ANALYSIS: FinCEN leaks will shine spotlight on “effectiveness” of global AML/CFT regime

The unlawful release of thousands of files from the U.S. financial intelligence unit’s database will shine a spotlight on the effectiveness of the international anti-money laundering (AML) regime, according to consultants with decades of experience in global banks and law enforcement agencies.

The International Consortium of Investigative Journalists (ICIJ) has released a series of articles based on the details of thousands of suspicious activity reports (SARs) filed with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCen).

The SARs covered transactions worth more than $2 trillion that moved through some of the largest global banks, including HSBC, JPMorgan, Deutsche Bank, Standard Chartered and Bank of New York Mellon.

The source of the leaks is uncertain, though some financial intelligence experts believe the material may be linked to an earlier breach.

The financial crime community had been watching closely yesterday to see whether the data breach was linked to the critical Egmont Secure Web system (ESW). This encrypted global communication portal allows the world’s financial intelligence units (FIUs) to share information via e-mail, including the most sensitive “operational” intelligence.

The Egmont platform also allows members to access meeting minutes, documents, contact information for the members and sanitised case typologies. The content of the leaks has ruled out a global hack on ESW, with the material instead coming directly from FinCEN’s database.

Trust and confidentiality

Financial crime experts with international experience, on both the public and private sector sides, said the leaks would damage the trust and confidentiality that underlies the AML regime. On the other hand, the leaks may trigger a re-think about the effectiveness of the existing financial crime compliance framework, which is led by the Financial Action Task Force (FATF).

“The FinCEN files highlight the reality that the AML/CTF current system is fundamentally flawed and is often deeply ineffective, despite the substantial cost and effort put into it by both reporting entities and regulators,” said Neil Jeans, principal consultant at Initialism. 

Jeans has worked on global financial crime cases during his time with UK police in the 1990s, before joining the UK regulator to help set up the country’s AML/CFT regime in 1998. Since then he has worked in some of the world’s leading international banks and consulting firms as an AML/CTF expert.

“Reporting entities and regulators both bear the responsibility for poor outcomes, such as those outlined by the FinCEN files.  To avoid these outcomes, the burden should be on reporting entities to revise their approach to ensure effective financial crime risk management is part of their DNA. Regulators need to evolve their expectations beyond box ticking.”

Suspicious minds

AML practitioners have said the existence of these SARs is an indicator that the banks involved had reported their suspicions to the relevant agencies. It is then up to the criminal intelligence and law enforcement community to take further action.

Bill Majcher, a former undercover agent with Canadian and U.S. law enforcement agencies, said authorities often ask banks to leave these accounts open so they can gather more intelligence or evidence for an ongoing investigation. He also noted that undercover operatives often set up covert accounts to wash money for criminal groups as part of their “proactive” investigative work.  

“Banks keep accounts open at the request of law enforcement agencies, so police can monitor account activities in real time and to ensure they did not compromise an active investigation. Often in these cases the banks will request an indemnification letter from police to protect them from any criminal or civil liability owing to the bank knowingly moving the proceeds of crime through the banking system,” Majcher said.

Under federal law, the banks are prevented from even acknowledging the existence of a SAR. Once a bank files a report with the relevant FIU it is not obligated to close the account and will often await further guidance from law enforcement on how to handle the accounts.

“When it comes to the confluence of money, criminals, and governments nothing is ever as it seems. My take away from this latest leak is simply to be reminded of the old adage ‘don’t believe anything you hear and only half of what you see.’ The world revolves around self-interest and banks and governments are no different,” Majcher said.

“Typically national security trumps commerce. But there is often an interplay that takes place as stakeholders in the public and private sectors juggle their competing interests. Unfortunately, many sins can also be buried and hidden in this grey zone of money and influence.”

Nathan Lynch is an experienced writer, public speaker, manager and technology enthusiast in the field of financial regulation and risk management. At Thomson Reuters, Nathan leads a team of experts who provide breaking news, deep analysis and practical guidance to risk practitioners in the global financial services sector.
Nathan manages Thomson Reuters’ award-winning Regulatory Intelligence team across the Asia-Pacific region, tracking developments in financial services law, regulation, financial crime and risk management.
Nathan has been involved in building innovative, tech-based businesses in the financial services “regtech” sector — including Complinet Australia and the Thomson Reuters Risk business.

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