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The FinCEN Files: Don’t Rush to Judgment

Oct. 29, 2020, 8:01 AM

There’s been a renewed focus on the misuse of the financial system to facilitate money laundering since the release of the Panama and Paradise Papers in 2016 and 2017. Recent reporting by the International Consortium of Investigative Journalists focuses on 2,500 leaked suspicious activity reports (SARs) made to the Financial Crimes Enforcement Network (FinCEN) in the U.S.

The FinCEN Files represent less than 0.02% of the suspicious activity reports filed over that period in the U.S., a tiny fraction of the suspicious transactions that banks have successfully identified and escalated to U.S. authorities. A similar story arises in the U.K., with the National Crime Agency receiving 478,437 SARs between 2018 and 2019 alone.

Despite some of the headlines, there should be no rush to judgment as to what the files reveal about the current system or any lessons to be learned. It is critical to understand the environment and context in which the relevant SARs were made.

What to Make of the Numbers

While many critics have deemed the figures alarming, a closer look at the information is warranted. Financial institutions are legally required to make SARs under a low reporting threshold, resulting in SARs being filed based on mere suspicion, rather than actual knowledge, of wrongdoing.

The large number of SARs suggests that institutions are taking appropriate steps to identify suspicious transactions and report them to the authorities.

In contrast, it would be alarming if institutions only made a small number of SARs. This would indicate a failure to identify and escalate suspicions, especially given the huge amount of suspect funds that circulate in the global financial system.

The large number of SARs is better viewed as an indicator of functioning transaction monitoring, information-gathering, and risk evaluation.

Additionally, it must be understood that, in many countries, a failure to submit a suspicious activity report may constitute a crime or regulatory breach. This results in many SARs that have limited intelligence value and often overwhelm the financial intelligence units receiving them.

In the U.K., the authorities have reviewed the SAR regime but have so far shied away from narrowing reporting obligations due to concerns of stifling the flow of information. Inevitably, therefore, a disproportionate number of SARs will be made compared to the cases actioned by law enforcement.

Misinterpretations of what the huge number of SARs may indicate could be counterproductive and may inadvertently discourage individuals from filing SARs, especially if their highly confidential reports are to be exposed in the press.

It is crucial to note that the data in the FinCEN Files is from 2000-2017, and there have been significant improvements in financial regulations and legal standards since then. In Europe, there has been an increased focus on a risk-based approach to these matters, particularly for clients or transactions connected to higher risk jurisdictions. The data in the files is therefore not an accurate reflection of enforcement activity today.

It bears remembering that the authorities will frequently explicitly consent to certain transactions or client relationships continuing in order to assist their own investigations. Institutions should not therefore be criticized for continuing with a relationship after submitting a report.

More Government Action Ahead

While financial institutions play an important role in mitigating financial crime risk, responsibility for detailed investigation ultimately rests with government and enforcement agencies.

The ability of banks to combat illicit activity could be improved by increased intelligence sharing between law enforcement authorities and the financial services sector. This would help in determining whether to take on clients initially, and also in the subsequent monitoring of client activity and transactions.

The FinCEN Files’ release, and the prospect that more disclosures are coming, may put pressure on U.S. authorities to appear to be taking action. FinCEN has recently signaled changes will be made to U.S. regulations with its advance notice of proposed rulemaking, which solicited public comments on a several potential amendments under the Bank Secrecy Act.

The proposed amendments are “intended to modernize the regulatory regime to address the evolving threats of illicit finance…resulting in the enhanced effectiveness and efficiency of anti-money laundering programs.”

For regulated institutions, the nature and extent of any action to be taken in response to the files is less clear. While the files provide some focused information on a number of prominent higher-risk individuals, broadly, the information released is a varied selection of SARs over a period of years, which may not be easily actionable.

Institutions need to do what is reasonable in the circumstances, taking into account their resources, customer base and risk profile.

A Better Understanding of AML Is Needed

Despite current challenges, institutions should not under-invest in their anti-money laundering function. The FinCEN Files should also act as a nudge to regulators to review processes and guidance, and to evaluate the effectiveness of the AML regime.

It would be dismissive of the wider context to say that the files reveal the tip of the iceberg. The small sample of SARs in the files may be the most sensational cases, and may have been taken out of context, without the benefit of understanding all of the information shared between institutions and regulators.

The recent reporting also does not take account of changes to regulations made within the last few years—or the inefficiencies of the system itself.

While it is clear that there is room for improvement, a better understanding of how the system works is required before laying criticism against the institutions themselves.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Arun Srivastava is a corporate partner and Simon Airey is a litigation partner in the London office of Paul Hastings LLP.

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