The FinCEN Files: Where Is the News?

Carol Beaumier, Senior Managing Director Risk and Compliance – New York

There has been widespread media coverage of the release by the International Consortium of Investigative Journalists (ICIJ) of the so-called FinCEN Files earlier this month. In the world of anti-money laundering (AML), the ICIJ also made news in 2016 with the release of the Panama Papers and the Bahamas Leaks, both which exposed the dark side of offshore banking, a theme also addressed in the FinCEN Files.

Setting aside the illegality of the leak that provided the information for this investigation (for which a former FinCEN employee has already pled guilty), what is it that makes the FinCEN Files so interesting? Is it newsworthy that global banks moved more than $2 trillion between 1999 and 2017 in payments they believed were suspicious and flagged bank clients in more than 170 countries as being involved in potentially illicit transactions? Since the estimated amount of money laundered annually is between $800 billion and $2 trillion, $2 trillion in potential laundering over an eight-year period reported by global financial institutions doesn’t seem shocking. Is it a surprise that five global banks moved potential suspicious activity after U.S. authorities fined these financial institutions for earlier failures to stem flows of dirty money? To the general public, it may be; however, to those with knowledge of money laundering or the Suspicious Activity Report (SAR) process, this isn’t a revelation. Given the banks involved, it seems reasonable that some, if not most, of the suspicious activity was conducted through USD clearing accounts. That means that the parties on which the SARs were filed were not customers of the banks, but rather customers of their customers.

Further, the obligation of banks subject to U.S. money laundering regulations is to detect suspicious activity and report it (by filing a SAR) – not to stop money laundering. Money laundering is complex, with criminals operating transnationally through multiple institutions. It would be naïve to expect that financial institutions on their own would be able to prevent money laundering with none of the powers or protections awarded to law enforcement. From a public policy standpoint, it might not even make sense for banks to stop the bad guys because the money laundering will still occur outside of the banking system and only become more difficult for law enforcement to identify it.

Is it remarkable that in half of the SARs banks didn’t have information about the underlying owners of entities behind transactions? Since the Financial Action Task Force (FATF) began warning of the risks of beneficial ownership more than twenty-five years ago and some countries (including the U.S.) have failed to take the necessary steps to mitigate this risk, this is likely not a surprise. Is it unexpected that some of the SARs involved political corruption or evasion of sanctions? Both seem like fairly common reasons for filing SARs. While statistics suggest that banks are only able to identify a fraction of the amount of funds laundered annually, and the banks cited in the FinCEN Files likely did not detect all of the dirty money that flowed through their institutions, criticizing them for doing what they are supposed to do – filing SARs on potentially suspicious activity they do detect – is misplaced. 

There is truth, however, to the statement attributed by the ICIJ to top U.S. government officials that “the system just doesn’t work to slow the flood of dirty money.” But, we have known this for a very long time. The SAR process was introduced by FinCEN in 1996 to streamline how banks reported suspicious activity. In that year there were approximately 50,000 SARs filed and in 2019 this number had risen to 2.3 million. The rapid expansion of financial services through technological advancements and innovation has seen the number of transactions processed increase exponentially with regulators and financial institutions struggling to keep up. Banks have invested untold billions into improving their AML compliance programs and yet detection levels remain very low. There is promise in the adoption of advanced analytics, including artificial intelligence and machine learning.

But even the next generation of tools won’t address one of the fundamental gaps in the U.S.’s AML regime – the absence of a true public-private partnership. This is precisely one of the issues identified by FinCEN in its recent proposal to reform the AML regime in the United States. For decades, U.S. financial institutions have complained that information sharing regarding potentially suspicious activity is one-sided. Financial institutions receive limited feedback on the SARs filed from government and law enforcement due to these agencies’ own inherent limitations (lack of resources, funding, etc.). Only when governments and law enforcement across the globe respond to existing calls for action by helping set the AML priorities for financial institutions and improving communications between the public and private sector to help direct the investigation efforts of financial institutions are we likely to make meaningful progress toward identifying more of the illicit activity that is occurring. 

The author thanks Protiviti London Risk & Compliance practice for contributing to this blog.

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