Treasury Secretary Henry Paulson's recent missive that community banks should face a lighter anti-laundering compliance burden than their larger brethren is a welcome respite for small banks, but they'll be left hanging until new rules are set next year.

"This is good news on both fronts," notes Eva Weber, an analyst at Aite Group. "Small banks have struggled to find adequate human and technology resources to address compliance issues, and the evolution of the [Bank Secrecy Act] to address money laundering has only made that struggle worse. Treasury Secretary Paulson's reference to a common-sense approach is exactly what the industry has been asking for. The only down side to this announcement is that we may not see changes for another year. In effect, small banks and [money-services businesses] are going to have to scrape by for a while yet, or roll the dice on suffering damage to their reputation."

Fred Curry, a principal in Deloitte Financial Advisory Services's Forensic and Dispute Services Anti-Money Laundering group and a former Federal Reserve Bank of New York examiner, agrees that Paulson's words are a good start. "The area of bank supervision with money laundering is so broad at this point that anything that narrows it is helpful. ...This is an evolution and refinement of the bank-supervision strategy."

Specifically, the four-point advisory to Financial Crimes Enforcement Network calls for BSA examinations to be more risk-based, particularly for small banks; narrowing the definition of the estimated 200,000 MSBs to pinpoint those more at risk for money laundering; making regulations more "intuitive;" and soliciting wide feedback from industry players. Specifically, FinCEN will provide written feedback to the industry within 18 months of any regulatory change to an existing rule, according to the directive.

Feedback appears to be a key issue of the mission of new FinCEN director James H. Freis Jr., who was named on March 5. "One of the things he did was start having a dialogue with the industry, including large banks and community banks," says Curry. "He committed to using this forum to supervise banks differently."

Though BSA rules have been around since 1972, only since anti-money-laundering compliance rules were written in 2005 have banks large and small been hollering in protest about how to stay out of trouble. Small banks, in particular, complain of being overwhelmed with compliance requirements and filing currency transaction and suspicious activity reports, the vast majority of which are never reviewed by lawenforcement officials.

Banks fearful of running afoul of the law have been going crazy with paperwork. In fiscal 2006, more than one million suspicious activity reports were filed with FinCEN, up nearly 20 percent from fiscal 2005, Meanwhile, an increasing number of banks have been caught in FinCEN's web, earning civil penalties for failure to implement adequate AML programs. Among them were ABN Amro Bank, Liberty Bank of New York, Metropolitan Bank & Trust Co, BankAtlantic of Fort Lauderdale, Banco de Chile of New York and Oppenheimer & Co. In 2006, FinCEN processed 241 cases involving banks with significant BSA violations or deficiencies.

"Banks have really been complaining about this for awhile," agrees Weber. "Paulson wanted them to know that somebody is listening."

David Caruso , CEO of Dominion Advisory Group , a Washington, D.C.-area AML consultancy, says Paulson's directive raises more questions than it answers. "If he's trying to bring regulatory relief to the industry, I'm not sure these measures are going to do much," he says. And since regulators' exams at banks are already risk-based, he says it's unclear how regulators would alter their examinations of small banks.

Until the new rules are published, banks are being urged to continue with business as usual. "I would caution smaller banks, if supervision becomes more risk-focused, that they remain vigilant," says Curry. "The critical factor where institutions get in trouble is in their failure to commit adequate resources to compliance. The challenge for community banks is to find the right balance."

David Caruso isn't convinced AML controls are such a big regulatory burden for small banks, especially compared to those of Sarbanes-Oxley. "The industry wants a reduction of regulations, but the needs of law enforcement and the political realities of needing to be seen as aggressively fighting crime and terrorism are such that this is probably not one of the areas of regulation that can be [modified] too much," he says. "Sox has had a greater impact on banks' competitiveness than the Patriot Act."

Maybe so, but a new KPMG survey of 224 banks from 55 countries found that the average AML cost to banks globally has spiked 60 percent since 2004. This is not a cheap battle.