The Federal Reserve has once again taken action against a Kansas community bank, this time for deficient money laundering controls. In a significant move, the Fed issued a cease and desist order against Lenexa-based Small Business Bank just 14 months after a previous enforcement. This latest action highlights the importance of strict compliance with the Bank Secrecy Act and anti-money laundering regulations.

Unveiling the Fed's Actions Against Small Business Bank's AML Compliance

First Encounter and Initial Flagging

Small Business Bank has been under the Fed's scrutiny since October 31, 2022. Examiners first flagged the $100 million asset institution for BSA/AML compliance issues. This marked the beginning of a series of concerns that would lead to more serious actions by the central bank. The initial issues raised were a cause for alarm and set the stage for subsequent enforcement measures.

These early signs of non-compliance indicated a need for immediate attention. The Fed's monitoring of the bank's activities revealed patterns and practices that raised doubts about its ability to effectively combat money laundering. The institution was clearly not meeting the required standards, and this led to a closer examination and ultimately, more severe consequences.

Escalation and the Latest Enforcement Action

Last September, the central bank issued a cease-and-desist order against Small Business Bank, citing a range of shortcomings. This was a significant escalation in the situation, demonstrating the Fed's determination to address the bank's compliance issues. In its latest public enforcement action, the focus was squarely on money laundering issues.

The order did not identify specific violations at the bank, but it did note that state and federal supervisors had documented the issues during their most recent inspection in May. This lack of specificity only added to the concern, as it left the bank with the task of addressing a wide range of potential problems without a clear roadmap. The Fed's actions sent a clear message that compliance with AML regulations is non-negotiable.

Requirements and Obligations

The order calls for Small Business Bank to address its BSA/AML compliance, customer identification, customer due diligence, suspicious activity monitoring and reporting, and various transaction oversight programs. The bank has 60 days to put together plans for addressing these various issues raised by the Fed.

This is a tall order for the bank, as it requires a comprehensive review and overhaul of its compliance processes. The bank must ensure that it has robust systems in place to identify and report suspicious activities, as well as to properly identify and verify customers. Failure to do so could result in further enforcement actions and significant reputational damage.

Consent Agreement and Restrictions

Because the bank entered a consent agreement with the Fed and its state supervisor, the Office of the State Bank Commissioner of Kansas, it waived its ability to challenge their findings or the obligations related to the order. As a result, Small Business Bank and its holding company, Gardner Bancshares, Inc., are prohibited from declaring or issuing dividends without first getting written consent from their regulators.

This restriction on dividends is a significant blow to the bank and its shareholders. It highlights the serious nature of the Fed's concerns and the need for the bank to address its compliance issues before it can resume normal business operations. The consent agreement also serves as a reminder of the consequences of non-compliance in the financial industry.

Initial Enforcement Action's Other Concerns

The original enforcement action also cited the bank for failing to sufficiently manage risks related to credit, interest rates, and third-party arrangements. It also raised concerns about lending and credit administration, funding and liquidity, earnings, and overall operations.

This shows that the bank's problems were not limited to money laundering but extended to other critical areas of its business. The Fed's comprehensive assessment of the bank's operations revealed a need for significant improvements across the board. The bank will need to address these issues in order to restore confidence and ensure its long-term viability.

Specialization and Services Offered

Small Business Bank specializes in serving small and “micro” businesses, as well as offering checking and high-yield savings accounts and business debit cards. This focus on serving the local business community is an important part of the bank's identity, but it also comes with additional responsibilities.

The bank must ensure that its services are not being used to facilitate illegal activities, such as money laundering. By specializing in this area, the bank has a unique opportunity to build strong relationships with its customers and contribute to the local economy. However, it must also be vigilant in protecting the integrity of its operations and complying with all relevant regulations.