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What the FinCEN leak means for regulatory changes in banks

In 2020, the publication of the FinCEN files by a consortium of journalists clearly exposed the failing of the Anti-Money Laundering measures currently in place at banks and regulators alike. In this article, we explore the content of the FinCEN leaks and the consequences for financial institutions.

What happened?

An investigation by over 400 journalists taking place from May 2019 to September 2020 led to the collection and release of over 2,100 suspicious activity reports (SARs) filed by global banks to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The ensuing report has brought back calls to reform anti-money-laundering regulations within the financial system.

As a result of the leak, banks, regulators and watchdog groups have underscored the central message that anti-money-laundering laws need to be updated to better disrupt illicit financial activity. A central argument that these groups have made is in regard to the efficiency of SARs. The argument is that while SARs have a record of helping to detect and prevent money laundering and other illicit activity, the overarching rules they are a part of are antiquated. This is in part due to the SAR filing process, which does not require financial institutions to prevent any transactions, but rather escalate concerns on transactions and follow up on them.

Previous to the leak, there has been an increase in pressure for financial institutions to file SARs in order to comply with bank supervisors and avoid fines, which has resulted in an environment where quantity takes priority over quality. The result is an overwhelming number of SARS that can obscure illicit transactions. Given this pressing issue, there is now a push for Congress to act and for the U.S. Treasury to implement new and more effective initiatives.

What has been revealed?

The more than 2,100 SARs released revealed over $2 trillion in suspicious transactions from 1999 to 2017.  According to the International Consortium of Investigative Journalists (ICIJ), more than 12 million SARs were filed between 2011 and 2017, meaning that those included in the leak represent roughly 0.02% of all SARs filed in this time frame. 

This is not the first time that a leak of confidential financial information has occurred.  The main distinction between the FinCEN leak and previous leaks is that these SARs implicate a number of different banks as opposed to a single financial institution.  They highlight different instances in which a variety of banks noticed repeated occurrences of suspicious activities on the same accounts, yet did not always act on their concerns.

The U.S. Dollar tends to be the common denominator between global discordant currencies, meaning many international banking customers need access to it through correspondent banking.  Because these transactions are effected through U.S. banks, both the Treasury Department and U.S. banks have a perspective of these global transactions that no other country has.  This puts U.S. banks on the frontlines in the fight against money laundering. 

However, with what some stakeholders argue are outdated anti-money laundering laws, billions of dollars in illicit transactions are still being transferred through U.S. banks.  Since 2010, it is estimated at least 18 financial institutions have received deferred prosecution agreements for AML or sanctions violations. 

FinCEN’s response

FinCEN, the agency within the Treasury Department tasked with combating money laundering, has stated that this leak could pose a threat to U.S, national security, and potentially stall ongoing investigations.  Additionally, FinCEN maintains that the current SAR filing program only functions properly if these SARs remain confidential, as filing a SAR does not necessarily mean that there is ongoing criminal activity, but rather only implies that there could be suspicious activity.  For this reason, releasing information regarding a flagged account, or even acknowledging the existence of a SAR puts the whole system at risk. 

Though FinCEN does acknowledge the need to make changes and has responded to the leaked SARs by announcing proposals to update U.S. anti-money laundering regulations.  These proposals included initiatives that make clarifications to the Bank Secrecy Act in order to modernize the U.S.’s anti-money laundering regime, with hopes of empowering U.S. banks to allocate their resources more effectively.  FinCEN officials have said new rules could also include clarifying requirements related to risk assessment and customer due diligence, as well as a guidance revision on politically exposed persons. 

Effect on Financial Institutions

The thousands of leaked SARs filed by banks to FinCEN highlighted the long-known ways that criminals use the financial system to move money. According to Buzzfeed News and the ICIJ, the leak of over 2,000 SARs and hundreds of other documents shows that banks have been unable to prevent trillions in money laundering, tax avoidance and criminality over the past decade. On the other hand, banks argue that the current process outdated and ineffective. Under existing rules, banks are filing what former regulators call an overwhelming number of SARs in order to satisfy bank supervisors, which raises concerns about quantity being prioritized over quality. This process merely raises a concern to regulators, and does not mean the bank has any evidence of wrongdoing, which means several follow-ups must be done causing further inefficiencies.

Moreover, Treasury officials have also joined banks in expressing that existing regulations do not give them the tools they need in order to track the trillions of currency transactions they handle every day. The role of banks in the process is to prevent, detect, and report crime, but with such a vast information flow and so much data being reported and unnecessarily flagged, illicit information becomes easily obscured. Banks have so far reacted to this and other previous failings by adding more people and processes rather than better processes and data. Banks must work within boundaries and standards set by regulators, and as regulators are being pushed to focus on the efficiency of AML programs as supposed to whether or not there is one, banks must be prepared for changes to come.

How will the FinCEN leak impact existing regulation?

The FinCEN leak is significant because it provides a snapshot of the potential illicit crime within the financial system that banks are openly reporting to the authorities. These leaks demonstrate that the reporting of these suspicious transactions is taking place, but many are tied to the same clients without any further action taking place. Moreover, of the accounts within the leaked SARs are accounts that had been previously responsible for facilitating money laundering, sanctions evasion, or terrorist financing. There appears to be a growing concern among regulators that, even after financial institutions have been served with large fines for allowing these transactions in the past, there is no true change. In addition to this, the number of SARs that have been reported has continuously grown. This is in part because of significant fines that have been served, but also because of the global surveillance U.S. banks must conduct due to cross border transactions. This has caused inefficiencies within FinCEN which lacks the personnel and budget needed to process the flow of information.

The FinCEN leak incident has pushed Congress to take action.  Banks argue that the existing rules in place do not provide the tools they need to better surveil the trillions of currency transactions they handle every day. Currently, the Treasury Department has already implemented several initiatives in recent months, including expanding regulations for banks to the cryptocurrency industry, bolstering real estate reporting requirements, more automation in the SARs reporting process, incentives for financial institutions to provide more accurate reporting, and kicking off a regulatory restructuring, but until legislation is passed, this may not be enough. Within the legislative space, the House of Representatives has recently passed a bipartisan bill that requires new companies to report the identity of the ultimate beneficiary to FinCEN. The bill has yet to receive a vote in the Senate, but it has been noted by regulators that the bill is an important first step towards superior regulation within the financial system. 

Next Steps

The FinCEN leak identified significant vulnerabilities in the financial system, and highlighted how U.S. banks may be playing host and facilitator to criminal activity and transactions that raise national security concerns. Aside from making a push for Congress to pass banking and corporate-transparency, the Treasury is also seeking to modernize the U.S.’s AML regime – a plan that has been highlighted in the 2020 National Strategy for Combating Terrorist and Other Illicit Financing that was released in February. Further, there is an emphasis on financial services organizations working closer than ever with government agencies to detect and mitigate illicit activities within the U.S. Financial System. In anticipation of forthcoming initiatives that are expected to be placed, Sia Partners recommends the following next steps for financial services organizations:

  • Establish clear communication channels with all relevant regulators
  • Ensure beneficial ownership of your institution and your clients is not obscured and is fully transparent. This includes trusts and offshore entities
  • Enhance your organization’s AML/CFT policies and procedures
  • Train pertinent employees on the beneficial ownership transparency and regulatory reporting obligations

Sia Partners has extensive experience in assisting our clients with compliance, risk and regulatory matters. Sia Partners has AML/CFT capabilities and former U.S. regulators on staff that can be utilized to navigate these vulnerabilities brought to the surface by the FinCEN leak. Sia Partners remains current on U.S. regulations and industry best practices, in order to provide the most accurate and necessary assistance on all compliance matters for our clients.

Key Takeaways

  1. As a result of the FinCEN leak, banks, regulators, and watchdog groups have underscored the central message that AML laws need to be updated to better disrupt illicit financial activity.
  2. FinCEN has suggested making clarifications to the Bank Secrecy Act as a way to modernize the U.S.’s AML regime, and to empower banks to allocate their resources more effectively.
  3. There is now a renewed push for Congress to act and pass legislation that is in line with the recent initiatives the Treasury Department has implemented.