The change in leadership at the Financial Crimes Enforcement Network presents an opportunity to consider afresh the agency's role in the constellation of regulators that enforce U.S. anti-money-laundering laws.
Jennifer Shasky Calvery is succeeding James H. Freis Jr. as director this month. Freis is leaving Fincen after five and a half years, reportedly because of a difference of opinion with the Treasury Department over its relationship with Fincen – specifically, Fincen's independence.
As a purely legal matter, this relationship should be clear. Fincen is not legally independent of Treasury, but a subordinate arm.
Fincen began as a fully subordinate office of Treasury. Nicholas Brady created Fincen in 1990 by secretarial order, relying on his general authority as Treasury Secretary, not a specific mandate from Congress.
Later, after 9/11, Congress afforded Fincen the status of a bureau of Treasury, but not an independent one. Fincen's director is appointed by the secretary of the Treasury and is not subject to Senate confirmation. Fincen's chief counsel reports to the general counsel of Treasury, not the Fincen director. And Fincen has no specific statutory mandate of independence – nor is there a specific statutory prohibition on the secretary of the Treasury becoming directly involved in Fincen enforcement actions (although secretaries and other Treasury appointees wisely avoid them). This is in contrast to other independent regulatory agencies, such as the Office of the Comptroller of the Currency, which is an independent bureau, led by a Senate-confirmed comptroller, with an explicit statutory mandate of independence.
As a practical matter, however, there are good reasons for Fincen to operate with a measure of independence from the political appointees at the Treasury.
These reasons stem most directly from Fincen's increased role as a regulatory agency and as a source of information for a network of law enforcement agencies.
Since 9/11, Freis and his predecessors – aided by capable lieutenants – have transformed Fincen from its original role as a conduit of information to law enforcement into a regulatory agency that both issues regulations for certain types of financial institutions without a primary federal financial regulator (such as nonbank mortgage loan origination firms) and coordinates the promulgation of rules that apply to financial institutions with primary federal financial regulators. Rulemaking is better when it is informed by the real-world experience of supervising examiners. It is therefore important that Fincen maintain the trust of the independent regulatory agencies, and a degree of independence from the political process is important to maintaining that trust.
In addition to its role as a regulatory agency, Fincen also serves as a source of information for law enforcement agencies. This was Fincen's historic role, predating 9/11 and where the "Enforcement Network" in its name comes from. Most would agree that it is important to keep this role independent from the political process as well.
At the same time, Fincen is part of Treasury and important to fulfilling Treasury's mandate to deter, detect and prevent financial crime. After most of Treasury's enforcement agencies were moved to the Department of Homeland Security, Treasury's restructured enforcement function – the Office of Terrorism and Financial Intelligence – has had limited resources to pursue this challenging mandate. It has thus far made up for a lack in resources through extremely able leadership, especially of Under Secretaries Stuart A. Levey and, now, David Cohen.
But Treasury needs Fincen's help to succeed. Treasury, with help from Fincen and other agencies, has gained extensive knowledge of terrorist finance networks and the financial dealings of rogue states. As Treasury increasingly focuses on additional threats, such as those posed by Mexican drug cartels and other transnational narcotics organizations, Fincen's capabilities will be important to Treasury's ability to advance key policy goals. Treasury must be able to direct Fincen in support of such goals.
Further, the U.S. regulatory apparatus is already complicated, as demonstrated by recent enforcement actions in which as many as five or more U.S. and international regulatory and enforcement agencies work on AML and sanctions matters. Another independent actor would make it even more complicated.
In the end, Fincen's new leader will have to balance these considerations. Fincen must be independent enough to be an honest broker in its rulemaking and enforcement network roles, while still being responsive to the policy objectives of Treasury and statutory mandates from Congress.
At the Department of Justice, Shasky Calvery demonstrated a capacity for effectively leading an arm of the government to address tough national and international threats to the financial system in coordination with a host of law enforcement agencies and financial regulators – both in the U.S. and abroad. Her experience and ability bodes well for Fincen as it continues to define its role.
Michael Dawson is a managing director at Promontory Financial Group and coordinator of its global compliance practice, which advises banks on anti-money laundering, sanctions and mortgage foreclosure issues. He served in the George W. Bush administration as a deputy assistant secretary of the Treasury.