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Daily Briefing: FinCEN budget request seeks funding, staffing bump, UK frets on AI, AML, and more

Wednesday, June 5, 2019   (0 Comments)
Posted by: Brian Monroe
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By Brian Monroe
bmonroe@acfcs.org
June 5, 2019

Quote of the Day: “You have been chosen, and you must therefore use such strength and heart and wits as you have.” – J. R. R. Tolkien

In today’s ACFCS Fincrime Briefing, FinCEN seeks more funding, staff to tackle special measures, cyber attackers, U.K. regulator exhorts banks to analyze boon, bane of AI, new human trafficking hotline in Canada, ACFCS covers new DOJ, OFAC, FinCEN guidance in video update, and more.

Please enjoy this unlocked story, part of the many benefits of being an ACFCS member.

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!


FinCEN

In latest FinCEN budget request, review, bureau asks for nearly $10 million more to tackle cyber, ‘special measures,’ data

FinCEN’s FY2020 Report to Congress Reveals its Priorities and Performance: Bureau Needs More Resources – and a TSV SAR Feedback Loop – To Really Make a Difference in the Fight Against Crime & Corruption

In his blog, Jim Richards, the former top AML officer for Wells Fargo, analyzes the latest budget request from the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), noting that the relatively diminutive bureau of roughly 330 is requesting more funds and resources – but also should undertake crafting a mechanism to improve feedback to banks filing suspicious activity reports (SARs), a requirement of the Bank Secrecy Act (BSA), the nation’s chief anti-money laundering (AML) law.

Richards notes that FinCEN, the country’s financial intelligence unit, is asking for just under $10 million to better tackle the rising specter of cyber attacks and investigations, better capture and analyze domestic and foreign data and devote resources to wielding “special measures,” including designating suspected major money laundering portals. Here are some of his thoughts:

Every year each US federal government department and agency submits its Congressional budget justification and annual performance report and plan: essentially a document that says to Congress “here’s our mission, here’s how we did last year, here’s what we need for next year.”

FinCEN’s fiscal year 2020 (October 1, 2019 through September 30, 2020) Congressional Budget Justification and Annual Performance Report and Plan is available now.

The FY2019 budget called for 332 people and a budget of $115 million. The FY2020 budget proposes an increase to 359 people and a budget of $124.7 million, with the increase in people split between two priority programs: 13 for cybercrime, and 14 for “special measures.”

Those measures include the actual special measures section (section 311) of the Patriot Act, requests to financial institutions for data on foreign financial institution wire transfers, and Geographic Targeting Orders (GTOs).

On SARs: Rising faster than other AML reports

The data on SARs filed, total BSA reports filed, and BSA Database Users is interesting. From FY2014 through FY2018 (actuals) and through FY2020 (estimates), the number of SARs filed has gone from 1.9 million to 2.7 million, an increase of 41.5%.

But in the same period, the total number of BSA reports filed – including SARs – has gone from 19.2 million to 20.9 million, an increase of only 9.2%.

That tells us two things: SARs are estimated to make up about 1 out of every 8 BSA reports filed in FY2020 compared to 1 out of every 10 BSA reports filed in FY2014 (a positive trend); and the total number of non-SAR BSA filings has essentially been the same for the last 7 years. In other words, the number of CTRs, CMIRs, and FBARs is not going up.

On law enforcement feedback of AML filings: Very very helpful in new, ongoing cases

FinCEN monitors the percentage of domestic law enforcement and regulators who assert queried BSA data led to detection and deterrence of illicit activity.

This performance measure looks at the value of BSA data, such as whether the data provided unknown information, supplemented or expanded known information, verified information, helped identify new leads, opened a new investigation or examination, supported an existing investigation or examination, or provided information for an investigative or examination report.

In FY 2018, FinCEN narrowly missed its target of 86 percent with 85 percent of users finding value from the data. FinCEN will work toward increasing its FinCEN Portal/FinCEN Query training efforts to provide more users with the knowledge needed in order to better utilize both FinCEN Portal and FinCEN Query. In FY 2019, the target is set at 86 percent and 87 percent in FY 2020.

On the tactical value of SARs: Law enforcement feedback must get back to bank producers

The feedback loop between the users of BSA data (law enforcement, regulators, and FinCEN) must be expanded to include the producers (financial institutions) of BSA data

I have written previously about the need to provide financial institutions with more feedback on the 20 million+ BSA reports they produce every year. In that article, I introduced something I call the “TSV” SAR, or “Tactical or Strategic Value” SAR.

What is a “TSV SAR”? A SAR that has Tactical or Strategic Value to Law Enforcement, where the value is determined by Law Enforcement providing a response or feedback to the filing financial institution within five years of the filing of the SAR that the SAR provided tactical (it led to or supported a particular case) or strategic (it contributed to or confirmed a typology) value, (via Jim Richards, founder of RegTech Consulting).

To read the full FinCEN report to Congress, click here.

Monroe’s Musings:

FinCEN is one of the most important government agencies in the U.S., and really the world, when it comes to fighting domestic and international financial crimes. It is also a major AML compliance regulator, working in concert with the IRS AML division, to review a bevy of sectors without a federal functional regulator, like money services businesses.

So to say the bureau has been historically understaffed is an understatement. FinCEN needs more funding. It needs more staff.

It needs more resources to better juggle the many shifting priorities it has to oversee and address, including better analyzing its database of AML filings, more aggressively wielding its “special measures” and other authorities, like designating an entity a money laundering concern, and foreign policy flashpoints, like Russia and China. Oh, and it also puts out guidance.  

And as this budget report notes, with FinCEN now tasked and enlisted to take up the fight against cyber attackers and crypto vulnerabilities, the agency’s staffers are no doubt stretched very thin.

With more staff, resources and even upgraded technologies, FinCEN can do even more good for the U.S. and, as this document alludes, better partner with foreign countries to teach them the tricks of the trade and form investigative and data sharing partnerships to help make connections and see the transactional puzzle pieces scattered by global criminal networks – and take them down.


AI/Compliance

U.K. regulator exhorts banks, boards to explore potential of AI and AML, but also be accountable for machine learning failings

As banks across the globe more aggressively explore the time, resource and cost savings of artificial intelligence and machine learning, particularly in the burdensome and data-heavy areas of countering financial crime, institutions should also be wary of tech-related pitfalls and be honest and accountable when system hopes and dreams come crashing down.

Those are just some of the sentiments expressed by James Proudman, Executive Director of UK Deposit Takers Supervision for the Bank of England (BoE), in a speech Tuesday at a Financial Conduct Authority (FCA) function.

He noted that these artificial intelligence systems are increasingly being used and scrutinized by banks to bolster anti-money laundering (AML) programs, analyses, effectiveness and outcomes – while also lowering resources and headcount spend.   

“The art of managing technology is an increasingly important strategic issue facing boards, financial services companies included,” he said, adding that firms must ensure oversight of these technologies lest they exclude certain customers.

“And since it is a mantra amongst banking regulators that governance failings are the root cause of almost all prudential failures, this is also a topic of increased concern to prudential regulators.”

AI/ML in financial services could “herald an era of leaner, faster and more tailored operations, reducing costs and ultimately improving outcomes for customers,” he said, adding that banks must still have individuals in senior positions dedicated to being responsible for the outcomes of machine activities, a result of the country’s focus on the role of “senior managers” in egregious compliance failings.

To gather more evidence of what is happening in the U.K., the Bank of England and the FCA sent a survey in March to more than 200 firms, including the most significant banks, building societies, insurance companies and financial market infrastructure firms in the UK.

It was the first systematic survey of AI/ML adoption in financial services, with full results to be published in the coming months.

Proudman also touched on AI and machine learning in the context of AML.

For example, AI and ML are “helping firms in anti-money laundering (AML) and fraud detection,” he said. “Until recently, most firms were using a rules-based approach to AML monitoring.”

But such a mindset is changing and firms are “introducing ML software that produces more accurate results, more efficiently, by bringing together customer data with publicly available information on customers from the internet to detect anomalous flows of funds,” Proudman said.

About two thirds of banks and insurers are either already using AI in this process or actively experimenting with it, according to a 2018 IIF survey.

These firms are “discovering more cases while reducing the number of false alerts,” he said. “This is crucial in an area where rates of so-called “false-positives” of 85 per cent or higher are common across the industry.”

But with more power in terms of technology, comes more responsibility to make sure these virtual machines are doing what is “right,” Proudman said.

“You cannot tell a machine to ‘do the right thing’ without somehow first telling it what ‘right’ is - nor can a machine be a whistle-blower of its own learning algorithm,” he said. “As the rate of introduction of AI/ML in financial services looks set to increase, so too does the extent of execution risk that boards will need to oversee and mitigate,” (via the BoE).

Monroe’s Musings:

Proudman brings up a fantastic nuance that is not talked about too much in all the hype, hoopla and hope related to AI, machine learning, deep learning and its potential to radically change financial crime compliance investigations, effectiveness and outcomes.

If these machines, while learning, teach themselves incorrectly, they could also be missing just as much as they are finding. Without professionals closely monitoring these AI-infused systems, and ensuring automation is not running amuck, banks may find out months or even years later that a system decided to completely disregard a certain crime, red flag or transaction type.

This puts more pressure on both the vendors creating these systems and the bank compliance professionals learning about them to ensure the smoothest transition between legacy bank core systems, near-legacy AML transaction monitoring systems and shiny new AI tech.  


Human trafficking

The Canadian Centre to End Human Trafficking fights back with Canada’s first-ever national human trafficking hotline

The Canadian Centre to End Human Trafficking (The Centre), a national charitable organization dedicated to ending human trafficking, launched the Canadian Human Trafficking Hotline at 1-833-900-1010.

This multi-lingual hotline is the first-of-its-kind in Canada and is operational 24/7, 365 days a year. The hotline is committed to eradicating this horrific crime and assisting the estimated thousands of victims and survivors in Canada, who are being exploited through forced prostitution or forced labor.

“This hotline will provide critical resources to victims and survivors and will help law enforcement dismantle human trafficking networks across the country,” says Barbara Gosse, CEO, The Canadian Centre to End Human Trafficking.

“People find it hard to believe, but human trafficking is a real threat to vulnerable individuals across this country. Law enforcement officials and survivors tell us that the statistics grossly underestimate the number of individuals, many of them children, trapped by this human rights abuse. We all have a moral and an ethical obligation to make a positive difference, and the hotline is a vital step in this process.”

The hotline has adopted a three-prong approach to making a difference on this issue:

  • Respond: leverage the hotline to immediately support and help victims/survivors; ensure a 24/7 response; and gather primary data that is critical to understanding the crime
  • Equip: use data to define all the types of trafficking in a given area; learn how the criminal networks operate; identify opportunities for intervention; and provide accurate information to educate and make the public aware
  • Disrupt: mobilize disruption campaigns to target specific types of trafficking

When to Call the Hotline

People should contact the hotline if they are victims/survivors of forced prostitution or forced labor, think they might be or think someone else might be. The Hotline Response Advocates will also take tips, answer questions and forward information, when appropriate, to law enforcement.

The website for the hotline – www.canadianhumantraffickinghotline.ca – will also be a public source for:

  • Submitting a tip
  • A national directory of social services
  • Education and outreach materials
  • Statistics and research reports

Built on anonymity, this hotline is staffed by Hotline Response Advocates who have received more than 60 hours of victim-centered training provided by The Centre’s technical consultant, Polaris, a leader in the global fight to eradicate modern slavery.

Polaris has operated the National Human Trafficking Hotline in the United States for more than 10 years and has also been instrumental developing similar systems in the UK and Mexico. Due to the international nature of this crime, global cooperation is a key to making a difference.

“A victim’s journey doesn’t end at the point of exit,” said Heidi Illingworth, Federal Ombudsman for Victims of Crime. “Having a national hotline available to connect victims and survivors with resources, both immediate and long-term, no matter where they are in Canada, is vital to supporting those who need it the most,” (via the Centre).

Monroe’s Musings:

This is such a worthy effort and I am glad to see Canada working so diligently to find a way to better help victims, with a potential benefit to law enforcement that these individuals could give tips to investigators and help crush larger human trafficking and organized criminal networks.


Guidance

Want to know how to create a financial crime compliance program in cases where there isn’t a law requiring you to make one?

In ACFCS’ latest Tip of the Week video, Vice President of Content, Brian Monroe, reviews three critical pieces of new guidance from federal investigative, regulatory and sanctions agencies detailing, in some cases for the first time, how to create a compliance program that could mitigate, or even negate, a potential monetary penalty.

One key overriding theme linking these pieces from the U.S. Department of Justice, Office of Foreign Assets Control and Financial Crimes Enforcement Network together is that authorities are looking for a shift toward compliance program effectiveness, rather than a good faith effort, where compliance professionals have the authority, autonomy, technology and resources to adequately and accurately counter illicit schemes and better identify their transactional tells.

Let’s hear what you think and have to say. Feel free to add comments and start a dialogue.

To see the full video on YouTube, click here.

To see the full video on LinkedIn, click here


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