Update: Banks, Criminals, and Dirty Money

Fincen Files

In my blog on September 21st, I detailed the recent flurry of regulatory posturing and reactions to the leak of 2,657 documents known as the FinCEN files. Briefly, as BuzzFeed News (BFN) summarizes:

“The FinCEN Files expose an underlying truth of the modern era: The networks through which dirty money traverse the world have become vital arteries of the global economy. They enable a shadow financial system so wide-ranging and so unchecked that it has become inextricable from the so-called legitimate economy. Banks with household names have helped to make it so.”

In one highlighted case, BBC News reported, HSBC moved about $80 million through its U.S. business to HSBC accounts in Hong Kong in 2013 and 2014. Authorities eventually tracked the money back to a global Ponzi scheme that came to be known in FinCEN circles as WCM777. Run by a Chinese national based in the Los Angeles area, the scam promoted a global investment bank known as World Capital Market. Its promise: a payout of 100 percent profit in 100 days. Its target: East Asian and Latino communities, many from the more impoverished regions of the U.S., Colombia, and Peru where the lure of Christian imagery and the promise of quick money was a powerful weapon.

To its credit, HSBC did file the mandatory Suspicious Activity Report (SAR) noting its concerns but did nothing more until the spring of 2014 when the U.S. Securities and Exchange Commission filed charges. Soon after, regulators barred World Capital Market from doing business in at least three states. Ironically, WCM777 funds began to flow through the bank’s network after HSBC was fined $1.9 billion for money laundering in the U.S.

(In what might be an unrelated item, September 18 saw shares in the most prominent global lenders slide quite dramatically, with the Stoxx 600 Banks index falling 4.6 percent by mid-afternoon. HSBC shares slumped below a level last seen in the 2008 financial crisis, while shares of Deutsche Bank and Barclay’s also dipped before a slight bounce back later in the week.)

As details continue to emerge, more familiar names are making headlines. The Bank of New York Mellon, for instance, flagged $137 million in transactions from businesses linked to OneCoin, which Coindesk describes as “a crypto scheme the U.S. government accused of being a Ponzi.” After filing a SAR, BNY Mellon then continued to send the money on to Hong Kong’s DBS bank as part of the cleansing process. Interesting, both BNY Mellon and DBS hold steadfast to their claims that they were in full compliance with existing financial regulations when completing this dubious transaction.

The FinCEN files also show that Deutsche Bank flagged $1.3 trillion in transactions in the period from 2011 to 2017, JP Morgan around $500 billion, and Bank of America another $384 billion. Other banks that processed billions during this period include State Street Corporation, Commerzbank AG, and China Investment Corporation.

As I observed previously, these cases taken collectively reveal a problematic loophole in the global banking system: Once a bank files a SAR, it is doubtful in the current climate that any bank or executives will be held accountable.

According to BFN, Democratic Senator Ron Wyden, who sits as a member of the Senate Intelligence Committee, sees the current FinCEN revelations as further evidence “that we now have two systems of law enforcement and justice in the country.” For most of us, financial crimes are punishable with fines and jail sentences, but “if you’re wealthy and well-connected, you can figure out how to do an enormous amount of harm to society at large and ensure that it accrues to enormous financial benefit for all of you.” To many experts, SARs are seen as “a kind of get-out-of-jail-free card, filing alerts about a huge array of transactions without actually moving to halt them.”

Possible Solutions to an Impenetrable Problem

Given that banks like HSBC regularly opt for the lowest possible level of compliance, there is increasing pressure for greater accountability and transparency across the system. As the current FinCEN conversations seem to underscore, it was only the knowledge that some of the negative reports would become public that compelled many of the banks to act at all. One step being considered by lawmakers in many countries is to require companies to disclose full ownership details of a business rather than allowing shell companies to effectively hide the identities of the individuals benefiting from suspicious transactions. Being able to share this type of intelligence in a timely, proactive, and strategic manner will also improve the effectiveness of regulatory and enforcement agencies.

To others, however, SARs themselves are only symptomatic of broader, systemic problems in the regulatory framework. The emphasis on SARs reporting forces banks to invest heavily in personnel and technology needed to identify suspicious cases. Essentially, banks are doing what they are told in order to avoid fines and other punitive measures. In doing so, they create millions of documents that overload regulatory and enforcement agencies. This flood of paperwork makes the detection of real money laundering a game of chance or, at best, a hit-and-miss affair. The resources used to generate this flood of SARs, banks argue, could be used more effectively to keep dirty money from ever entering the global banking system.

An interesting fact to remember throughout these FinCEN file revelations: According to the International Consortium of International Journalists, financial institutions filed more than 12 million SARs from 2011 through 2017, which means that the total number of leaked documents represents only about 0.02 percent of that total. Clearly, there are many more stores to share and many more issues to investigate.

At the end of the day, the global banking system will be best served by this leak only if it leads to more strategic ways for international agencies to:

  • work together more openly
  • share information more effectively
  • make a credible impact on the movement of dirty money through enhanced anti-money laundering (AML) programs around the world.

As always, watch this blog for important updates and follow-up stories as the FinCEN files continue to provide new details and insights into the way money moves through our banks.


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