It is sometimes said that the government never met an industry that it didn't want to regulate. But it may be truer that the Financial Crimes Enforcement Network has never faced a bank like the Tanzania-based FBME, which refuses to cede to the demands of an overzealous U.S. regulator.
In a recently reissued rule, Fincen once again blocked U.S. correspondent banking relationships with FBME. Just like the agency's original rule labeling the family-owned bank a “primary money laundering concern,” the new one effectively means a death sentence for FBME. Yet the bank still refuses to go down without a fight. After winning a court injunction against the original ruling, FBME has pledged to challenge the new one as well. Based on the public record and federal agencies' obligations under the Administrative Procedures Act, the bank still has a good case.
On top of the fact that Fincen's punishment was draconian, the glaring gaps in its administrative process and lack of substantiated claims in its pursuit of FBME suggest that Fincen sleepwalked toward a predetermined outcome of simply wanting the institution closed — undeterred by FBME's cooperation, remedial actions or even outright facts. From court filings and public comments, it appears that Fincen may have violated the APA. Even more troubling, it also appears that Fincen's targeting of the bank borders on unconstitutional.
In the vast majority of situations, an action by a federal agency that results in the significant taking or deprivation of property interests is unconstitutional. Under Fincen's Patriot Act authority to designate a foreign bank tied to U.S. correspondent banks as a money-laundering concern, the agency need not even issue a formal finding. The reputational damage of simply a proposed rule is sufficient to significantly damage a bank. Just look at the agency's track record. Of the five banks which had the special rule imposed on them, Fincen rescinded the rule for three of them. That was not because the agency reconsidered its rulemaking. It was because the banks had gone out of business.
Secondly, the agency has been remiss in evaluating evidence presented to it and in providing information to FBME, a violation of the APA. Fincen appears to disregard the numerous steps taken by FBME to remedy and improve its internal controls. The agency ignored conclusions drawn by independent auditors Ernst and Young and KPMG that the bank was compliant with international and domestic money-laundering standards. An agency with significant discretionary power cannot afford to skip elementary due diligence. If Fincen has engaged with this evidence in a meaningful way, it must attempt to refute those sections of the evidentiary record it disagrees with, rather than glossing over inconvenient facts.
In my research, I have come across two ways to control and limit wayward agency behavior, such as Fincen's actions against FBME. The first are ex ante controls, namely how Congress designs the agency. Potential legislative limits on federal agencies include: reporting and consultation requirements with which the agency must comply when making policy; the role, if any, of key constituencies in influencing the agency's policymaking decisions; standards and criteria the agency must consider when introducing regulations; and the number and nature of political appointments within the agency.
The second way to supervise agency behavior consists of ongoing controls, namely institutions or procedures that check Fincen's actions on a regular basis. These include congressional oversight through direct and indirect monitoring, and renewing or withholding appropriations. They also include judicial oversight implemented through existing administrative law. I am pleased to see judicial oversight of Fincen through the lawsuit brought by FBME. However, ongoing controls are the responsibility of all three branches of government.
Congress can and should evaluate whether the controls it imposed on Fincen are sufficient to avoid similar, overzealous actions against other financial institutions. For the time being, Fincen should critically evaluate its own actions and determine whether the agency has acted in a manner that is consistent with its mandate and the APA. If not, it may be time to regulate the regulators.
Sharyn O'Halloran is the George Blumenthal Professor of Political Economy and a professor of international and public affairs at Columbia University, where she also serves as senior vice dean and chief academic officer of the School of Professional Studies. She has written extensively on the political economy of international trade and finance, regulation and institutional reform, economic growth and democratic transitions, and the political representation of minorities.