The paper analyzes the current effectiveness of the regime, and then identifies problems and proposes reforms to remedy them. The report is based upon conclusions reached at two symposia (April and October 2016) where leading experts from the fields of law enforcement, national security, bank regulation, and domestic policy convened, together with consultants and lawyers, FinTech CEOs and the heads of Anti-Money Laundering (AML) and Countering Financing of Terrorism (CFT) at major financial institutions. The April meeting focused on problems with the current AML/CFT framework, and in October potential solutions were reviewed.1
Assessment of the Existing Regime
During these symposia, it was concluded that the current AML/CFT statutory and regulatory framework is outdated and therefore ill-suited for apprehending criminals and combating terrorism in the 21st century.2 Under the current regime, the nation’s financial firms are collectively deputized to identify, investigate, report and prevent criminal activity, including money-laundering, terrorist financing and tax evasion.3 These firms spend billions of dollars each year, yet the conclusion among the symposia participants was that many, if not all of the resources devoted to AML/CFT by the financial sector have limited law enforcement or national security benefit, and in some cases actually damage other US interests.4 The current AML/CFT regulatory framework is an amalgamation of statutes and regulations that derive from the Bank Secrecy Act, which was passed by Congress in 1970, and added to, but not reformed by the USA PATRIOT Act passed in 2001. This regime has not seen substantial changes since its inception and is built on individual bilateral reporting mechanisms grounded in the analog technology of the 1980’s, such as currency transaction and suspicious activity reports.5
Participants in the April symposium identified a number of fundamental problems with the current AML/CFT regime.6
- Absence of Prioritization: In law enforcement it is routine for the Justice Department to establish priority enforcement areas, regarding which crimes to prosecute and which to let pass, however financial institutions operating AML/CFT compliance programs receive little guidance. Although the government may want financial institutions to prioritize cases involving terrorist financing and human trafficking, in practice these institutions are not engaged with the law enforcement and intelligence communities, and are supervised by regulators who are more focused on preventing financial loss or reputational embarrassment, and so establishing auditable policies and procedures, rather than developing innovative approaches to important threats.
- Outdated Nature of the SAR Regime: In the 1990’s the SAR (Suspicious Activity Reporting) regime was established for financial institutions to provide leads to law enforcement, as the latter had no ability to mine data. Today, government agencies could develop resources to mine financial data, and therefore make the SAR data valuable.
- Counterproductive Examination Standards: Financial institutions face regulatory criticism for taking unconventional or innovative actions that may deviate from policy and not be readily auditable. Law enforcement and national security officials however, value the development of innovative methods of detecting illegal or dangerous conduct. As Compliance officers are under increasing pressure to meet 100% compliance, and are at risk of personal liability in the event of any deviation from regulatory expectations, so their focus centers on auditable processes rather than “outside-the-box” methods of detection.
- Broader Conflicting Policy Interests: The enforcement regimes for the Bank Secrecy Act have incentivized financial institutions to exclude accounts where there may be a higher potential to engage in criminal activity. Policymakers however, together with intelligence officials and lawmakers encourage multinational financial institutions to stay engaged abroad in order to establish leads on nefarious activity, rather than ceding those markets to other, less transparent institutions.
- Barriers to Information Sharing: Significant barriers to information sharing are embedded in the system, and are often the result of basic policy errors that have not been remedied over time. While there are legitimate privacy concerns, these should be balanced against potential benefits of information flow between financial institutions and law enforcement.
- Inefficiencies: Financial institutions devote considerable resources to activities that could be performed centrally by the government or other party. Reporting requirements for beneficial owners, SARs filing on cases that will not be prosecuted, and tracking of politically exposed persons (PEPs), are all examples, where there are changing standards across agencies and jurisdictions.
Areas for Potential Reforms
There was a clear consensus among the symposium participants of a need for reforms that would make the AML/CFT regime more effective as a tool for law enforcement and national security. These reforms were categorized into; (1) Areas for Immediate Reform; and (2) Areas of Reform Requiring Further Study.7
1) Areas for Immediate Reform
There are a number of recommendations, and key to all of these is the reform of the role of FinCEN (Financial Crimes Enforcement Network). FinCEN was granted authority to examine for compliance with the Bank Secrecy Act, but over 20 years ago it delegated its authority to the Federal Banking Agencies, as restrictions on interstate banking meant there were no national banks, and US banks were not generally internationally active. The situation now is clearly very different. The recommendations for immediate reform include:
i. Rationalize the Supervision of Multinational Complex Financial Institutions – It was recommended that FinCEN reclaim sole supervisory authority, so rationalizing the AML/CFT supervision of multinational, complex financial institutions, and through a core centralized examination team, would work with regulatory agencies, law enforcement and national security. This would allow for a shift of resources away from box checking and reporting of petty offenses, toward law enforcement and national security.
ii. Enact Beneficial Ownership Legislation – FinCEN’s new customer due diligence rule will soon require financial institutions to collect beneficial ownership information from certain legal entity customers. Congress should enact legislation for the collection of beneficial ownership information, and such information should be provided to FinCEN and law enforcement.
iii. Establish a Clear Mandate in Support of Innovation – Financial institutions should be motivated to assist the government in understanding and identifying financial crime, and should establish FIUs (Financial Intelligence Units), which should be given latitude by regulators to operate outside the compliance regime, giving them the agility needed to aid law enforcement. FinCEN should propose a rule allowing FIUs to operate outside the strictures of regular policies and procedures.
iv. De-prioritize the Investigation and Reporting of Activity of Limited Law Enforcement or National Security Consequence – The SAR regime should produce SAR filings that actually advance law enforcement and other national security goals. FinCEN should review existing SAR guidance to confirm that it establishes appropriate priorities, and allow the SAR dollar thresholds set in 1996 to be raised.
v. Provide More Raw Data to FinCEN and Feedback to Financial Institutions – The flow of raw data from financial institutions to law enforcement should be facilitated. Current technology allows for the sharing of encrypted data, allowing analytical integrity to be preserved while protecting personal information. Providing such data in bulk directly to FinCEN would enable law enforcement to use big data analytics to effectively sift through large quantities of data without requiring the assistance of financial institutions in investigating illicit activity.
vi. Clarify and Expand the Scope of Information Sharing under Section 314(B) – This section of the PATRIOT Act allows financial institutions to share with each other information relevant to potential money laundering or terrorist financing operations. FinCEN should clarify that financial institutions can share information about clients as part of their effort to identify suspicious activity. Congress should expand 314(B) to include technology companies and other non-depository institutions to provide freedom to experiment with information-sharing platforms.
vii. Enhance Legal Certainty regarding the Use and Disclosure of SARs – FinCEN regulations generally prohibit the disclosure of SARs across borders. FinCEN should authorize US depository institutions to share SARs with foreign branches or affiliates, if that branch is located in a country that is a member of FATF (Financial Action Task Force). A less restricted flow of AML/CFT information would result in higher quality SARs, better transaction monitoring and better information for law enforcement investigations.
2) Areas of Reform Requiring Further Study
The following are reforms discussed during the two symposia that would bring substantial benefits, but warrant further study and the input of a wide array of stakeholders:8
i. Enhance Information Sharing – Financial institutions have vast amounts of information about their customers, however the current system inhibits the dynamic flow of that information and limits the ability of any one institution to see the bigger picture. The recommendation is to establish a utility-like data base of AML/CFT and sanctions information gathered from multiple public and private sources. An AML sanctions utility would facilitate the bulk screening of transactions against sanctioned and suspect parties, and the detection of patterns of potentially suspicious transactions on a real-time basis across multiple financial institutions. With FinCEN or a private consortium acting as a clearinghouse, the sharing of information among financial institutions and law enforcement would become more efficient and effective.
ii. Provide Better Protection from Discovery for SAR Information – The disclosure of SAR information in private litigation can undermine the ability of financial institutions to combat crimes by compromising ongoing investigations. Congress should enact legislation making clear that SAR Investigatory Materials are to be treated as confidential. FinCEN should also issue a guidance to this end.
iii. Clarify and Balance the Responsibility of the Public and Private Sector to Detect and Prevent Financial Crime – The current AML/CFT statutory and regulatory regime does not clearly allocate responsibility for detecting and preventing financial crime between the public and private sectors. This creates incentives for financial institutions to de-risk, the result of which is to deprive law enforcement of valuable intelligence, as transactions are forced into shadow banking channels. Government intervention is needed to reverse the de-risking trend and better allocate money laundering and terrorist financing risk.
iv. Establish a Procedure and Resources for No-Action Letters – FinCEN should provide a no-action letter mechanism for financial institutions to pose compliance questions in a format designed to promote efficiency. The SEC has such a procedure so that the financial institutions it regulates have access to the government’s perspective on complex issues.
v. Provide Clear Standards to Financial Institutions – The AML/CFT regime should be geared toward law enforcement outcomes, not only compliance processes. FinCEN should establish by regulation a clearer definition of a reasonable AML/CFT program, including what actions will result in an enforcement or prosecution.
vi. Better Coordinate AML/CFT and Sanctions Policy Goals, Supervision and Enforcement – The AML/CFT and sanctions compliance regimes are increasingly interdependent. Better coordination would help reconcile competing US government priorities, while creating efficiencies. One way to accomplish this would be to empower TFI (Office of Terrorism and Financial Intelligence) to coordinate policy and enforcement across FinCEN and other regulatory and government agencies.
vii. Modernize the SAR Regime – Standards for SAR filings have incentivized filing SARs on activity unlikely to be prosecuted. FinCEN should clarify what is deemed suspicious, and provide guidance on what does not need to be filed.
Key Observations and Take-aways
Under the current AML/CFT statutory and regulatory regime, financial firms play an integral role in preventing, identifying, investigating and reporting criminal activity, yet most of the resources devoted to AML/CFT compliance by the financial sector have limited law enforcement or national security benefit. Banks are spending billions of dollars complying with outdated rules that do not reflect the current threats to the US financial system, or to national security. The changes reflected above would in our view “lessen the burden” on banks, and would allow law enforcement to decide what banks should supervise more closely and puts the responsibility of finding the bad guys back on the law enforcement agencies. Such a reorganization would also be well received by the different regulatory bodies tasked with addressing money laundering activities as they report into different agencies, each with its own set of expectations. Clearly from the comments captured in the two symposia, a wholesale overhaul of how the US federal government organizes itself in assessing AML/CFT threats is needed.
1) The Clearing House Publishes New Anti-Money Laundering Report,” The Clearing House, Press Release, February 16, 2017. Access at: https://www.theclearinghouse.org/press-room/in-the-news/29170216%20tch%20aml%20cft%20report
3) “A New Paradigm: Redesigning the U.S. AML/CFT Framework to Protect National Security and Aid Law Enforcement,” The Clearing House, February 2017. Access at: https://www.theclearinghouse.org/~/media/TCH/Documents/TCH%20WEEKLY/2017/20170216_TCH_Report_AML_CFT_Framework_Redesign.pdf
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