Reforming the US AML System: Some Proposals Inspired by the FinCEN Files

Last week, I did a post with some preliminary (and under-baked) reflections on the so-called “FinCEN Files” reports by BuzzFeed News and the Independent Consortium of Investigative Journalists (ICIJ). These stories relied in substantial part on a couple thousand Suspicious Activity Reports (SARs) that had been filed with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), and leaked to a BuzzFeed journalist in 2018. The documents, and the reporting based on them, highlight the extent to which major Western banks assist suspected kleptocrats, terrorists, and other criminal actors move (and launder) staggering amounts of money all over the world, and highlight the deficiencies of the existing anti-money laundering (AML) system.

What can we do to rectify this depressing state of affairs? Much of the commentary I’ve seen so far (both in the FinCEN Files stories themselves, and commentary on the reporting from other sources) emphasizes the need for more individual criminal liability—putting bankers in jail, not just fining banks. Even when banks are threatened or hit with penalties, the argument goes, this doesn’t really have much of a deterrent effect, partly because even what seem like very large monetary sanctions are dwarfed by the profits banks stand to make from assisting shady clients with shady transactions, and partly because the costs of monetary sanctions are mostly passed on to the bank’s shareholders, and don’t really hurt the individuals responsible (or the managers who tolerate, or turn a blind eye to, misconduct).

I’m quite sympathetic to both of these arguments, though with a couple of important caveats. Caveat number one: The absence of individual prosecutions of bankers is sometimes attributed to the fecklessness—or, worse, the “soft” corruption—of federal prosecutors, but as I noted in my last post, I tend to think that the more significant obstacle is the fact that it is very difficult in most cases to prove beyond a reasonable doubt that the that bankers or other intermediaries had the requisite level of knowledge to support a criminal money laundering conviction. Caveat number two: I don’t think we should be too quick to dismiss the idea that levying significant monetary penalties on banks can affect their behavior. After all, these institutions are motivated overwhelmingly by money, so hitting them in the pocketbook is hitting them where it hurts. The problem may be less that monetary sanctions are inherently ineffectual in this context, but rather that they are too low and too uncertain to have a sufficient impact on incentives and behavior.

In that vein, I want to suggest a few legal reforms that might make the U.S. AML system function more effectively. I acknowledge that these are “inside the box” ideas, insofar as they seek to make the existing framework more effective rather than to drastically transform that system. That may make these proposals feel unsatisfying to some, though I suspect the proposals will seem radical, even outlandish, to others. I should also acknowledge that I am not at all an AML expert, so it’s quite possible that the discussion below will contain errors or misunderstandings of the law or the system. But, in the spirit of trying to stimulate further discussion by those who really understand this field, let me throw out a few ideas. Continue reading

FACTI Background Paper: Current Trends in Foreign Bribery Investigation and Prosecution

The United Nations High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda Financing for Sustainable Development (FACTI) will recommend reforms to tax and anticorruption laws, asset recovery rules, beneficial ownership disclosure requirements, and other international norms to staunch the outflow of illicit funds from developing nations and speed the return of corrupt monies held abroad. A link to the panel’s interim report and instructions for submitting comments is here

As explained in an earlier post, the panel’s recommendations will draw on background papers commissioned by the United Nations Department of Economic and Social Affairs, the panel’s Secretariat.  A link to the papers is here

Dr. Abiola Makinwa of the Hague University of Applied Sciences authored a very fine one analyzing trends In the investigation and prosecution of foreign bribery cases (here).  Her summary of the paper is below.

Current Trends in Foreign Bribery Investigation and Prosecution

My paper examines systemic issues, such as lack of political will, profound information asymmetries, and the overarching general insufficiency of traditional criminal punishment as a response to the ‘true costs’ of corruption. I draw attention to Article 39 of the UN Convention against Corruption which calls for cooperation between national authorities and private sector entities as an integral aspect of anti-corruption enforcement. In practice, such cooperation between alleged offenders and prosecuting authorities may result in an agreement or resolution that reduces eventual sanction or penalty. These agreements are variously referred to as non-trial resolutions (NTRs), negotiated settlements, or structured settlements.

I show in the paper how the use of NTRs in foreign bribery cases is spreading across jurisdictions and is dramatically changing the face of anti-corruption enforcement.  While NTRs may be a pragmatic, new mechanism to overcome the limitations of traditional criminal prosecution of foreign bribery, they must not be seen as a get-out-of-jail card or lead to the decriminalization of the grievous crime of foreign bribery. Nonetheless, it is clear that NTRs provide a development-friendly response to foreign bribery enforcement by overcoming historic impunity and lack of enforcement. The most important “development dividend” of NTRs, is, in my opinion, the fact that NTRs shift the focus of anti-foreign bribery enforcement to corruption prevention.

There are 4 KEY arguments that support countries buying into NTR regimes for anti-foreign bribery enforcement.

Continue reading

New Podcast Episode, Featuring Frederik Obermaier

A new episode of KickBack: The Global Anticorruption Podcast is now available. In this week’s episode, my collaborators Nils Köbis and Christopher Starke welcome back to the podcast Pulitzer Prize-winning investigative journalist Frederik Obermaier of the German publication Süddeutsche Zeitung, who is also affiliated with the International Consortium of Investigative Journalists. A year and a half ago, I had the opportunity to interview Mr. Obermaier on the podcast about his work breaking the Panama Papers story, which shed unusual light on how corrupt officials and other criminals use anonymous companies to launder the proceeds of their illegal activity. In the new episode, Mr. Obermaier discusses the so-called FinCEN Files (which I blogged about last week): the leak of over two thousand suspicious activity reports (SARs) filed with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). Mr. Obermaier explains why and how the FinCEN Files reveal how badly broken the international anti-money laundering (AML) system is, the likely reasons for the ineffectiveness of the system, how the ICIJ and its journalistic collaborators handled such a sensitive story, and the possible political implications of the stories based on the FinCEN Files reporting.

You can find this episode here. You can also find both this episode and an archive of prior episodes at the following locations:

KickBack is a collaborative effort between GAB and the ICRN. If you like it, please subscribe/follow, and tell all your friends! And if you have suggestions for voices you’d like to hear on the podcast, just send me a message and let me know.

Tracking Corruption and Conflicts of Interest in the Trump Administration–October 2020 Update

Back in May 2017, this blog started the project of tracking and cataloguing credible allegations that President Trump, and his family members and close associates, have been corruptly, and possibly illegally, leveraging the power of the presidency to enrich themselves. The newest update is now available here.

The most significant new additions are primarily due to some very good pieces of investigative reporting.

  • The first, and more widely covered, is the New York Times reporting on several years of President Trump’s federal income tax returns, including the returns from his first two years in office. The returns shed light on many troubling aspects of the President’s finances, including the exceptionally low tax rates he has paid, evidence of multiple instances of possible fraud (still under investigation by the IRS), and his deep personal indebtedness, which plausibly raises security and other risks. The tax returns also provide significant corroborating evidence of the extent to which President Trump and his businesses have continued to earn substantial income from both private firms and foreign governments, giving rise to extraordinary conflict-of-interest concerns, as well as possible (indeed, likely) violations of the Constitution’s Emoluments Clauses.
  • Second, Dan Alexander’s new book White House, Inc.: How Donald Trump Turned the Presidency Into a Business, covers in much greater depth, and with significant original reporting, the same themes that we’ve been trying to keep track of here, namely the ways that President Trump has sought to monetize the presidency for personal financial gain. A terrific and troubling Vanity Fair article summarizes some of the most significant findings, including compelling evidence that the government of Qatar rented office space in a building 30% owned by President Trump for no apparent purpose other than to influence the U.S. government’s Middle East policy.

As previously noted, while we try to include only those allegations that appear credible, many of the allegations that we discuss are speculative and/or contested. We also do not attempt a full analysis of the laws and regulations that may or may not have been broken if the allegations are true. (For an overview of some of the relevant federal laws and regulations that might apply to some of the alleged problematic conduct, see here.)

FinCEN Is Seeking Public Input on Proposed Amendments to Its AML Regulations. AML Advocates Should Comment!

In my last post, I discussed the so-called “FinCEN Files” (leaked Suspicious Activity Reports (SARs) filed by banks with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN)), and the reports from BuzzFeed News and the International Consortium of Investigative Journalists (ICIJ) based on those leaked documents. This reporting highlighted serious weaknesses in the current anti-money laundering (AML) system, both in the United States and globally. Perhaps coincidentally (but perhaps not), just a couple of days before the FinCEN Files stories went public, FinCEN issued an Advanced Notice of Proposed Rulemaking (ANPRM), seeking public comment on various proposed changes to its current regulations implementing the AML provisions of the Bank Secrecy Act (BSA). The comment period will remain open until November 16th, 2020. Of course, it’s never clear how seriously federal agencies will take public comments, but in at least some circumstances sophisticated comments, supported by evidence and analysis, can move the needle, at least somewhat, on agency policy. So, I very much encourage those of you out there in ReaderLand, especially those of you who work at organizations that have expertise in this area and might be well-positioned to submit the sort of detailed, substantive comments that stand a chance of making some practical difference, to submit your comments before that deadline. (Comments can be submitted through the federal government’s e-rulemaking portal, referencing the identification number RIN 1506-AB44, and the docket number FINCEN-2020-0011, in the submission. The link above goes directly to the comment section for this rule, though, so you don’t need to enter that info again if you follow the link.)

The full ANPRM is not that long, but let me provide a very quick summary, highlighting the main proposal under consideration and the specific questions on which FinCEN is seeking public input. Continue reading

Comments Requested on UNOHCHR Draft Guidelines: Human Rights Framework for Asset Recovery

As readers of this blog know, the asset recovery provisions of the United Nations Convention Against Corruption sit uneasily with states’ duties under the International Covenant on Civil and Political Rights and other human rights conventions (here and here).  Most notable is the conflict between states’ obligations under UNCAC to return stolen assets in response to a confiscation order issued by a foreign court and their obligation under the ICCPR to refuse recognition to a judgment issued in violation of a defendant’s basic rights. What is a state to do if presented with an asset recovery order secured by torture?

The fair trial/judgement recognition conflict is not the only tension between states’ anticorruption and human rights responsibilities under international law. What if the state requesting return of stolen assets is guilty of rampant human rights abuses? Does UNCAC’s mandatory return provisions trump the requested state’s duties to further human rights and avoid being an accomplice to violations?

For the past year the United Nations Office of the High Commissioner for Human Rights has consulted with governments, academics, and human rights and corruption lawyers on how to reconcile the tensions between the two bodies of international law.  The resolution may not please states with poor human rights records, but the rest of global community will surely applaud the careful, scholarly approach found in its draft Guidelines on a Human Rights Framework for Asset Recovery. The OHCHR now asks Member States, intergovernmental organizations, national, regional and global human rights groups, NGOs, academic experts, and practitioners for comments on its handiwork.  Details on how and where to submit them are here. The deadline is October 30. 

The FinCEN Files: Some Scattered Preliminary Thoughts

As most readers of this blog are likely well aware, last week BuzzFeed News and the International Consortium of Investigative Journalists (ICIJ) released a bombshell story about international money laundering through major financial institutions. The collection of stories—more of which are likely in the works—is based on an analysis of a large trove of leaked documents from the U.S Treasury Department’s Financial Crimes Enforcement Network (FinCEN), which the journalists reporting on the case have dubbed the “FinCEN Files.” These files consist of so-called Suspicious Activity Reports (SARs), which are documents that, pursuant to a U.S. statute called the Bank Secrecy Act (BSA), banks and certain other institutions are legally required to file with FinCEN whenever the bank has reason to suspect that a transaction it’s handling involves money laundering or some other criminal activity, or simply lacks an apparent lawful purpose. The bank does not inform its customer that it’s filing a SAR—indeed, the BSA prohibits banks from doing so. FinCEN can use SARs to detect and investigate financial crime, and may share SARs with other law enforcement agencies in the context of an investigation, but otherwise SARs are supposed to remain strictly confidential. However, in October 2018 a FinCen employee leaked over 2,100 SARs to a BuzzFeed reporter. (While BuzzFeed and ICIJ do not identify their source, it is almost certain that this former employee, who pled guilty last January to illegally leaking the documents, is the source.) Journalists with BuzzFeed and the ICIJ analyzed these documents and have published multiple stories (see, for example, here and here) about what these documents reveal regarding the global anti-money laundering (AML) regime, together with a subset of the actual SARs. (The journalists released only those SARs that support reporting in specific stories, principally SARs that pertain to known criminal figures. They are not publishing a database of all the SARs in their possession due to concerns about privacy of the individuals involved, many of whom are not currently accused of any wrongdoing.)

The picture that these stories paint of the global AML regime is not a pretty one. While the stories are lengthy and detailed, and discuss many different aspects of the overall issue, if I had to try to distill all this reporting into a simple punchline, it would go something like this: The leaked SARs reveal that the major banks repeatedly handled huge and highly suspicious transactions for corrupt kleptocrats, organized crime groups, terrorists, fraudsters, sanctions evaders, and others, and relatively little was done, by the government or the banks, to stop it. As the ICIJ puts it, “The FinCEN Files show trillions in tainted dollars flow freely through major banks, swamping a broken enforcement system.” Or as BuzzFeed puts it, the FinCEN files reveal “how the giants of Western banking move trillions of dollars in suspicious transactions,” while “the US government, despite its vast powers, fails to stop it.”

I’m still working my way through all the FinCEN Files stories, and I’m certainly no expert on money laundering or banking regulation. (I come to this issue sideways, from an interest in anticorruption, rather than any professional expertise in AML as such.) But, in the interest of getting some ideas down in writing and perhaps stimulating some further conversation on what we can learn from the FinCEN Files reporting, let me share a few scattered, somewhat disconnected preliminary observations. Continue reading

Anticorruption Bibliography–September 2020 Update

An updated version of my anticorruption bibliography is available from my faculty webpage. A direct link to the pdf of the full bibliography is here, and a list of the new sources added in this update is here. As always, I welcome suggestions for other sources that are not yet included, including any papers GAB readers have written.

FACTI: Launch of Interim Report// Background Paper on Global Anticorruption Efforts

The United Nations High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda Financing for Sustainable Development, or FACTI, presents its interim report tomorrow, September 24, 8:00 – 10:30 a.m. Eastern Time, 12:00 – 14:30 UTC (register for webinar here). The report will identify reforms to the laws governing international tax cooperation, anticorruption, and money laundering needed to staunch illicit financial flows and hasten the return of stolen assets. As explained last week, the FACTI panel was created by the UN General Assembly and the Economic and Social Council as part of the effort to ensure developing states will have sufficient resources to meet the 2030 Sustainable Development Goals.

Professors J.C. Sharman, Daniel L. Nielson, and Michael G. Findley of Cambridge, Texas, and Brigham Young Universities respectively, prepared a background paper for the panel assaying the progress made in curbing money laundering and other abuses of the financial system that facilitate corruption. A summary of their paper is below; the full text is here.

Progress in Global AntiCorruption Efforts? Not So Fast

In April of 1989, Laurence Greenwald, a partner in the NYC law firm Stroock & Stroock & Lavin had reached the end of his patience. His firm had spent thousands of hours and tallied $1.2 million in legal fees seeking to identify and seize hundreds of millions of dollars in assets stolen from Haiti’s treasury by its notorious dictator Jean-Claude “Baby Doc” Duvalier. The successor Haitian government had retained Stroock firm to investigate and launch recovery proceedings. Yet after years of legal work by Stroock and other firms around the globe, in 1988 the new government stopped cooperating and refused to pay its legal bills.

In a letter to the Haitian government, Greenwald fumed, “The behavior of your ministers leaves us no alternative except to conclude that your ministers apparently want our efforts on behalf of Haiti to fail, are not concerned that Haiti will lose the substantial investment it has made in pursuing the Duvaliers, and want the Duvaliers to keep the money they stole.” Such frustrations commonly afflicted those seeking an end to corrupt practices in the international financial system during the late 20th Century. What progress has the international community made in the intervening decades?

Continue reading

New Podcast Episode, Featuring James Wasserstrom

A new episode of KickBack: The Global Anticorruption Podcast is now available. In this week’s episode, I interview James Wasserstrom. Mr. Wasserstrom, currently a private consultant on corruption and transparency issues, began his career with the United Nations, and was posted to the UN Mission in Kosovo (UNMIK) in 2007. His UN career took an unexpected turn when he uncovered corruption by high-level UNMIK officials. He reported his findings to the UN, but this was leaked to the perpetrators, and he was subjected to an extensive campaign of retaliation. After extensive legal proceedings, it was eventually determined that he had been mistreated, but the UN denied him compensation on dubious procedural grounds. During and after his dispute with the UN, Mr. Wasserstrom has been a leading advocate for institutional reform at the UN and integrity reforms more generally, and from 2009-2014 served as a special advisor on anticorruption at the U.S. Embassy in Afghanistan. In our interview, Mr. Wasserstrom and I discuss his experience as a UN whistleblower, the flaws in the UN’s whistleblower protection system, and what if anything can be done. We also discuss Mr. Wasserstrom’s ideas for providing more international support for whistleblowers in hostile environment, including his new proposal for an “integrity sanctuary” program.

You can find this episode here. You can also find both this episode and an archive of prior episodes at the following locations:

KickBack is a collaborative effort between GAB and the ICRN. If you like it, please subscribe/follow, and tell all your friends! And if you have suggestions for voices you’d like to hear on the podcast, just send me a message and let me know.