1 Regulatory Lapses in Monitoring Anti-Money Laundering Performance by Financial Institutions*

I discuss the key new regulations that impose anti-money laundering obligations on U.S. financial institutions. These obligations have been superimposed on the performance of normal banking activities. Society has determined that national security requires banks to play a part in responding to this need, much as airlines have been given the responsibility to participate in the screening of passengers and their belongings before permitting them to board. It is useful also to consider the inordinate foreign demand for U.S. banknotes as a source of large cash deposits in U.S. banks that constitute one of the roots of the money laundering problem. In this context I shall refer to the Federal Reserve’s Extended Custodial Inventory Program although it involves only financial institutions that have accepted a contractual agreement to participate in this program, not the entire class of financial service institutions. Compliance with money laundering regulation has been spotty because regulators have been lax in enforcing the rules to insure financial institution safety and soundness. One general observation about bank safety and soundness regulation, whether or not the overall results were favorable, is that regulators did not publicize the name of an individual institution whose performance fell short of regulatory standards. Market participants might have had suspicion