The land of the free: combatting financial crime in the US

Update: 10.17am 9.11.20

“When America sneezes, the whole world catches a cold” goes the old saying and, while perhaps not the most tasteful of metaphors during a global pandemic, it does seems apt to describe the impact of the US on the world of anti-money laundering and counter terrorism financing.

Whether it is the power of the dollar, strong sanctions imposition and enforcement, or the robust role the US plays in the Financial Action Task Force (FATF), no single nation on earth is arguably more influential and crucial to the ongoing fight against financial crime then old Uncle Sam.

Just days away from a presidential election that has been raucous in nature we take a look at the current regulatory landscape and environment for anti-money laundering and counter terrorism financing, focusing on suspicious activity reports, enforcement action, sanctions, corporate transparency and regulation of cryptocurrencies. We attempt to gauge what may happen down the line if either candidate wins.

There’s no better place to start than arguably the biggest financial crime story in recent months: September’s publication of thousands of leaked suspicious activity reports, given the moniker the “FinCEN Files.”

Suspicious Transaction Reporting

It isn’t too often that a mechanism for detecting financial crime dominates the headlines but the FinCEN Files last month certainly did just that. The investigation, months in the making, saw Buzzfeed News obtain 2,657 leaked documents, including 2,121 SARs, and share them with the International Consortium of Investigative Journalists (ICIJ). A reported 400 journalists in 88 countries then worked on investigating the information. The files showed details of more than $2 trillion of payments that were made between 1999 and 2017 even though banks had flagged them as suspicious.

A crucial point is that the transactions in the FinCEN files didn’t relate to the banks’ own customers. Rather it was in their roles as correspondent banks, converting money into dollars on behalf of other banks, that the suspicious activity was flagged.

For Graham Barrow, anti-money laundering expert and director of The Dark Money Files, this says something about the nature of the global banking system.

He says: “The FinCEN Files bring into sharp focus the role of the US as the world’s banker.

“Criminals like to deal in dollars because they don’t want to deal in their own local currencies because they are inherently problematic. The goal of the corrupt politician, government official or organised criminal gang is to get your money out of the country you acquired it in, get it into a safe haven and convert it into dollars,” he adds.

It is no mystery why the FinCEN Files story took off in the way it did, as it taps into lingering distrust of bankers and their intentions, possibly a legacy of the 2008 financial crisis.

As FinCrime Report noted last month, the blame game got under way immediately. Some in the banking sector pointed out that the banks had fulfilled their obligations under the rules, some pointed to restrictions on disclosing SAR content cross-jurisdictionally and others pointed to the sheer number of SARs filed every year (FinCEN received 2.3 million in 2019 alone) and the lack of staff in agencies to deal with them.

For Barrow, the problem is that the horse has long bolted by the time a SAR is acted on.

He says: “The median time from detection to filing was about six months, so they are pretty useless in terms of managing active threats.”

He also says that many of the SARs were filed in response to public reporting of problems, so they are reactive, filed long after the event.

“I think the biggest changes will be a call for greater secrecy and protection of data.” 

Daniel Wager, Vice President of Financial Crime Compliance, LexisNexis Risk Solutions

Barrow uses the analogy of a shop selling designer goods that is not sure where 20% of its stock comes from but sells it anyway, and then tells the police afterwards that they think it might not be legitimate.

“That’s exactly what a SAR is. After they’ve transacted the money they say ‘You know, that may have been suspicious.’ We wouldn’t have any truck with a luxury goods firm not checking where its stock comes form, so banks really shouldn’t be processing funds if it is not comfortable that they are legitimate.”

So what can we expect to change? In the aftermath of the FinCEN Files, public figures across the globe called for action, including MEPs, British MPs and notably, Linda Lacewell, Superintendent of the influential regulator the New York State Department of Financial Services. Lacewell wrote a highly critical op-ed calling on banks to stop using SARs as a “free pass”, calling for bankers who allow corrupt transactions to be sanctioned and even suggesting regulators prescribe automated transaction monitoring if banks don’t do this effectively themselves.

Whether these comments translate into wider reform of the SARs reporting system is doubtful though, according to several commentators FinCrime Report spoke to for this report.

A thornier question is whether the ICIJ and Buzzfeed have actually helped matters by publishing SAR information. SARs are supposed to be confidential and are not evidence of a crime, merely suspicion – and there are strict rules about disclosing the information on the basis of mere suspicion. Sometimes investigatory agencies do not want a SAR to be acted on because they do not want to tip off the alleged criminals.

One consequence could actually be a tightening of the secrecy around reporting.

Daniel Wager, Vice President of Financial Crime Compliance at LexisNexis Risk Solutions, says it is “proper and due” that if a bank files a SAR based on mere suspicion, the person in question is afforded secrecy, because often their behaviour is eccentric but not criminal (such as somebody who stashes cash under their mattress).

He says: “I think the biggest changes will be a call for greater secrecy and protection of data and there will be likely be a push to reduce the numbers of filings, because that reduces the optics of ‘how could millions of dollars have moved and nobody acted on it?’

Corporate transparency

Whether the future evolution of the SARs system itself will look different under Joe Biden’s presidency as opposed to a Donald Trump presidency is unclear.

However, there may well be some differences between the candidates on the broader issue of corporate transparency, which for Barrow and many others is the real key to stepping up the fight against financial crime in the US.

Currently the US does not have a federal register of beneficial owners and does not enforce requirements to ascertain and verify who owns companies. This allows the proliferation of thousands of anonymous shell companies, which can be used to hide the origins of money. The Financial Action Task Force has raised this on numerous occasions and described it as a “significant shortcoming” in a follow-up report on the US in March this year.

This means the US is falling behind the UK, which created its register in 2016, and the EU, which directed its member states to set up registers of beneficial owners in 2020.

“Without corporate transparency regulations, the US will always be weaker than it should be”, says Jim Richards, founder of RegTech Consulting and an experienced financial crime compliance professional.

Change could be coming, although many are not holding their breath. In October 2019 the House of Representatives passed the Corporate Transparency Bill, which would require companies to disclose information about their beneficial owners in a federal register upon formation and on an annual basis. It enjoyed bipartisan support. However, it has since stalled in the Senate and many now are sceptical about whether the bill will become law.

But what are the barriers to enactment? The business community, as you might expect, has put up some resistance to the measures on cost and resource grounds.

However, Barrow has a much more cynical take on matters. “There shouldn’t be anywhere in the world where you can create a legal entity and hide the ownership behind secrecy.

“That’s a problem if significant numbers of elected and unelected public officials themselves have arrangements which would not necessarily want a bright light to be shone on them”.

Even if a corporate transparency act of some description is passed, the question is whether the President would support the enforcement of the measures.

Richards believes that a Trump presidency, with his focus on small state, low business regulation, would have been loath to fund the regulatory agencies appropriately.

By contrast, he says: “Under a Biden administration it is more likely that the agencies that would enforce the requirements would be appropriately funded.”

Wager is more hopeful that some form of corporate transparency act will pass, given the level of bipartisan support the measures initially received in the House of Representatives. He says: “It would fundamentally change the way we view things. Imagine tens of thousands of Nevada shell companies; the connections we could highlight to politicians across the world and to tax evasion… it would be staggering.”

Enforcement action and prosecutions

While transparency could aid investigations and deter bad practice, what will the difference be between Trump and Biden in the type and volume of penalties handed out to criminals once they have been caught?

The temptation is to say “not a lot”, due to the separation of powers in the US constitution. “Political influence only has some effect on whether criminal investigations are progressed,” says Wager, who points out that the judiciary tends to be apolitical and has lifetime tenure.

Regulators are also independent.

However, Andrew Jacobson, associate at law firm Seward & Kissel, points out that the President does have some impact. He says: “In some sense, presidents do dictate policy because they have the authority to appoint individuals to senior positions and so they have a degree of control over policy and how laws will be administered, but it is very difficult for them to be dictating individual cases, particularly criminal prosecutions.”

“We have a real reluctance to imprison people and hold them criminally accountable.” 

Graham Barrow, director, The Dark Money Files

So the President’s role on enforcement action and prosecutions may be more limited to setting the general direction of travel and focus.

However, we must point out that statistics do seem to show changes in patterns of prosecutions under different presidents. Richards points to figures from the Attorney General’s office which show a 17% drop in white collar crime cases filed in the courts in the first two years of Trump’s presidency compared to the last four years under Obama. Non-prosecution agreements for Bank Secrecy Act offences, such as money laundering, bribery and fraud, also fell 57% over the same period with agreements involving financial institutions dropping 37%. As a comparison, criminal cases for violence and immigration offences rose 31% and 32% respectively.  It would appear then that Trump may have been less keen on prosecuting financial crime than Obama, and presumably less so than Biden would be.

“I think that a Biden administration will probably go after bad corporate actors as well as white collar crime”, says Richards.

Sanctions

As we have seen, the US is arguably suffering from both a reluctance to adopt corporate transparency measures and to prosecute money launderers, especially in the corporate world. 

This infuriates Barrow, who believes that there is still an inaccurate perception among the US public that financial crimes are victimless. He says that financial crime is often glamourised, when it is actually a “nasty world that people suffer from”.

He says: “To me it is like robbing a bank, but instead you take it from the inside. We have a real reluctance to imprison people and hold them criminally accountable.”

One area where the public, and therefore politicians in response, do take financial crime more seriously is when it is linked to terrorism or national security.

Sanctions have been a weapon of choice for the Trump regime, but also under the previous Obama administration and, one would imagine, under Biden as well.  

When the US puts sanctions on a nation the knock-on effect is that jurisdictions, and banks, have to follow suit in making sure they are not breaching the sanctions rules.

Barrow says: “When Trump withdrew from the JCPOA [the Iran nuclear deal] the European Union did not agree, but because the dollar is ubiquitous in global transactions, the US said ‘fine but you can’t use the dollar’ – so you are forced into serving US sanctions because otherwise you can’t do business.

“This creates real difficulties for the banks and it is not remunerative business, and yet they spend a lot of money on sanctions compliance because you face criminal penalties for getting this wrong.”

Cryptocurrencies

One other area to look out for in the future of money laundering regulation in the US concerns cryptocurrencies and the regulation of virtual asset providers. There has been quite a lot of noise in the US in recent months on this topic.

Earlier this month, the US Attorney General’s Cyber-Digital Task Force published its enforcement framework along with warnings of a “coming storm” of criminal and terrorist use of cryptocurrencies. Just this week, the US lowered the threshold for the “travel rule” threshold for international transactions to $250 and changed the wording to ensure the definition of “money” includes convertible virtual currencies.

When it comes to cryptocurrency regulation, the US appears to be ahead of Europe, and the big picture is an ongoing process by which virtual assets are coming under more general anti-money laundering regulations. It is doubtful whether Biden or Trump would depart from this ongoing trend.

However, might the US look at creating its own digital currency in the longer term? They may be tempted, particularly as China’s central bank digital currency has already been used in a reported 3.13 million transactions.

Jacobson says: “Theoretically you could have a digital dollar that you could build into the code of the software that would block bad actors from accessing dollars.”

But this is obviously a lot further down the line and, to be effective, there would also have had to have been a general shift from fiat dollars to crypto dollars.

As the two candidates continue to trade blows and furiously campaign in the few days remaining, it is not always clear how the US’s approach to tackling financial crime is likely to change.

The US appears to have a big problem with corporate transparency and is also seemingly prosecuting white collar crime less intensely than it was a few years ago.

But, with the strength of the dollar, and its regulatory reach and powerful role in FATF, the US should be at the forefront of tackling the problem of financial crime.