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

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.

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