WASHINGTON — After the departure of Financial Crimes Enforcement Network's director last month, the future of the Treasury Department unit remains the subject of fierce speculation within the financial services industry.
Jennifer Shasky Calvery was a prosecutor in the Justice Department before taking the Fincen job, and set a new path for the agency in many respects, with a focus more on its law enforcement capacity. It's unclear if the next director will follow that course.
"Treasury will be sending a signal as to how seriously they take anti-money-laundering efforts, depending on who they name," said Ross Delston, an AML expert based in Washington. "Is it viewed as the reward for good service to a longtime stalwart, or is it an agency that needs to be revitalized and re-energized with the appointment of somebody who's already a subject-matter expert?"
Following are some of the big issues facing Calvery's successor.
Calvery has been hailed for modernizing Fincen's data processing unit.
"The quality of their analytical work [for law enforcement agencies] has improved," said Dennis Lormel, a former head of the FBI's financial crimes unit.
But some said the agency still has further to go, including instigating a much higher amount of investigations based on the information it sees. The agency received close to 1.9 million suspicious activity reports in 2015, compared to about 1.6 million in 2012 — the year Calvery joined the agency.
"While it's a repository of information [notably from SARs], it should also be a way of generating actionable intelligence" for law enforcement, said Richard Gordon, a Case Western law professor and AML expert. "We can get evidence of people committing crimes if we don't just break down doors or if we don't pay snitches, but if we look at the bank records."
One of the perennial issues facing Fincen is the criticism that SARs produced by banks and other financial institutions are not used by law enforcement officials or anyone else.
"There's always the perception that SARs go into a black hole and you never hear about them again, but that's not the case," Lormel said.
But SARs that result in a successful investigation often take years to bear fruit, he added. To improve morale and help compliance departments become more effective, the agency should "share more information back to financial institutions more consistently about the quality of the suspicious activity reports that are filed," Lormel said.
By the same token, some experts recommend that Fincen encourage more information-sharing among financial institutions on money laundering or terrorist financing. Fincen has the authority to authorize such cooperation under Section 314 (b) of the USA Patriot Act.
"I think an enhanced ability for 314(b) information sharing would be very helpful to the industry and law enforcement going forward," said David Chenkin, an AML expert and managing partner at Zeichner Ellman & Krause.
Beneficial Ownership: Part II
One sizable accomplishment during Calvery's tenure was the May final rule requiring banks to identify beneficial ownership of companies that own accounts.
Though the rule took four years to finalize, many argue that it is riddled with loopholes, including a grandfathering clause, low identification standards and exemptions for certain industries.
It will likely have to be ironed out for specific cases, including for homeowners' associations, which can combine the accounts of thousands of beneficiaries, said Jim Dowling, a former special agent in the Internal Revenue Service's criminal investigation division. Efforts to clarify the rule "may occupy a little more bandwidth of Fincen than they anticipated," he said.
Fincen as Enforcer
By repurposing certain Fincen tools, Calvery cemented the agency's role as an enforcer, according to Duncan Levin, a former federal prosecutor.
He pointed to the use of geographical targeting orders aimed at luxury real estate in specific Florida and New York areas.
"They've been using old regulations in novel ways," said Levin, who was also a white-collar-crime official at the Manhattan District Attorney's Office. "Fincen has become not just a regulatory agency, but an enforcement authority. It's as muscular an agency as it's ever been."
But that role is a controversial one for the agency, with some accusing it of overreaching. "Fincen has gotten slightly off the tracks over the past several years," said Peter Djinis, a former Fincen official. In the beginning, he said, the agency served as "a balancing act" between law enforcement and the financial services industry and its consumers.
"The balance has tipped, at this point, away from the consumer and away from the financial services industry, towards an ever-expanding set of new regulatory requirements and new regulatory burdens," Djinis said.
Culture of Compliance
In August 2014, Fincen published an advisory that encouraged "promoting a culture of compliance," with institutions directed to improve their AML programs by better educating leadership, ensuring compliance departments were sufficiently funded and encouraging communication on the issue.
But it has also sent conflicting messages about how much a compliance officer is responsible for the actions of the firm for which they work. In December 2014, Fincen fined Thomas Haider, a former compliance officer for MoneyGram, $1 million, a move that sent shock waves through the compliance industry.
"Is the compliance officer's only resource to resign rather than face crippling civil or criminal sanctions?" Djinis said. "That can't be good policy."
At the same time, Fincen also issued an enforcement action in May in which it lauded a compliance officer's efforts to keep her company — a Nevada casino called Sparks Nugget — beyond reproach.
"Fincen determined that the casino lacked a culture of compliance but, importantly, it also determined that the [Bank Secrecy Act] officer was routinely disregarded by her superiors and not individually responsible," Chenkin said.
Still, observers said that compliance officers are likely to remain on the hook for how they perform their job.
"In any given matter, it is likely that [Fincen] will continue to assess potential individual personal liability for compliance officers and others," Chenkin said.
Fincen must also wrestle with the anti-money-laundering requirements of fintech firms and banks that do business with them, including digital currency, the blockchain and other innovations.
"Fincen needs to be able to get smart about [digital currency] very quickly to analyze what the threats are to our financial system," Dowling said. "They're going to need to spend more efforts in that area of having a technology section that brings in the brainiacs."
A Fincen spokesman said the agency was the first to "address virtual currency" — it issued guidance on its application to the Bank Secrecy Act in March 2013. He added that Fincen has staff with "virtual currency expertise across our policy, enforcement, liaison, IT, intelligence, and legal divisions."
Fincen also continues to struggle with how to treat banks that do business with marijuana companies in states where it is legal. The agency issued guidance in February 2014 allowing banks to take on marijuana firms, but directed them to take several precautionary measures.
Still, companies and banks are still unsure "how that fits in with the rest of the federal government's enforcement infrastructure," Levin said.
The agency should take additional steps to clarify how banks can take on the burgeoning industry, he said. "Fincen is in a position to help pull together different parts of the federal government to solve this issue."
Because of Fincen's evolving mandate — which includes financial institutions, but also casinos, precious metal dealers and close to 27,000 money services businesses — the next director will also have to focus the agency's attention on the riskiest products and industries.
"It's going to be very difficult to have a regime where everything is high risk," Djinis said. The Fincen director, he said, should "work more closely with law enforcement and the financial services community to see what it is that is truly needed and are there better ways to skin a cat."
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Corrected June 29, 2016 at 11:17AM: An earlier version gave the wrong number of suspicious activity reports for 2012.