FinCEN files: Poor legislation creates “defensive mentality”

Anti-money laundering (AML) legislation is creating a scenario where too many suspicious activity reports (SARs) are filed, hampering authorities’ attempts to crack down on criminal activity. That’s according to Andrew Northage, partner in the regulatory & compliance team and head of international trade at law firm, Walker Morris.

The threshold for suspicion in AML cases is so low, Northage says, that banks and other financial institutions create SARs far too readily to absolve themselves of any blame further down the line.

“It’s almost like the system is geared towards ‘we want lots of reports and then we’ll work out which are the good ones and which aren’t.’ But the NCA [National Crime Agency], the authorities say ‘no, that’s not what we want.’ But I think that’s what the law as it stands leads to,” Northage says.

The FinCEN files are more than 2,500 documents, made up mainly of SARs that were sent to the US Financial Crimes Enforcement Network (FinCEN) by banks between 2000 and 2017. They were first leaked to Buzzfeed News and then shared to a network of investigative journalists, before BBC Panorama produced a documentary on the findings.

Michael Harris, director of financial crime at LexisNexis Risk Solutions agrees with Northage, saying the AML regulations put banks into a “defensive mentality”.

“In other words, the legislation mitigates or doesn’t help a bank or financial institution actually take a more reflective approach to suspicious activity.

“For most banks because of the legislation, the law, which is basically all predicated around the Proceeds of Crime Act, it forces them to take a defensive mentality because otherwise they’ve got liability if they haven’t reported it,” Harris adds.

Northage adds that because the legal definition for suspicion in AML is “as low a bar as you can get”, it means you end up with a self-defeating outcome.

“Because the threshold for suspicion is so low, it is more likely to be [about] self-protection – ‘If I make a report, I won’t get into trouble.’”

“It’s [the regulations are] essentially saying, is it completely absurd to say that you suspect money laundering from this? No, it’s not completely absurd. Well, then it could be a possibility, in which case, you’ve hit the threshold for when you report.”

Harris agrees, and claims that the process creates a gigantic task for law enforcement to sift through all the reports generated, stretching their already thin resources.

“The whole system of SARs both in the US and the UK encourages generation of suspicious activity reports way beyond what you would really want to happen, so the net result of that is you’ve got massive volumes of SARs being produced in the US – I think it’s in excess of 2 million – and over half a million are raised in the UK.”

Legacy technology hampering authorities

A report by KPMG found that US banks are spending more than $25bn on AML compliance and with such an eye-watering sum, they are surely reluctant to hear calls that the solution to fighting financial crime is to spend even more.

However, Harris argues that the problem is not in the banks’ technology but in law enforcement, both in the US and UK.

“The National Crime Agency has limited resources. It also has a fairly old legacy technology platform, and it simply can’t do the sort of analytical work at this moment that ICIJ [the International Consortium of Investigative Journalists who broke the FinCEN files story] were able to do.”

Had the NCA and the US FinCEN had the resources and latest technology available, there would have been the potential to “join the dots” and prevent significantly more financial crime, Harris adds.

Coupled with the lack of up-to-date technology, Harris says there isn’t a culture of “information sharing” amongst banks and different crime agencies.

“We’ve not managed to get it all joined up and working efficiently. It’s a bit like an orchestra, you’ve got your brass, you’ve got your percussion, you’ve got your strings, you’ve got a conductor – all the elements are there but you’ve got to bring it together to make a good piece of music. And at the moment, we’ve got it all there, but we haven’t got it all in tune and making a joined-up sound.”

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