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Congress mulling stronger beneficial ownership rules, shifting focus to bank filings that matter

Thursday, January 11, 2018   (0 Comments)
Posted by: Brian Monroe
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By Brian Monroe
bmonroe@acfcs.org
January 11, 2018

If Congress has its way, U.S. banks are in for a radical paradigm shift when it comes to financial crime compliance, as the Senate contemplates ways to boost public-private financial intelligence sharing, pare back penalties for minor programmatic failings, and encourage technological innovations.

Those are just some of the issues tackled and possible glimpses of the future proffered last week by Congress and speakers in a hearing before a U.S. Senate Committee entitled, “Combating Money Laundering and Other Forms of Illicit Finance: Opportunities to Reform and Strengthen BSA Enforcement.” It is the first of two hearings focusing on tactics to ease the compliance burden on banks while improving intelligence to law enforcement.

The hearing touched on persistent vulnerabilities in the country’s anti-money laundering (AML) and counter financing of terrorism (CFT) defenses, including the need to require company formation agents to capture beneficial ownership information at the time of incorporation, and make that information available to law enforcement and banks. It also focused on the need for more bank-to-bank and law enforcement-to-bank information sharing.

The questions by those in attendance included what, why and how not having access to U.S. beneficial ownership data is hurting the country and how to change that. Senators also queried how to coax regulators to pull back on dinging banks on minor program snags, so they can experiment with new technologies to better catch crooks.

To watch the hearing and read witness statements, please click here. To read ACFCS coverage of a November Senate hearing on these issues and a potential legislative bill to fix them, please click here.

Legislators and speakers also hit on a seemingly intractable dichotomy in the country’s compliance practices: Regulators are grading banks not on how much they actually help law enforcement crack large money laundering and fraud cases, but on how they execute compliance processes.

The dynamic has lead to a situation where banks could actually find themselves in trouble if they attempted to rise above rote tasks and innovate to better identify, and cripple, larger criminal groups or networks – Such as shifting resources to find potential instances of human trafficking or criminals hastening the opioid epidemic, said Greg Baer, President of the Clearing House Association.

His association and others have offered proposals to change AML rules and last week sent a letter of support to Congress over a new draft bill to update AML rules, including pushing the burden of collecting beneficial ownership information from banks to company formation agents.

“The consensus reflected in our report is that our current AML/CFT systems is extra-ordinarily inefficient, outdated and driven by perverse incentives,” he said at the hearing.

“Collectively U.S. financial firms act as an intelligence gathering agency for law enforcement and national security, employing thousands of people and spending billions of dollars,” Baer said, efforts that yield “much extremely valuable intelligence, but a fraction of what a modernized properly targeted regime can achieve.”

Risk-based approach, but this time, with regulatory support

That can change if banks are given more freedom, and leeway, to focus on the greatest risks.

“An effective approach to AML/CFT should be risk-based, devoting the greatest majority of resources to the most dangerous activity,” Baer said.

“Unfortunately, banks have been pushed away from risk-based approaches because their performance is graded not by law enforcement or national security officials, but rather by bank examiners who don’t track how the intelligence is used,” he said.

“Instead, those auditors focus on what they know: policies, procedures and quantifiable metrics, for example, the number of computer alerts generated,” Baer said, adding that can lead to situations where banks are punished for trying to really make a dent in larger scale money laundering schemes.

“So. for example, if a bank were to start a [financial intelligence unit (FIU)] focused on the opioid crisis, it would likely receive no exam credit for that activity,” he said. “But it would receive blame if a diversion of resources caused it to fail to file a [suspicious activity report (SAR)] in another area.”

Many Congresspersons also noted that while the U.S. has had AML laws in place since the 1970s, with a major upgrade after the 9/11 terror attacks with the 2001 Patriot Act, comparatively little has happened since then.

Current regulations have not kept pace with the advances of technology, creativity of criminals or limitations hamstringing law enforcement and banks – locking them in systems that require immense effort, come with increasing liability and yield few results.

Most illicit money makes it through the U.S. and international financial systems, with possibly less than a percent actually captured and forfeited, even after the U.S. Government Accountability Office concluded that from 2009 to 2015, banks paid $12 billion in fines, penalties and forfeitures for AML, corruption and sanctions failures, said Senator Sherrod Brown, (D-OH).

Overall, with all of the banks filing SARs, and specialized teams to review filings at the national and regional levels, the average SAR has less than a 10 percent chance of being seen, Baer said, adding that for the crimes that make up most reports – structuring and insider fraud – the “yield is close to zero percent.”

“There is more time spent documenting decisions on why not to file a SAR than following up on the SARs they do file,” he said. “So they are focusing on the noise, not the signal.

Muting regulatory penalty power could weaken compliance

While that is true, some of the proposals by the various banking groups could cause more harm than good, said Heather Lowe, legal counsel and director of government affairs for Global Financial Integrity, a transparency watchdog group. 

For instance, muting the powers of the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) and federal regulators’ ability to levy penalties could “have serious negative repercussions on compliance and ultimately allow a lot of criminals’ access to” the international financial system.

As well, Lowe said she “strongly” opposes a Clearing House proposal to transfer “responsibility for setting AML priorities for individual banks from the banks to FinCEN,” she said. “Banks are best placed to understand their own businesses, own systems and own risks their own client base presents.”

And to better understand those customers, banks should engage in broader information sharing with other banks and law enforcement.

One way to do that is more aggressively extending government top secret security clearances to key compliance professionals at certain banks, said Dennis Lormel, a consultant and former chief of the FBI’s Financial Crimes Program.

Any actions to improve current methods to better detect and prevent financial crime are vital because, as it stands now, the United Nations estimates that between two and five percent of global gross domestic product, equating to $800 million to $2 trillion, are laundered annually, according to Senator Elizabeth Warren, (D-MA.).

“Money laundering is a massive problem,” she said, adding that there has been a 50 percent increase in SARs filed between 2012 and 2017.

“Everything we can do to crack down on that is good," Warren said. "It seems to me we need to rethink a lot of our money laundering laws. Some of which as you know were written in the 1970s and are badly out of date. Because that makes it hard for law enforcement to stop money laundering and bad for financial institutions that are trying to comply with these laws.”


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