What the FinCEN Files tell us about the AML framework

Recently, an international consortium of 108 media organizations reported the results of a 16-month investigation into how money is laundered through the financial system. The investigation was triggered after Buzzfeed received 2100 SARs (suspicious activity reports) filed by some of the world’s largest banks. The bottom line finding is that billions of dollars are generated by banks, which regularly process transactions on behalf of entities whom they suspect of suspicious activities. 

Not surprisingly, the findings have resulted in calls for greater scrutiny of anti-money laundering protocols. Yesterday, Linda Lacewell, Superintendent of New York’s Department of Financial Services, wrote a scathing analysis in Law360 (subscription required) based on the findings, in which she accused the largest banks of using suspicious activity reports as a “get out of jail free card,” enabling them to make huge amounts of money off of criminal activity. 

In addition, FinCEN has responded to the investigation by coming out with a statement reminding would-be leakers that the unauthorized disclosure of SARs is a federal crime and issuing an Advanced Notice of Proposed Rulemaking (ANPR) inviting industry stakeholders to suggest improvements to the AML framework. 

Here are some initial thoughts:

• Too often when it comes to BSA regulations, smaller banks and credit unions are disproportionately impacted by the misdeeds of larger institutions. There is something fundamentally wrong with a framework that imposes the same basic standards on every institution, regardless of size and sophistication. Whatever changes come as a result of this report should be tied to an institution’s asset size and sophistication. 
• Regulators and policymakers should take a realistic view of what financial institutions should be expected to do. Let’s face it – illegal activity generates a tremendous amount of money around the world. The current system is far from perfect, but it gives law enforcement officials and regulators insights into illicit activity to which they otherwise would not have access. 
• Don’t forget about the right to financial privacy. Call me old-fashioned, but the existing SAR system attempts to strike a balance between a consumer’s right to privacy and law enforcement’s desire to track illicit activity. 

The bottom line is that we should take a serious, thoughtful look at our anti-money laundering framework, but by concentrating exclusively on the role of financial institutions, we run the risk of identifying a symptom rather than a cause of just why there is so much international corruption and what can be done to deter it.