Fincrime Briefing: New McKinsey whitepaper charts compliance convergence, Tether hit with $1.4 trillion lawsuit, and more

By Brian Monroe
bmonroe@acfcs.org
October 8, 2019

Quote of the Day: “The one exclusive sign of thorough knowledge is the power of teaching.” Aristotle

In today’s ACFCS Fincrime Briefing, a new McKinsey whitepaper touts the virtues of compliance convergence for AML, fraud and cyber, firm behind crypto coin Tether hit with $1.4 trillion lawsuit, new FinCEN report highlights more banks willing to bank cannabis businesses, and more. 

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Want to talk about industry trends, story ideas or get published? Feel free to reach out to ACFCS Vice President of Content Brian Monroe at the email address above. Now, on to more sweet sweet content! 

Compliance

Financial crime and fraud in the age of cybersecurity: new McKinsey whitepaper talks current, future efforts to converge disparate groups, move from collaboration to full team integration 

At leading institutions the push is on to bring together efforts on financial crime, fraud, and cybercrime, according to a new McKinsey whitepaper touting the virtues of compliance convergence. 

The expansive, detailed report crisply lays out the pros and cons of such an initiative, analyzing the potential pitfalls but eventual incredible windfall when institutions switch from legacy ad-hoc financial crime compliance collaboration to full counter-crime team integration – a move that comes with a variety of intelligence, risk and resource benefits.  

Both the front line and back-office operations are oriented in this direction at many banks. Risk functions and regulators are catching on as well. AML, while now mainly addressed as a regulatory issue, is seen as being on the next horizon for integration. 

Important initial steps for institutions embarking on an integration effort are to define precisely the nature of all related risk- management activities and to clarify the roles and responsibilities across the lines of defense. 

These steps will ensure complete, clearly delineated coverage—by the businesses and enterprise functions (first line of defense) and by risk, including financial crime, fraud, and cyber operations (second line)—while eliminating duplication of effort.

All risks associated with financial crime involve three kinds of countermeasures: identifying and authenticating the customer, monitoring and detecting transaction and behavioral anomalies, and responding to mitigate risks and issues. 

Each of these activities, whether taken in response to fraud, cybersecurity breaches or attacks, or other financial crimes, are supported by many similar data and processes. 

Indeed, bringing these data sources together with analytics materially improves visibility while providing much deeper insight to improve detection capability. In many instances it also enables prevention efforts.

In taking a more holistic view of the underlying processes, banks can streamline business and technology architecture to support a better customer experience, improved risk decision making, and greater cost efficiencies. The organizational structure can then be reconfigured as needed, (via McKinsey).

Monroe’s Musings: This report, while not mentioning ACFCS or any other associations, describes the mission of ACFCS since our inception. 

Better arming every person in a bank – in and out of compliance – can sensitize an institution on an enterprisewide scale to the true totality of financial crime and create and spread awareness of the red flags of money laundering, fraud, corruption and cybersecurity to the most distant nerve endings of an organization and across borders. 

Such a change holds the promise of creating nimble, informed, interwoven financial crime compliance teams who can all speak the same language, boosting the depth and speed of investigations and creating richer, more timely intelligence to law enforcement. 

As well, by moving broad expertise to the frontlines, business line, top executives and even the board room, it actualizes many of the more esoteric terms cropping up in recent regulatory enforcement actions and guidance, such as creating a “tone at the top” and “culture of compliance.”

At the same time, this empowers many of the bank insiders in customer-facing positions to make better decisions about who they allow in the bank in the first place, morphing AML compliance initiatives from simply a reactive, forensic exercise to a proactive defense measure that prevents certain illicit entities from getting in the door in the first place. 

Cryptocurrency

Tether created ‘Largest Bubble in Human History’ claims $1.4 trillion federal lawsuit against Bitfinex

A common attack against Tether in the crypto ecosystem is that the stablecoin isn’t really backed one-to-one by the U.S. dollar. The crypto, compliance and law enforcement communities might soon get to know if these concerns are substantial, as the matter is now going to court. 

A new lawsuit against the operators of USDT accuses them of creating the largest bubble in human history, and causing well over a trillion dollars in damages.

Tether Accused of Fraud and Market Manipulation

A class action lawsuit against the operators of Tether and the Bitfinex exchange was filed on Sunday with the United States District Court for the Southern District of New York. 

The lawsuit accuses the groups of managing a sophisticated scheme to defraud investors, manipulate markets, and conceal illicit proceeds. It came just a day after the two companies notified users of an imminent legal action which they were trying to frame as a shameless money grab attempt.

Tethers are cryptographic tokens which claim to be backed 1 for 1 with US dollars held in bank accounts. Tethers are the most popular cryptocurrency in the world by turnover, recently exceeding Bitcoin in turnover value, despite having a vastly smaller market capitalisation.

The lawsuit alleges that Bitfinex had created and been in control of Tether Holdings Limited since September 2014 and that the same individuals in control of Bitfinex were also secretly in control of Tether, noting that the overlapping control structure between Tether and Bitfinex had been largely concealed from the public until it was revealed by the Paradise Papers leak in November 2017.

According to the complaint, Bitfinex and Tether commingled their corporate identities and customer funds while concealing their extensive cooperation. 

And they also lied to investors saying that the number of USDT tokens in circulation will always be the same as the amount of dollars in the companies’ bank accounts. This allegedly gave them the power to fake market demand for cryptocurrencies by just printing more USDT and using it to buy coins.

“Tether issued extraordinary amounts of unbacked USDT to manipulate cryptocurrency prices. Because the market believed the lie that one USDT equaled one U.S. dollar, Bitfinex and Tether had the power to, and did, manipulate the market on an unprecedented scale to profit from boom-and-bust cycles they created.”

Over $1.4 Trillion in Damages

The amount of influence over the crypto market that the lawsuit assigns to the stablecoin is incredible. 

It states that from 2017 to 2018, Tether printed 2.8 billion USDT and used it to flood the Bitfinex exchange which artificially inflated demand for cryptocurrencies and caused prices to spike. Economists cited by the complaint estimate that as much as half the growth in the cryptocurrency market at that time was driven by this manipulative scheme.

“As the cryptocurrency market reached a fever pitch, Tether’s mass issuance of USDT created the largest bubble in human history. When it burst, over $450 billion of value disappeared in less than a month.”

According to the accusations the fallout from the crash when the USDT-infused bubble burst continues to affect the cryptocurrency market today, by causing prices to be lower than they would have been but for the market manipulation. 

And Tether and Bitfinex are said to continue to defraud the public these days, even in the face of an ongoing investigation by the New York Attorney General, the CFTC, and the Department of Justice. 

As for the potential compensation or settlement that the class action will seek, the lawyers state that calculating damages at this stage is premature, but that they could surpass $1.4 trillion U.S. dollars, (via BitsofBlocks) and (Bitcoin.com).

Monroe’s Musings: This story is absolutely huge and a fascinating development in the crypto sector, giving crypto enthusiasts and naysayers weighty allegations, insider baseball and troubling trends aplenty to chew on. 

These allegations, however, won’t come as a complete surprise to many in the space who have wondered allowed how and why certain crypto coins rise and fall and rise again without clear indicators of what is behind this dipping, diving and dodging sinusoidal cycle of virtual value. 

An academic group tackled this very issue in a powerful piece asking the question: “Is Bitcoin really un-Tethered,” and mirrored many of the same findings and accusations in the federal lawsuit. 

In short: Many are pondering if there is a cabal of secretive, powerful profit-hungry individuals controlling the price of Bitcoin through the movement of Tether, and lining their own pockets in the process while attempting to hide ownership interests, preventing anyone from realizing they are all working together. 

I am keen to see how this plays out in the formal court system, the court of public opinion and, of course, see what happens if this apparently historically hot and quivering bubble bursts. Will we see the implosion of the crypto market? 

Or, conversely, could the world see a rebalancing of crypto market forces that brings more transparency, fairness and, dare I say, credibility and respectability to the crypto sector – even while, no doubt, the debate will rage on if this exercise is the future of global value and financial transmission or a footnote in the history books equating a once-mighty digital funding hoard to Monopoly money.

Cannabanking

Number of banks accepting Marijuana business grew again last quarter, Feds report

The number of banks and credit unions that service the marijuana industry grew again in the third quarter of 2019, a move that shows more willingness from the financial services arena to accommodate a sector still illegal at the federal level – and a trend that doesn’t take away the need for a broader federal solution of new legislation or cannabis de-scheduling according to a federal report.

As of June 30, there were 553 banks and 162 credit unions that submitted documents indicating that they are providing financial services to state-legal cannabis businesses. That’s up from 493 and 140, respectively, in the previous quarter ending March 30.

While marijuana remains a federally controlled substance and accepting cannabis businesses as clients is largely viewed as risky within the financial sector, the increase reflects a growing willingness to take that chance as lawmakers work to resolve the marijuana banking issue.

Just before the end of the second quarter in March, the House Financial Services Committee approved the Secure and Fair Enforcement (SAFE) Banking Act, a bipartisan bill that would protect banks that service cannabis firms from being penalized by federal regulators. 

It’s possible that the development—along with expectations that the legislation would advance further—emboldened banks and credit unions to accommodate the industry.

The full House did vote in favor of the banking bill last month, sending it to the Senate. Rep. Ed Perlmutter (D-CO), sponsor of the legislation, has emphasized the need to provide these financial services to the industry in order to increase transparency and mitigate the risks associated with operating on a largely cash-only basis.

The Financial Crimes Enforcement Network, or FinCEN, released this latest update on cannabis banking in August. The numbers are based on an analysis of suspicious activity reports, or SARS, that financial institutions are required to file in accordance with 2014 cannabis banking guidance issued under the Obama administration.

“As of 30 June 2019, FinCEN has received a total of 87,249 SARs using the key phrases associated with [marijuana related businesses],” FinCEN wrote.

The overwhelming majority (68,378) were described as “marijuana limited,” which refers to marijuana firms that seem to be operating in compliance with state law, thus meeting the agency’s standard for being serviceable under existing federal guidelines.

About 6,900 fit the definition of “marijuana priority,” a term that means the business “may raise one or more of the red flags” under federal guidelines or they “may not be fully compliant with the appropriate state’s regulations” and so they’d be under investigation.

There were approximately 22,000 SARS marked as “marijuana termination,” defined as a cannabis business that has violated at least one federal enforcement priority or state regulation and so “the financial institution has decided to terminate its relationship with” the business, (via Marijuana Moment). To read the full FinCEN Cannabis banking report, please click here

Monroe’s Musings: Obviously, this is a positive trend for the state-legal cannabis sector, but, as a point of context, these overall numbers of bank accounts are still miniscule compared to many other legal industries and the ease of which they can get and keep bank accounts. 

The real answer must come from Congress that gives formal shielding to these businesses so they can safely and securely move and deposit the massive cash stores they are shouldering on a daily, weekly and monthly basis – making them easier targets from criminals. 

This has resulted in deadly clashes with robbers and security personnel. So this is more than an AML compliance, illicit drug and law enforcement money laundering issue, this is also a safety issue that has cost the lives of individuals simply because a business didn’t have access to basic bank deposit or credit card processing services.  

There has been growing momentum at the state and federal levels for what many consider to be the most important move: de-scheduling marijuana as one of the most dangerous drugs in this country. 

Until that happens, banks overall will still be reticent to offer formal banking services to marijuana businesses. 

In reality, that’s because, at any time, when or if the political winds change out of favor with cannabis, that leaves the institutions that helped cannabis-based operations with months or years of transactions that are instances of clear money laundering – a dynamic that could bring unwanted regulatory scrutiny, penalties and unwelcome law enforcement probes.

Human trafficking

Special ACFCS Exclusive Report: New non-profit aims at better arming banks, protecting victims against human trafficking by bolstering public-private partnerships, data sharing

A new non-profit comprised of a bevy of the brightest minds in financial crime compliance and investigations, a broad group cumulatively commanding decades of experience, is taking on one of the sector’s most vexing challenges with a mission to counter the rising scourge of human trafficking.  

The Anti-Human Trafficking Intelligence Initiative (ATII), which formally formed last month, is designed to be a hub helping to better knit together the at-times disparate groups of public and private entities divining the red flags of human trafficking from customer actions and transactional tells and the law enforcement agencies on the ground putting all the pieces together to identify and crush larger domestic and international trafficking networks. 

ATII is also working to foster more aggressive convergence between legacy bank financial intelligence units and the credit card fraud operations in banks, a move that can more quickly help institutions understand when larger trafficking operations are attempting to victimize one institution, enabling them to report those linked transactions more quickly to law enforcement. 

To visit ATII’s website, please click here or to start a dialogue on LinkedIn, please click here

As a point of context, human trafficking is a global problem generating billions of dollars annually, a horrific figure indeed, but one that has forced these illicit groups to interact with the financial system – a dynamic that allows specially trained anti-money laundering (AML) teams a chance to identify, interdict and report those instances of human slavery. 

The issue of human trafficking and its connections to banks – and what those red flags may look like – is not something lost on top regulatory and investigative watchdogs. 

Over the past decade, groups like the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) and the Paris-based Financial Action Task Force (FATF) have released guidance pieces to better help financial institutions understand when human traffickers might be attempting to move sullied funds through their institution.  

ATII will build on the analyses from FinCEN, FATF and others and combine their conclusions with insight from banks, law enforcement and other counter-trafficking groups in a bid to filter down to the latest schemes used by human trafficker operations to launder their ill-gotten proceeds. 

Some examples could include delving into and dissecting current flashpoint issues such as trafficking groups weaving together transactions in crypto coins and anonymous prepaid cards before transacting with banks – making financial institution identification all the more difficult and increasing pressure on information sharing between brick-and-mortar operations and virtual coin vaults. 

To read the full story, click here

Monroe’s Musings: Here is what I wrote in a LinkedIn posting related to the story: I really enjoyed working with ATII on this piece. 

This is such an important, but challenging, issue from a compliance and investigations perspective. I salute ATII’s mission and believe this non-profit can help so many people better detect, prevent and report on this horrific crime.  

This initiative has the potential to empower fincrime professionals across the spectrum to better understand the nuanced red flags of human trafficking and could literally change and save lives. Thank you again for the opportunity to tell your story.