Will ‘Fincen Files’ give banks opening to push for AML reform?

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WASHINGTON — Many banks were in the uncomfortable position over the weekend of having their ties to dubious customers revealed thanks to the BuzzFeed report on data sent to the Financial Crimes Enforcement Network. But there may be a silver lining.

The "Fincen Files" report, based on over 2,000 suspicious activity reports that were leaked to BuzzFeed, could shine an unenviable light on the client list at certain large institutions. But industry lawyers and others say the investigation, a collaboration with the International Consortium of Investigative Journalists, could also heighten attention on flaws with SARs and other anti-money-laundering efforts that banks have urged Congress and Fincen to fix.

"If I were looking at anti-money-laundering today, knowing what I know about the instances and enforcement matters I was involved in, I would sort of rebuild it from the ground up," said Thomas Vartanian, a former regulator and industry attorney who now directs the Program on Financial Regulation & Technology at George Mason University’s Antonin Scalia Law School.

Banking industry representatives have rejected the report's suggestion that banks aided and abetted criminals by moving roughly $2 trillion in transactions. They say the SARs banks submit to Fincen are intended as a red flag to help law enforcement agencies track illicit activity.

"It does not make sense that the basis for media allegations that banks knowingly hid illegal activity consisted solely of Suspicious Activity Reports that those banks filed alerting law enforcement to that very activity," Greg Baer, president and CEO of the Bank Policy Institute, said in a statement on Sunday.

Yet the report could lead to AML reforms supported by banks if policymakers start to question the effectiveness of Fincen reporting. Last year, the SARs filed by depository institutions exceeded 1 million for the first time.

The industry has urged Congress to finally pass a measure to require corporations to disclose beneficial owners to Fincen. Bank lobbyists have urged lawmakers to go further by seeking to make the reporting process more efficient, including raising the transaction thresholds requiring reports.

“For years, [Fincen] farmed out all of the SAR analyses,” said Ross Delston, an independent attorney specializing in anti-money-laundering compliance issues. “More recently, they formed a group in-house that does the analysis but it’s still largely done by law enforcement in regional locations around the country. That’s not supposed to be the way a financial intelligence unit works. Financial intelligence units are supposed to analyze SARs in-house and … send their recommendations to law enforcement for further investigation.”

Others cautioned that while the heightened attention to money-laundering issues could lead to reforms, there are still looming risks for banks.

"I think you can look at it two ways. One way is that it creates more urgency for AML reform because some may now perceive that the current system isn’t working all that well," said Dan Stipano, a partner at Buckley and a former official at the Office of the Comptroller of the Currency. "But to the extent that there is a perception that AML reform results in more leniency for banks, some may think we need to hit the pause button before charging ahead with very significant reform legislation. If it plays out that way, I can see it derailing the reform bill.”

When beneficial owner legislation aimed at cracking down on anonymous shell companies was included a House defense spending bill in July, banks believed they were closer than ever to updating decades-old AML laws. The bill also includes a provision enabling Fincen to upgrade its technology.

“The Fincen Files highlight the need to strengthen our anti-money- laundering laws and to crack down on anonymous shell companies to ensure that banks know with whom they’re doing business, both of which are key components of my Corporate Transparency Act,” said Rep. Carolyn Maloney, D-N.Y., the lead sponsor of House legislation that would require companies to disclose their true owners to Fincen at the point of incorporation.

Up to now, Congress has effectively abandoned doing more, such as raising the SAR and CTR reporting thresholds to mitigate bank compliance costs. But industry lawyers say the "Fincen Files" reflect broad concerns about the way banks report potential cases of money laundering through SARs and how the government handles those submissions.

“Banks are encouraged to file SARs whenever they see anything remotely close to money laundering or remotely close to a crime at the institution," said Vartanian. “When I was in the government … the regulators, Fincen, Treasury people, were just overwhelmed by the number of SARs being filed, because between regulators filing criminal referrals and institutions filing SARs, it’s just an enormously overwhelming amount of information.”

Some lawmakers have proposed relieving banks of their AML reporting burdens and limiting superfluous reports by raising the monetary thresholds at which banks are required to submit SARs and CTRs. Legislation was proposed in 2018 that would triple the dollar threshold for filing CTRs to $30,000 and double it for SARs to $10,000. Those thresholds have been unchanged since 1970 and 1996, respectively.

A report this week by the Government Accountability Office recommends that Fincen take steps to ensure law enforcement has better access to SARs. The report also contains details on the compliance burdens particulary for smaller banks.

Vartanian said a better AML regime would ensure that the reporting "really gets at the real money laundering rather than creating a universe of recordkeeping that probably isn’t focused as clearly as it could be on what the actual money laundering is that’s going on.”

“All of the policies and procedures and all of the rules and the regulations and all of the examinations that’s going on, are they as targeted and efficient as they could possibly be? And my sense is the answer to that question is no," Vartanian said. "And they could be a lot more enhanced by technology and a lot more enhanced by focusing more on actual money laundering and less on policy and procedures.”

But federal law enforcement agencies have consistently pushed back against raising reporting thresholds, arguing that it would limit valuable reporting that can help combat crime.

While the BuzzFeed report criticized banks for allegedly continuing to facilitate money laundering after submitting SARs to Fincen, observers say banks may simply be complying with regulators’ orders.

“The fact that banks are filing lots of SARs is a good thing,” said Stipano. “That means that they are complying with the law. … It could very well be that banks were working side by side with law enforcement in investigating this activity and that story can’t be told because the banks are legally prohibited from talking about it.”

Still, the report suggests that there is vast illicit activity that is not being policed.

“If there is any lesson from the Fincen Files, it’s that there’s no shortage of financial crime and it’s ongoing and continuing on a massive scale,” Delston said.

Vartanian said that while money laundering continues to occur, Fincen would be better served in combatting crime by improving its technology infrastructure.

“If the government doesn’t start using technology properly and catch up with how technology is being used by the outside world, we have no chance of regulating anything in any reasonable way that makes sense,” Vartanian said.

Fincen would not indicate whether it would like Congress to allocate more resources. The agency, which earlier this month unveiled plans to overhaul rules governing AML compliance, has also issued a warning to news outlets about publishing SARs.

“As Fincen has stated previously, the unauthorized disclosure of SARs is a crime that can impact the national security of the United States, compromise law enforcement investigations, and threaten the safety and security of the institutions and individuals who file such reports,” Fincen said on its website.

The beneficial ownership reform bill would also facilitate improvements in Fincen's technology. The Senate version of the legislation would put Fincen employees on a more competitive pay scale with other regulators in an effort to recruit better talent. It also would require the Justice Department to provide metrics on how frequently AML data from financial institutions contains useful information to further law enforcement’s purposes, the extent to which such data leads to investigations of bad actors, and emerging patterns and threats in the AML landscape.

“I don’t want to understate how important that bill is being negotiated as part of the defense bill would be from the beneficial ownership side, but also on the money laundering side, allowing the banks and Fincen to use more machine learning and technology and analyze trends,” said Clark Gascoigne, interim executive director at the Financial Accountability and Corporate Transparency Coalition. “If Congress could do one thing right now, it is to get this bill across the finish line.”

But opponents of the bill have argued that it is overly burdensome for small businesses to report beneficial ownership information to Fincen and that creating a database of beneficial ownership information would put their information at risk.

“The report confirms NFIB’s worst fears that an expanded database will be used for surveillance purposes and small business owners’ privacy will lack sufficient protections,” said Kevin Kuhlman, vice president of federal government relations at the National Federation of Independent Business.

Stipano said the fact that the BuzzFeed report is based on leaked SARs could amplify the small businesses' concerns that Fincen cannot be trusted with their private information.

“That this highly sensitive, highly confidential information was apparently leaked by an insider within Fincen is very, very troubling,” Stipano said. “Banks file SARs with an expectation of confidentiality, and they rely on that expectation in filing millions of SARs every year that contain incredibly sensitive information. … People who are named in SARs, including preparers, could have their physical safety jeopardized by a leak like this.”

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