Since the late 1990s Congress, along with the law enforcement community and financial regulators, has taken an on-again off-again interest in the prevention, detection and reporting of money laundering when the funds being laundered are the proceeds of foreign political corruption.
Reports describing the magnitude of the problem and efforts to repatriate these stolen assets have been published by the Senate Permanent Subcommittee on Investigations, the World Bank and the Organization of Economic Cooperation and Development's Financial Action Task Force. Case studies involving rulers such as Omar Bongo of Gabon, Augusto Pinochet of Chile, Ferdinand Marcos of the Philippines, Sani Abacha of Nigeria, Mobutu Sese Seko of Zaire, the Duvaliers of Haiti and Teodoro Obiang of Equatorial Guinea illustrate how financial institutions in the U.S. and abroad were used by these individuals and others acting on their behalf to convey and protect their significant wealth.
To combat this problem the Treasury Department issued regulations under the USA Patriot Act of 2001 which formalized certain existing practices aimed at requiring banks to perform "enhanced due diligence" for private banking accounts of so-called PEPs (politically exposed persons), and which required "enhanced scrutiny" of transactions occurring in these accounts. Regulatory agencies such as the OCC, the FDIC and the Federal Reserve then incorporated formal procedures into their examination protocols, designed to test whether banks had adequate controls to keep the proceeds of foreign political corruption out of their institutions and to report any instances where suspect accounts were detected.
It appears there has been considerable progress in this area, but recent calls by quasi- and nongovernmental organizations for enhanced controls and improved safeguards have been taken up by Congress, which convened hearings on the issue last spring. Next month Congress plans to reconvene those hearings to explore how the financial community can be more effective in identifying, and enabling enforcement action against, accounts containing the proceeds of foreign political corruption.
Here are four areas the government should explore to ensure success.
First, amend the form that financial institutions use to report accounts with tainted assets.
Under current law, covered financial institutions are required to file suspicious activity reports with the Treasury's Financial Crimes Enforcement Network to report suspected crimes and other suspicious activities.
SARs are filed for approximately 200 predicate crimes, such as money laundering, check kiting, mortgage fraud, identity theft, wire fraud, drug trafficking and terrorist financing. Fincen closely tracks the statistics relating to SARs and their underlying trends and shares relevant information with law enforcement on a regular basis. Surprisingly, however, Fincen is not able to track SARs reporting suspicious PEP accounts, because there is nowhere on the form where the reporting institution can indicate that the report relates to foreign political corruption.
This gap can be remedied by adding a box to the form so that this category of crime can be tracked and prosecuted more effectively by law enforcement. (Since most SAR filings are electronic, amending the form is relatively easy.) The existing Fincen guidance prescribing that the SAR narrative should contain language noting that the SAR relates to a PEP account is not sufficient by itself to allow for rigorous tracking and enforcement.
Second, the Treasury should issue guidance or regulations prescribing an automatic, short-term "freeze" of an account that is the subject of a SAR filed for foreign political corruption.
In several countries with developed regulatory environments, the law provides for an automatic, short-term freeze of accounts on which a report has been filed for money laundering or certain other serious crimes. This short-term freeze provides law enforcement with an opportunity to pursue the case before the assets can be transferred out, usually to a third party in a secrecy jurisdiction, making it much more difficult if not impossible later to "follow the money." The U.K. and Switzerland are two countries with such requirements, and while they may not be the exact models for the U.S. markets, they provide compelling evidence that such a mechanism can work effectively. Fincen, which has already issued guidance for the financial services industry relating to keeping accounts open at the written request of law enforcement, should explore the various options for a short-term freeze when potentially tainted assets of a senior foreign official are involved.
Along these lines, Fincen already has a Financial Institutions Hotline for banks and others to report, in real time, ongoing criminality so that law enforcement can respond quickly. In consultation with the industry, and taking into account relevant privacy concerns, the Treasury should explore the viability of an automatic, short-term freeze of specified PEP accounts that are the subject of SARs filed for potential money laundering relating to foreign government corruption.
Third, the Treasury should designate a section to keep track of SARs filed for foreign political corruption and related issues.
As surprising as it sounds, there is no single dedicated area within the Treasury to keep track of these cases. This fact, combined with the Department of Justice's renewed vigor in prosecuting criminal cases under the Foreign Corrupt Practices Act (and the recent fines in the hundreds of millions of dollars), suggests the need for a dedicated resource to oversee this important area. Political corruption contributes to a country's economic and political instability, reduces foreign direct investment in that country and diminishes the integrity of and confidence in that country's financial system. Since the U.S. government has already indicated an interest in stepped-up enforcement, this third suggestion seems an obvious prerequisite to an effective effort.
Finally, the Treasury should issue guidance or regulations prescribing certain minimum standards for screening client names against available lists of PEPs.
Few if any governments issue official lists of senior officials, family members and "close associates," the categories of persons covered by the Patriot Act requirements. Accordingly, financial institutions are forced to rely on commercially available databases to identify foreign PEPs.
Unfortunately, it's an open secret in the industry that no one knows whether these lists are thorough and adequate, whether they miss many relevant names, and whether, from region to region and list to list, they are constructed with the rigorous methodology for "mapping" the various foreign government infrastructures that ought to be expected. Of real concern is that the regulators appear to have acquiesced to this situation (i.e., lack of testing, disclosure and standards). The Treasury should prescribe minimum standards around the transparency of these databases and the methods used to compile the names in them. Financial institutions relying on these databases to manage their legal and reputational risk deserve to be expressly informed as to how the databases were compiled; how often the databases are updated; the scope and depth of coverage within individual countries including what entities are covered and to what degree (e.g., parastatals and other government-controlled entities like oil companies and telecoms); and how the databases' search engines operate. Without a disciplined approach to PEP list screening, which can be attained by the issuance of guidance or regulation, financial institutions and regulators will continue to have a perhaps misplaced sense of security with potentially serious adverse consequences.
Congress, along with the Treasury Department and financial regulators, can help the financial industry address the risks associated with opening and maintaining accounts for PEPs by taking action on these recommendations.