Banks, Criminals, and Dirty Money

Fincen Files

With the recent leak of 2,657 documents known as the FinCEN files, a spotlight is again on the relationship between international banks, Russian oligarchs, and the laundering of dirty money. The leaked documents reveal how some of the world’s largest banks took part in cleaning about $2 trillion. Feeling more like a plot trajectory of Ozark (the award-winning Netflix series about money laundering) than real life, the FinCEN files drawback the curtain on some of the international banking system’s most closely guarded secrets.

What is FinCEN?

FinCEN is the acronym for the U.S. Financial Crimes Enforcement Network. These are the people within the U.S. Treasury who combat financial crimes and monitor transactions made in U.S. dollars anywhere in the world. When a bank is concerned that a transaction might be of concern, it submits a Suspicious Activity Reports (SAR) to FinCEN authorities for review. Concerns arise over anything from a suspicious Electronic Funds Transfer (EFT) to suspicions concerning the source of the funds.

For any criminal enterprise, from manufacturing illicit drugs to corruption and pyramid schemes, the need to “clean” money is paramount. Getting the proceeds from illegal activity into a bank account that effectively erases its connection to any crime is a lucrative business: the more respectable the bank, the more effective the laundering.

Banks know of this activity, of course, and by law must maintain their due diligence on who their clients are and where the money is coming from. Filing SARS is not enough. At the first sign of evidence of criminal activity, banks should stop the flow of money and trigger FinCEN and other relevant authorities into play.

Don’t Ask, Don’t Tell.

As the FinCEN files highlight clearly, many international banks are much more comfortable taking a “Don’t Ask, Don’t Tell” approach to their due diligence. Some of the lowlights from the files:

  • HSBC continued to allow money obtained through fraud to move around the world freely even after U.S. investigators confirmed that the scheme was fraudulent.
  • JP Morgan allowed a company of unknown ownership (a clear FinCEN red flag) to move more than $1 billion through a London-based account. The bank later learned that there is a possibility the company is owned by a criminal on the FBI’s 10 Most Wanted List.
  • Despite evidence that Russian President Vladimir Putin was using a close associate to help him avoid sanctions against him using financial services in the West, Barclay’s Bank in London allowed money to be moved and accessed freely.
  • Deutsche Bank regularly moved money for known members of organized-crime syndicates as well as for terrorists and drug traffickers.

The list goes on.

What Makes the FinCEN files Important

Compared to other leaks of a similar nature, which focused on one or two banks, the FinCEN files are far more comprehensive in scope. The files highlight a wide range of suspicious behavior across a significant number of banks, hinting of a systemic problem rather than just a few rogue institutions or individuals at work.

The FinCEN files also point to a clear flaw in the policies and processes governing due diligence across the banking system. Once a bank files a SAR, it is extremely difficult to prosecute it in any way even if it continues to allow the reported activities to occur. The U.N. Office on Drugs and Crime estimated that as little as 1 percent of illicit money that flows through the international banking system is seized or frozen by enforcement agencies.

Some initial progress is being made. Reporting in August, for instance, the Wall Street Journal noted that “nearly 20 countries have created information-sharing partnerships” that create more open and two-way communication channels for discussing suspected financial crimes. The belief is that “when the two parties can share information on specific cases or the types of potential criminal activity they’re seeing, the thinking goes, the industry can more effectively screen for suspicious activity.’

Closer to Home

What is also clear from the FinCEN files is that U.S. authorities were made aware of the 2,121 Suspicious Activity Reports from 2001 through 2017, which is worrisome given that any number of the SARs activities could post a direct or indirect threat to national security.

As the WSJ reported on September 21, the U.S. Treasury Department moved in recent weeks to address “a longstanding gap in U.S. anti-money-laundering regulations.” As experts have pointed out, current regulations around due diligence, “coupled with elevated enforcement of anti-money-laundering laws over the past decade, has driven institutions to file massive amounts of low-value reports.”

Proposed amendments are “part of a larger effort to modernize” U.S. anti-money laundering regulations. Changes would include “clarifying requirements related to risk assessments, and initial and ongoing customer due diligence.” Amendments might also extend to “revising guidance on so-called politically exposed persons” as well as extending regulatory reach to include financial institutions that have traditionally operated without the oversight of a federal regulator. This latter list includes private banks, non-federally insured credit unions, and some trust companies.

However this story unfolds in the coming months, there is a clear expectation due diligence and compliance regulations are undergoing some dramatic, and much-needed, changes. Watch this blog for important updates and follow-up stories as required.


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