from FDIC’s Summary of Deposits database, we identified all  Southwest border banks as of June 30, 2016. We then selected banks to  interview in the following ways. First, we interviewed four of the five  largest Southwest border banks (based on asset size). Second, as part of  our site visits to communities in the Southwest border region (described  below), we interviewed nine Southwest border banks that operate in or  near the communities we visited— Nogales, Arizona; San Ysidro,  California; and McAllen, Texas. We selected banks in these communities  based on the following criteria: (1) the number of branches the bank  operates in the Southwest border region, focusing on banks that operate  only a few branches in the region; (2) the size of the bank based on  assets; and (3) the bank’s primary federal regulator. We focused our  selection on banks that operate fewer branches in the region because we  interviewed four of the five largest banks in the region that operate many  branches in the region. To the extent that a bank was located in the  community and willing to speak with us, we interviewed at least one bank  that was regulated by each federal banking regulator (Federal Reserve,  FDIC, and OCC). Third, we interviewed six additional Southwest border  banks as part of the development of our bank survey (described in more  detail below) and also asked them questions related to their efforts to  comply with BSA/AML requirements. We selected these banks using the  same criteria we used for the selection of banks in our site visit  communities: the bank’s primary federal regulator, size of the bank  (based on assets), and number of branches. For the interviews, we used  a semistructured interview protocol, and responses from bank officials  were open-ended to allow for a wide variety of perspectives and  responses. Responses from these banks are not generalizable to all  Southwest border banks. In addition to the interviews with banks, we also  interviewed officials from FDIC, Federal Reserve, and OCC, as well as  BSA/AML examination specialists from each federal banking regulator to  gain their perspectives on the risks faced by banks in the Southwest  border region.

To determine the extent to which banks are terminating accounts in the  Southwest border region and the reasons for the terminations, we  administered a web-based survey to a nationally representative sample of  banks to obtain information on bank account terminations for reasons  related to BSA/AML risk. In the survey, we asked banks about limitations  and terminations of accounts related to BSA/AML risk, the types of  customer categories being limited or terminated, and the reasons for  these decisions. We administered the survey from July 2017 to  September 2017, and collected information for the 3-year time period of  January 1, 2014, to December 31, 2016. Appendix II contains information  on the survey results.

To identify the universe of banks, we used data from FDIC’s Statistics on  Depository Institutions database. Our initial population list contained  5,922 banks downloaded from FDIC’s Statistics on Depository Institutions  database as of December 31, 2016. We stratified the population into five  sampling strata and used a stratified random sample. First, banks that did  not operate in the Southwest border region (non-Southwest border banks)  were stratified into four asset sizes (small, medium, large, and extra- large). Second, to identify the universe of Southwest border banks, we  used FDIC’s Summary of Deposits database as of June 30, 2016. This is  a hybrid stratification scheme.

Our initial sample size allocation was designed to achieve a stratum-level  margin of error no greater than plus or minus 10 percentage points for an  attribute level at the 95 percent level of confidence. Based upon prior  surveys of financial institutions, we assumed a response rate of 75  percent to determine the sample size for the asset size strata. Because  there are only 17 extra-large banks in the population, we included all of  them in the sample. We also included the entire population of 115  Southwest border banks as a separate certainty stratum. We reviewed  the initial population list of banks in order to identify nontraditional banks  not eligible for this survey. We treated nontraditional banks as out-of- scope. We also reviewed the initial population list to determine whether  subsidiaries of the same holding company should be included separately  in the sample. In addition, during the administration of our survey, we  identified six banks that had been bought and acquired by another bank,  as well as one additional bank that was nontraditional and, therefore, not  eligible for this survey. We treated these sample cases as out-of-scope;  this adjusted our population of banks to 5,805 and reduced our sample  size to 406. We obtained a weighted survey response rate of 46.5  percent.

Because we followed a probability procedure based on random  selections, our sample is only one of a large number of samples that we  might have drawn. Since each sample could have provided different  estimates, we express our confidence in the precision of our particular  sample’s results as a 95 percent confidence interval (for example, plus or  minus 7 percentage points). This is the interval that would contain the  actual population value for 95 percent of the samples we could have  drawn. Confidence intervals are provided along with each sample  estimate in the report. All survey results presented in the body of this  report are generalizable to the estimated population of 5,805 in-scope  depository institutions, except where otherwise noted.

The practical difficulties of conducting any survey may introduce errors,  commonly referred to as nonsampling errors. For example, difficulties in  interpreting a particular question or sources of information available to  respondents can introduce unwanted variability into the survey results.  We took steps in developing the questionnaire, collecting the data, and  analyzing the results to minimize such nonsampling error. To inform our  methodology approach and our survey development, we conducted  interviews with representatives from seven selected Southwest border  banks. From these interviews, we gathered information on the type and  amount of data banks keep on account terminations for reasons related to  BSA/AML risk. The selection process used to identify these banks is  described above. We conducted pretests of the survey with four banks.  We selected these banks to achieve variation in geographic location  (within and outside the Southwest border region) and asset size (small,  large, extra large). The pretests of the survey were conducted to ensure  that survey questions were clear, to obtain any suggestions for  clarification, and to determine whether representatives would be able to  provide responses to questions with minimal burden. We also interviewed  the federal banking regulators; federal, state, and local law enforcement  officials; and bank industry associations, to obtain their perspectives on  banks’ experience with account terminations.

To determine the extent to which banks have closed branches in the  Southwest border region and the reasons for the closures, we analyzed  data from a variety of sources and interviewed bank officials. To assess  trends in bank branch closures, we analyzed data from FDIC’s Summary  of Deposits database on the size and location of bank branches. Our  measure of bank branches includes both full-service and limited-service  branches. Limited-service branches provide some conveniences to bank  customers but generally offer a reduced set of bank services. As of 2016,  limited-service branches were about 2.5 percent of branches in the  Southwest border region. We compared growth rates for all branches in  the Southwest border region and only full-service branches, for 2013  through 2016, and found that they were almost identical (-5.92 percent  and -5.93 percent, respectively). We combined the Summary of Deposits  data on the size and location of bank branches with demographic,  economic, and money laundering-related risk data from the U.S. Census  Bureau, U.S. Department of Commerce’s Bureau of Economic Analysis,  and FinCEN, among other sources. We then utilized the merged dataset  to conduct an econometric analysis of the potential drivers of branch  closures (see app. III for information on the econometric analysis). We  also compared trends in branch closures in the Southwest border region  to national trends, as well as trends in counties in Southwest border  states that were not in the Southwest border region, and trends in HIFCA  and HIDTA counties not in Southwest border states. We also interviewed  representatives from banks that operate in the Southwest border region  about the time and resources required to file SARs and how they  approached the decision to close a branch.

To describe what Southwest border banking customers and others told us  about any effects of account terminations and branch closures in  Southwest border communities, we conducted site visits to communities  in three of the four Southwest border states (Nogales, Arizona; San  Ysidro, California; and McAllen, Texas). We selected these communities  to achieve a sample of locations that collectively satisfied the following  criteria: (1) counties with different classifications of how rural or urban  they are based on their RUCC classification; (2) counties that  experienced different rates of branch closures from 2013 through 2016;  and (3) counties that had received different designations by the federal  banking regulators as distressed or underserved as of June 1, 2016.  Perspectives gathered from our visits to the selected cities cannot be  generalized to all locations in Southwest border counties.

During our site visits, we conducted a total of five discussion groups and  summarized participants’ responses about how they were affected by  account terminations and branch closures in their communities.  Discussion groups included a range of 2 to10 participants with varied  experiences related to access to banking services in their area, including  customers whose accounts were terminated or branch was closed.  Participants were selected using a convenience sampling method,  whereby we coordinated with local city government and chamber of  commerce officials who agreed to help us recruit participants and identify  facilities where the discussion groups were held. Local officials  disseminated discussion group invitations and gathered demographic  data on potential participants. Three of the five discussion group sessions  included business banking customers—persons representing businesses  that utilize banking services (such as banking accounts or business  loans). The other two sessions included nonbusiness retail banking  customers—persons with individual experience with banking services  (such as a personal checking or savings account) and were conducted in  Spanish. Each session was digitally recorded, translated (if necessary),  and transcribed by an outside vendor, and we used the transcripts to  summarize participant responses. An initial coder assigned a code that  best summarized the statements from discussion group participants and  provided an explanation of the types of discussion group participant  statements that should be assigned to a particular code. A separate  individual reviewed and verified the accuracy of the initial coding. The  initial coder and reviewer discussed orally and in writing any  disagreements about code assignments and documented consensus on  the final analysis results. Discussion groups are intended to generate in- depth information about the reasons for the participants’ views on specific  topics. The opinions expressed by the participants represent their points  of view and may not represent the views of all residents in the Southwest  border region.

We also interviewed various border stakeholders including economic  development specialists, industry and trade organizations that focus on  border trade and commerce, as well as chamber of commerce and  municipal officials representing border communities. We reviewed recent  articles on the effects of account terminations and branch closures on  communities as well as research organization, industry, and government  reports. Finally, we reviewed academic studies on the effects of branch  closings on communities. In particular, we focused our review on one  recent paper that estimated the impact of branch closings, using detailed  geographic and lending data, on employment growth and small business  lending, among other outcomes. We identified the census tracts of all  branch closures in our three site visit communities from 2013 through  2016 and applied impact estimates from this research to the level of small  business lending and employment in these communities, based on data  from Community Reinvestment Act reporting (small-business lending) and  the U.S. Census American Community Survey (employment).These  results are intended to illustrate an approximate magnitude of effects and  not produce precise estimates of local impacts.

To evaluate how FinCEN and the federal banking regulators have  assessed and responded to concerns about derisking and the  effectiveness of those efforts, we reviewed guidance the agencies issued  to banks related to derisking, related agency memorandums and  documents, and an OCC internal analysis on derisking. We also reviewed  guidance from FATF on AML and terrorist financing measures and  financial inclusion. In addition, we reviewed various executive orders  that require most executive branch agencies, and encourage independent  agencies, to develop a plan to conduct retrospective analyses, and Office  of Management and Budget guidance implementing those executive  orders. We reviewed Treasury documentation on BSA regulatory  reviews and the BSA-related components of the 2007 and 2017  Economic Growth and Regulatory Paperwork Reduction Act reports  issued by the Federal Financial Institutions Examination Council  (FFIEC). We also reviewed federal internal control standards related to  risk assessment. Finally, we interviewed officials from FinCEN and the  federal banking regulators about the actions they have taken related to  derisking, as well as retrospective reviews they had conducted on BSA  regulations.

We utilized multiple data sources throughout our review and took steps to  assess the reliability of each one. First, to assess the reliability of data in  FDIC’s Summary of Deposits database we discussed the appropriateness  of the database for our purposes with FDIC officials, reviewed related  documentation, and conducted electronic testing for missing data,  outliers, or any obvious errors. Second, to assess the reliability of  FinCEN’s data on SAR and CTR filings, we interviewed knowledgeable  agency officials on the appropriateness of the data for our purposes, any  limitations associated with the data, and the methods they used to gather  the data for us. We also reviewed related documentation and conducted  electronic testing to identify missing data, outliers, and any obvious  errors. Third, we assessed the reliability of the HIFCA and HIDTA county  designations by interviewing officials from FinCEN, the Office of National  Drug Control Policy, and the National HIDTA Assistance Center on  changes to county designations over time and reviewed related  documentation. Fourth, to assess the reliability of FDIC’s Statistics on  Depository Institutions database, we reviewed related documentation and  conducted electronic testing of the data for missing data, outliers, or any  obvious errors. Fifth, we interviewed officials from FDIC, the Federal  Reserve, and OCC on the data the agencies collect related to BSA/AML  bank exam violations and also asked them questions related to methods  they used to gather the data for us and any limitations associated with the  data. We also manually reviewed the data for any obvious errors and  followed up with agency officials, as needed. Finally, for data we obtained  from the U.S. Census Bureau (American Community Survey data on  population and age and the Residential Building Permits Survey), the  Bureau of Economic Analysis (Local Area Personal Income), and  Department of Agriculture (Rural-Urban Continuum Codes), we reviewed  related documentation, interviewed knowledgeable officials about the  data, when necessary, and conducted electronic testing of the data for  missing data, outliers, or any obvious errors. We concluded that all  applicable data were sufficiently reliable for the purposes of describing  BSA/AML risks and compliance challenges for Southwest border banks;  identifying banks to survey on account terminations and limitations;  evaluating branch closure trends in the Southwest border region and  elsewhere, and the factors driving those closures; and describing the  effects for Southwest border communities experiencing branch closures  and account terminations.

We conducted this performance audit from March 2016 to February 2018  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix II: Responses to Selected Questions from GAO’s Survey of Banks on Account Terminations and Limitations

From July 2017 to September 2017, we administered a web-based  survey to a nationally representative sample of banks. In the survey, we  asked banks about the number of account terminations for reasons  related to Bank Secrecy Act/anti-money laundering (BSA/AML) risk;  whether banks are terminating, limiting, or not offering accounts to certain  types of customer categories; and the factors influencing these decisions.  We collected information for the 3-year time period of January 1, 2014, to  December 31, 2016. All survey results presented in this appendix are  generalizable to the population of banks, except where otherwise noted.  We obtained a weighted survey response rate of 46.5 percent. Because  our estimates are from a generalizable sample, we express our  confidence in the precision of our particular estimates as 95 percent  confidence intervals. Responses to selected questions we asked in our  survey that were directly applicable to the research objectives in this  report are shown below. Survey results presented in this appendix are  categorized into three groups (1) all banks nationwide, (2) Southwest  border banks, and (3) non-Southwest border banks, unless otherwise  noted. Our survey was comprised of closed- and open-ended questions.  In this appendix, we do not provide information on responses provided to  the open-ended questions. For a more detailed discussion of our survey  methodology, see appendix I.

Questions 15 through 23 applied only to banks in our sample that  had branches domiciled both inside and outside of the Southwest  border region in order to obtain information on their accounts  domiciled in the Southwest border region.

All the percentage estimates for this question are not statistically reliable.

Between January 1, 2014 and December 31, 2016, did the bank  terminate any cash-intensive small business checking, savings, or  money market accounts domiciled in the bank’s Southwest border  branches for reasons related to BSA/AML risk? (Check one.)  (Question 21)

Appendix III: Econometric Analysis of Bank Branch Closures

This technical appendix outlines the development, estimation, results, and  limitations of the econometric model we described in the report. We  undertook this analysis to better understand factors that may have  influenced banks to close branches in recent years.

We developed a number of econometric models that included  demographic, economic, and risk factors that might have influenced  branch closures nationally since 2010. We developed these models  based on a small number of relevant studies, our discussions with banks  and regulators, and our own prior empirical work on banking. Our models  are based on all counties with bank branches in the United States and are  designed to predict whether a county will lose a branch the following year  based on the characteristics of the county. Because we are modeling a  binary outcome (whether or not a county lost a branch) we use a specific  functional form for our regression models known as a logistic regression  (logit).

The demographic factors included in our models are rural-urban  continuum codes, age profile (proportion of the population of the county  over 45), and the level of per capita income. We chose these  demographic factors, in particular, because they tend to be associated  with the adoption of mobile banking, which may explain the propensity to  close branches in a community. The economic factors included in our  models—intended to reflect temporary or cyclical economic changes  affecting the county—are the growth of per capita income, growth in  building permits (a measure of residential housing conditions), and growth  of the population. The money laundering-related risk factors are whether  a county has been designated a High Intensity Financial Crime Area  (HIFCA) or a High Intensity Drug Trafficking Area (HIDTA), and the level  of suspicious or possible money laundering-related activity reported by  bank branches in the county (known as Suspicious Activity Report (SAR)  filings). HIDTA and HIFCA designations in our model could proxy for a  number of features of a county, including but not limited to the intensity of  criminal activity related to drug trafficking or financial crimes. Bank  officials we spoke with generally said that SAR filings were a time and  resource-intensive process, and that the number of SARs filings—to  some extent—reflected the level of effort, and overall BSA compliance  risk, faced by the bank. That said, the impact of SAR variables in our  models could reflect a combination of (1) the extent of BSA/AML  compliance effort and risk faced by the bank, as described by bank  officials, and (2) the underlying level of suspicious or money laundering- related activity in a county.

We constructed variables from the following data sources to estimate our  models:

Net branch closures and the size of deposits in each county, from  Federal Deposit Insurance Corporation’s (FDIC) Summary of  Deposits;

Rural-urban continuum codes, from the U.S. Department of

Population growth and age profile in each county, from the Census  Bureau’s American Community Survey;

Per capita income, from Bureau of Economic Analysis Local Area

Building permits by county, from the Census Bureau;

HIFCA and HIDTA county designations from the Financial Crimes  Enforcement Network (FinCEN) and the Office of National Drug  Control Policy, respectively; and

SAR filings by depository institution branches, from FinCEN  We estimated a large number of econometric models to ensure that our  results were generally not sensitive to small changes in our model, in  other words, to determine if our results were “robust.” Our results, as  described in the body of the report, were highly consistent across models  and were generally both statistically and economically significant—that is,  results of this size are unlikely to occur at random if there were no  underlying relationship (p-values of interest are almost always less than  0.001), and the estimated impacts on the probability of branch closures  are substantively relevant.

For our baseline model, we estimated branch closures (dependent  variable: 1/0 for whether or not a county lost one or more branches, on  net, that year) as a function of the 1 year lagged share of the population  over 45 in the county, a rural-urban continuum code, level of per capita  income, population growth, growth in the value of building permits, growth  in per capita income, whether or not the county is a HIDTA, and the level  of suspicious activity report filings per billion dollars of deposits held in the  county, including time and state fixed effects. Economic variables were  adjusted for inflation (converted to constant 2015 dollars) using  appropriate price indices. We generally estimated models with cluster  robust standard errors, clustering at the county. See the logistic  regression equation for our baseline model below, where the c subscript  represents the county and the t subscript represents the year.

Where f is the cumulative logistic function: 𝑓𝑓(𝑧𝑧)= 𝑦𝑦𝑧𝑧1+𝑦𝑦𝑧𝑧  Full year SAR filings are only available for 2014–2016 which is generally  the limiting factor on the time dimension of our panel. Because FinCEN  changed reporting requirements as of April 2013, we were able to obtain  an additional year of data by calculating SAR filings for 4 truncated years,  which is April–December 2013, April–December 2014, April–December  2015, and April–December 2016. As we discussed earlier in the report,  this variable is an important geographic measure of money laundering- related risk, based on a bank-reported measure of the extent of  suspicious or money-laundering related activity associated with branches  located in a particular county. After confirming that results were similar for  full year and truncated year SARs, we continued estimation with  truncated year SARs to benefit from the additional year of data. We report  estimates from the version of our baseline model that includes truncated  year SARs. Marginal effects for select coefficients (and associated p- values) are reported in table 20 below along time period, sample size,  and goodness-of-fit (pseudo r-squared).

Generally speaking, across our baseline specifications and robustness  tests, counties were more likely to lose branches, all else equal, if they  were (1) urban, high income, and had a younger population (proportion  under 45), or (2) designated HIFCA, HIDTA, or had higher SAR filings.  Economic variables were generally not statistically significant.

Below is a list of robustness tests—changing how or which variables  influenced branch closures in the model, over what time period—we  performed. Unless specifically noted the results described above were  very similar in the models listed below (i.e., robust):

As an alternative to total SARs as an indicator of money laundering- related risk, we estimated a model with only those SARs that were  classified as money laundering or structuring. Total SARs include  suspicious activity that may be unrelated to money laundering or  structuring, including, for example, check fraud.

As an alternative to HIDTAs as a county risk designation we  estimated a model with HIFCA county designations. The impact of  HIFCAs in the model was smaller magnitude and less statistically  significant.

We estimated a model interacting HIDTAs with SARs (the interaction  suggests SARs have a larger impact on non-HIDTA counties).

We estimated models restricted to only rural counties or only urban  counties. SARs and HIDTAs have larger effects in urban counties and  the impact of the age profile and per capita income are not statistically  significant in the model with only rural counties.

We estimated models with MSA fixed effects or state-year fixed  effects, in addition to state and year fixed effects.

We estimated models that assumed that economic conditions from  the previous 2 years were relevant or only economic conditions from 2  years prior. Our baseline model assumed only the prior year’s  economic conditions influenced branch closures.

We estimated a panel logit with random effects.

We estimated a panel logit with county fixed effects. None of the  results discussed above are statistically significant when county fixed  effects are introduced. This suggests that the model is identified  primarily based on cross-sectional (differences between counties that  persist over time) rather than time series variation in the relevant  variables. The role of county fixed effects here may also indicate the  presence of unobserved, county characteristics that are omitted from  our models, although it is generally not possible to simultaneously  estimate the role of highly persistent factors that influence branch  closures while including fixed effects.

We estimated models where we omitted small percentage changes in  branches from our indicator dependent variable—for example, we  estimated models with indicators equal to one only if branch losses  were above 3 percent or 5 percent (omitting smaller branch losses  from the dependent variable altogether). Generally speaking,  demographic factors have less explanatory power for larger loss  levels although SARs remains statistically significant and at practically  meaningful magnitudes. This suggests that higher SARs are relatively  better at explaining larger branch losses while demographic factors  are better at explaining smaller branch losses.

Despite the robustness of our results and our efforts to control for relevant  factors, our results are subject to a number of standard caveats. The  variables we use come from a number of datasets, and some of them  have sampling error, relied on imputation, or are better thought of as  proxy variables that measure underlying factors of interest with some  degree error. As such, our statistical measures, including standard errors,  p-values, and goodness of fit measures such as pseudo r-squared,  should be viewed as approximations. Some of the effects we measure  based on these variables may reflect associational rather than causal  relationships. Also, our regression models may be subject to omitted  variable bias or specification bias—for example, it is unlikely that we have  been able to quantify and include all relevant factors in bank branching  decisions, and even where we have measured important drivers with  sufficient precision the functional form assumptions embedded in our  choice of regression model (e.g., logistic regression) are unlikely to be  precisely correct. Should omitted variables be correlated with variables  that we include, the associated coefficient may be biased. We interpret  our results, including our statistical measures and coefficients values, with  appropriate caution.

Appendix IV: Comments from the Board of Governors of the Federal Reserve System

Appendix V: Comments from the Federal Deposit Insurance Corporation

Appendix VI: Comments from the Office of the Comptroller of the Currency

Appendix VII: GAO Contact and Staff Acknowledgments

In addition to the individual named above, Stefanie Jonkman (Assistant  Director), Christine Houle (Analyst in Charge), Carl Barden, Timothy  Bober, Rebecca Gambler, Toni Gillich, Michael Hansen, Michael  Hoffman, Jill Lacey, Patricia Moye, Erica Miles, Marc Molino, Steve  Robblee, Tovah Rom, Jerry Sandau, Mona Sehgal, Tyler Spunaugle, and  Verginie Tarpinian made key contributions to this report.