A Guide to Anti-Money Laundering for Crypto Firms

The FinCEN Files Fallout

Regulation Knowledge & Training

This week we learned that over 2100 suspicious activity reports (SARs) filed by banks and sent to FinCEN, the US financial regulator, were leaked to journalists. These documents were sent to the International Consortium of Investigative Journalists (ICIJ) and its 108 media partners across 88 countries, sending shockwaves through the financial sector in both private and public spaces

We conducted a Q&A with our own Charles Delingpole to get his thoughts on the impact this could have on banks, regulations and the role of regtech.

Q: What impact might the leak of the FinCen files have on future legislation and AML requirements?

It’s important to remember that the FinCEN leaks have not revealed any materially new information to the regulator. This is how the industry usually works. However, the media interest in the issue may create an opportunity for anti-corruption and anti-financial crime lobbyists to push for further reform and for more stringent AML measures.

The potential laws related to this could range from a complete reformation of the SARs process to a push for a more aggressive stance on AML or it could simply be an enhanced budget for investigations by FinCEN itself.

Regulatory changes are not a silver bullet. Compliance is typically viewed as cost-center and therefore set up to always play defense, not offense. The FinCEN Files are a perfect example of this.

Regardless of what laws are passed in response to the FinCEN leaks, it’s certain that the large banks will be deeply affected by them. Any changes are likely to affect FinCEN and how it works and FinCEN oversees the banks.

FinCEN has recently published proposals to reform the AML framework in the US, whether that was due to pressure from these leaks is unknown but it may have played a role in how soon they were published.

Q: The thousands of “suspicious activity reports” (SARs) filed by banks take place after transactions are completed, rather than pre-empting them. Is there a role for regulatory technology to halt such transactions from taking place? How else can regtech be used to shore up banks’ money laundering safeguards?

Halting transactions from taking place would not be the ideal outcome, banks are prohibited from ‘tipping off’ those suspected of using the financial system for criminal activity under the Bank Secrecy Act. If the transactions were stopped preemptively then the banks would effectively be telling the criminals that they’re onto them.

Tipping off a criminal could have them change their money laundering activity or pattern and risk losing sight of how extensive their reach is as well as losing the ability to identify other transactions that could be related to them. Banks cannot act preemptively as FinCEN may advise them or whether or not to continue allowing transactions through in order to build a stronger case or assist investigations.

It’s also worth bearing in mind that these transactions are marked as suspicious, they’re not definitively criminal actions. These suspicions are meant to be bundled to create a pattern of activity and gradually determine criminality by the investigators at FinCEN.

Regtechs can shore up money laundering safeguards beyond SARs. Compliance extends far beyond being suspicious of certain transactions and there are many requirements that need to be met.

For example, most jurisdictions globally require or emphatically encourage the use of adverse media solutions for financial institutions so that when compliance officers are onboarding a customer onto a financial product they can better understand the customer’s behavior.

Adverse media reveals whether or not a potential customer has been arrested for any crimes such as fraud or drug-related activity. The compliance officer can then weigh up the risk as to whether or not that customer will use their financial products to launder money or use them to facilitate crime in any way.

Sanctions screening is another example, this is a check on the transactions made by a customer to make sure that they’re not breaching the law by sending money to sanctioned entities. That is individuals, businesses or nations that have been decided as too dangerous to send money to. These sanctioned entities are often chosen by supranational bodies such as the UN or EU but also includes the US. Failure to abide by these rules can see a financial institution lose its license or be taken to court for criminal charges as the subject of sanctions are often involved in activities considered dangerous such as nuclear proliferation, which is why Iran and North Korea are commonly sanctioned nations. By providing these checks, regtechs are assisting businesses in their AML activities and ensuring that they don’t breach the law.

Q: The investigation identifies the U.S. government as part of the problem, noting that “most SARs are never even read, let alone acted upon. What role could regtechs play in improving the government’s process for better monitoring and acting upon suspected financial crime?

There are definite areas where the SARs process could be improved and this has long been recognized by multiple AML bodies. A digitalized process rather than manual form filling would certainly assist in SAR filing itself and regtechs could assist in that respect.

But there’s also the issue of providing fuller information to FinCEN and other regulators that regtechs can assist in. Thick-file SARs should be the standard. This is the name commonly given to SARs that provide extensive information on transactions, recipients, behavior, frequency, the ultimate beneficial owners of related companies, and other companies those people own are all vital pieces of information that should be included in a SAR and should be the standard. Regtechs can assist in supplying that information to banks so that FinCEN is better able to investigate the SAR.

However, governments don’t have enough investigators to follow the money, and financial institutions don’t have the proper tools, training, and partnerships with the government to effectively do their jobs. Perhaps the FinCEN leaks will push the legislature to change that.

Q: How can ComplyAdvantage’s technology help to address some of the problems identified in this investigation?

ComplyAdvantage is leading the AML compliance industry. We use machine learning and natural language processing to help regulated organizations manage their risk obligations and prevent financial crime. What makes us unique to our competitors is our proprietary database, which is derived from millions of data points that provide dynamic, real-time insights across sanctions, watchlists, politically exposed persons, and negative news. This reduces dependence on manual review processes and legacy databases by up to 80% and improves how companies screen and monitor clients and transactions.

We are the only anti-money laundering database in the world to provide dynamic, real-time updates across huge volumes of data on sanctioned, politically exposed and other high-risk entities. We find and process around 10 million web pages per day in order to deliver automated updates on new risks which are driven by our unique technology-first approach built on AI and machine learning.

Our solutions represent an exciting and transformative next stage of development in AML risk data. A new driving force that is changing the industry via our unique approach and advancements in our highly technological solutions.

Originally published September 25, 2020, updated November 17, 2021

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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