December 1, 2020

FinCEN leak : Disclose, Disrupt, Defeat?

When the International Consortium of Investigative Journalists (ICIJ) broke the FinCEN Files story this autumn, the scandal grabbed headlines across the globe. A couple of months on, is the issue already dead and buried?

The latest in a long string of ‘leak-fueled’ scandals, the FinCEN Files went beyond digging into the tax peccadillos of the elite by shining a light on thousands of bank-authored ‘for regulators’ eyes only’ Suspicious Activity Reports (SARs). The files focus on allegations of corruption, fraud and money laundering, potentially incriminating thousands of clients. Although SAR reports don’t often uncover anything groundbreaking, journalists, the financial services industry and authorities continue to trawl through the files to discern trends and learn valuable lessons.

While this work takes place, the public and anti-money-laundering (AML) gurus are left to wonder what the leak meant. Do the FinCEN Files represent (a) a systemic world-wide failure to combat financial crime, or rather (b) evidence of diligent and dutiful (albeit defensive) reporting by law-abiding institutions? Both views appear valid, but can that be the case?

The official reaction to the FinCEN Files is understandably guarded. US authorities condemned the unlawful disclosure. Perhaps, distracted by the presidential elections, they were unable to commit to a decisive course of corrective action before the political dust had settled. The big banks rushed to reassure their customers and the general public. They cited their commitment to wide-ranging compliance programmes and re-iterated that they are doing everything in their power to fight financial crime. As the exposés clearly show, they are filing vast numbers of suspicious activity reports – and that may be part of the problem.

We know that detecting and disrupting illicit money flows is challenging. It requires both sustained investment and constant innovation. Most banks are committed to getting this right. But upscaled AML resources – costing many billions of dollars – have not stopped banks from being hit by punitive fines relating to AML failings. So where are we today?

There is a message emerging: raising a suspicion and filing a report does not in itself end the movement of shady money. If the SAR route has not been effective up to now, it will not work going forward. The banks have been seen as slow to put a stop to the activities of dubious but profitable clients. The contents of many SARs are unclear, incomplete and untimely. Moreover, insightful and high-quality reports can be drowned among more defensive, run-of-the-mill reports. Under-resourced, poorly motivated and inefficient Financial Intellegence Units (FIUs) and regulatory agencies have also been exposed as laggards. They must raise their game to digest data more effectively and stay ahead of enterprising criminals.

From the European perspective, a senior European regulator suggested in a discussion with A&M that the indicators point to failings on the part of banks – who did not act sufficiently robustly in respect to some of their customers – and regulatory authorities, who did not supervise AML risks effectively. It should be acknowledged that many of the leaks referred to old cases so may not necessarily reflect current deficiencies. Nevertheless, we strongly caution against kicking these issues into the long grass on the basis that all is now fine. It is not.

One thing is clear: both parties must take advantage of this learning opportunity and refresh their approach to AML and counter-terrorist financing (CTF). Doing nothing after such a revelation would be a foolhardy response.

As one of the countries thrown into the spotlight by the FinCEN files, the UK is under renewed political pressure to show leadership in this area. The UK Parliament’s Treasury Select Committee has now launched a fresh inquiry, following on from their March 2019 report which criticised the UK’s “fragmented approach” to AML risk management. This week, the UK National Crime Agency (NCA)’s annual report highlighted a 20% increase in the number of SARs it received (a record-breaking total of well over 500,000 in the year to March 2020). The NCA renewed its commitment to the UK’s SARs reform programme, which includes an IT transformation project aimed at improving analysis, engagement and communications around SARs.

What are we hearing?

In light of these events, our clients – both commercial banks and investment institutions – are looking to make meaningful changes to their AML/CTF strategies, renewing their focus on achieving (and demonstrating) efficiency and effectiveness. While targeted look-backs may be an appropriate short-term solution for some, many boards recognise that in this new world of evolving technologies, risk management requires a holistic solution. Banks and other financial institutions must be forensic in their analysis of customer, product, geography and associated financial crime risk. So many factors at play are fluid – hence the need for flexible thinking and agile responses.

As one senior banker says: “We are doing all we can, but it is not enough. We have to keep on top of our global risks and engage the best possible technology and processes to combat money laundering.” Another remarked: “This is about the customer, and we have to do more to better understand the customer and our relationship with them”.

The next step in the AML story will hinge on joined-up internal approaches, proactive engagement with supervisors and law enforcement, and smarter use of technology. There is plenty to do: the FinCEN leak demonstrates that the issue is certainly not going away.

How can A&M help?

Our AML specialists have relevant experience drawn from both sides of the fence (working in financial industry as well as regulatory bodies) and are ideally positioned to assist banks and other financial institutions. We collaborate with lawyers and advisory firms, and help industry players who are ready to take a fresh look and augment their AML risk management. To suit our clients’ needs, we offer both targeted tailor-made reviews and broadly scoped assessments encompassing technology, people and processes. Can your institution afford to ignore the warning bells of FinCEN leaks?

If you have any questions about issues discussed in this article, please get in touch with one of our experts. 

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