Just like the average taxpayer, banks have to report their finances or they may face steep penalties for failing to alert the government or investors of potentially fraudulent activity. There are actual several layers beyond the Bank Secrecy Act, although this important piece of legislation is one of the most frequently evoked in common political parlances.
Why Banks Report
Banks have to report their financial activity for a few reasons. Capital reserve requirements are one big one, so reporting finances helps assess the amount of capital a bank must keep to protect from a serious market crash. The state of a bank’s finances can also affect the institution’s credit rating, which affects every action the bank takes. The statement is also a representation of management. Management is supposed to run a bank properly, so financial statements should be able to adequately account for all of the bank’s financial transactions.
In 2002, in response to the Enron and Worldcom scandals, Congress passed the Sarbanes-Oxley Act. It created a list of responsibilities a corporation’s board had to be accountable for. It also outlines criminal penalties for anyone caught breaking those regulations.
The Bank Secrecy Act
During the 1970s, money laundering became a serious problem that needed to be formally addressed. Congress decided to help “safeguard the financial system” by establishing some requirements for record keeping. Banks had to keep track of certain transactions that would lead to analyzing the movement of money, as well as the volume and type of currency. This would prove instrumental in finding and catching money launderers, although the challenge of routinely catching illegally circulated money still persists.
About the Author: Phineas Upham is an investor at a family office/ hedgefund, where he focuses on special situation illiquid investing. Before this position, Phin Upham was working at Morgan Stanley in the Media and Telecom group. You may contact Phin on his Phineas Upham website or LinkedIn page.