How banks want to reshape anti-money-laundering regime

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WASHINGTON — While markets and stakeholders wait to see what comes of the new administration’s plans to scale back the Dodd-Frank Act, banks are pushing regulators to revisit the long-established procedures around anti-money-laundering.

In a position paper published Thursday by The Clearing House Association, which represents the largest banks, banking representatives called on lawmakers and regulators to rethink how banks combat money laundering and counter the finance of terrorism — known as AML/CFT compliance.

Greg Baer, president and CEO of The Clearing House, said banks are eager not necessarily to reduce their compliance costs but to deploy their resources toward actually preventing financial crimes and catching bad actors.

Banks "don’t tend to complain about how much money they’re spending; they complain about how much money they’re wasting,” Baer said. “They genuinely don’t believe that the compliance regimes that they’ve been forced to construct are actually … catching more bad guys.”

The report was developed quietly over the course of almost a year with a diverse group of stakeholders, including banking attorneys, AML experts and former officials who have served in Democratic and Republican administrations. Baer said the development work was not made public in order to ensure that the final recommendations fairly represented a broad consensus of stakeholders.

“We’ve worked very quietly and very hard to assemble a unique coalition to support reform like this,” Baer said. “We think we’ve really assembled a remarkable, unprecedented coalition for reform.”

The main issues the paper aims to address are inefficiencies and excessive burdens posed by the existing AML regime, which is statutorily based on a half-dozen laws, primarily the 1970 Bank Secrecy Act and the 1978 Foreign intelligence Surveillance Act. The most significant recent overhaul of the AML/CFT regime was in 2001, when the post-9/11 Patriot Act created the Treasury's Office of Terrorism and Financial Intelligence and set out a handful of additional reporting requirements for banks.

Banks are required under those laws to report any and all suspicious activities or activities potentially related to terrorism via suspicious activity reports that are sent to law enforcement authorities. Other measures include “know your customer” rules that require various levels of positive identification for individuals to open accounts or undertake other financial transactions.

Those requirements are enforced by bank supervisors at the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency, as well as at the Treasury’s Financial Crimes Enforcement Network, or Fincen.

The report recommends, among other things, consolidating AML/CFT examination authority within Fincen; expanding safe harbor provisions in the Patriot Act and elsewhere to spur innovation; and establishing a process for setting priorities to respond to trends and threats.

The paper also says that authorities should “de-prioritize the investigation and reporting of activity of low law enforcement and national security consequence” and calls on lawmakers to adjust some legal constraints to better facilitate information sharing between financial institutions.

AML/CFT compliance is a major source of compliance costs — one estimate suggests that the aggregate costs for large, complex institutions could top $8 billion in 2017. But the expansion of AML rules and laws over the last forty years has also made it far more challenging for criminal enterprises to conduct their business out in the open — a benefit that is, at best, difficult to quantify.

Baer said that “the great majority” of the recommendations could be achieved by the regulatory agencies without legislation, but that he expects The Clearing House and other developers of the recommendations to begin pushing the changes in the coming weeks. Representatives of the Treasury, Federal Reserve, OCC and FDIC declined to comment.

“We don’t think there’s any reason to wait for legislation,” Baer said. “We’ve had some engagement with the regulators and expect to do considerably more now that the report is complete.”

The recommendations come during the same month that President Trump issued an executive order instructing the Treasury to oversee a sweeping overhaul among financial regulators to identify areas where rules can be streamlined or simplified. Fed Chair Janet Yellen said on Tuesday during testimony that she supported the goals of that executive order.

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AML Compliance