Leaked documents have revealed how financial institutions around the world have been complicit in the movement of trillions of dollars of illegal money.
In September 2020, journalists revealed a cache of leaked documents from the United States Treasury’s Financial Crimes Enforcement Network (FinCEN), detailing hundreds of thousands of suspicious transactions reported by global banking and financial institutions. The documents, which have become known as the “FinCEN Files,” exposed the widespread failure of financial institutions and FinCEN to deal with significant patterns of international money laundering, despite having the financial intelligence to do so.
What are the FinCEN Files?
The FinCEN Files comprise over 2100 suspicious activity reports (SARs) that were submitted to FinCEN by numerous banks and financial institutions between 1999 and 2017. The documents were investigated by a group of international journalists and shared with news organizations in 88 countries. The investigation revealed not only the significant scale of international money laundering but the complicity of financial institutions and regulators that failed to prevent potential criminal activity once they were made aware of it.
The leaked FinCEN documents involve revelations about specific individuals and financial institutions. Key highlights of the investigation reveal:
- Tax havens, such as Panama, and high-risk jurisdictions, such as Venezuela, feature frequently in suspicious transactions.
- The UAE’s Central Bank processed transactions worth $142 million from 2011 to 2012, despite the transactions being designated as suspicious.
- HSBC continued to allow the movement of millions of dollars around the world, despite learning from US authorities that the funds were being used in a scam.
- An individual known to be a childhood friend of Vladimir Putin was accused of using Barclays Bank in London to avoid sanctions against him.
- A prolific UK Conservative party donor was found to have been secretly funded by an oligarch with ties to Vladimir Putin.
- Deutsche Bank was found to have been moving illegal money for known terrorists, drug traffickers and organized crime networks.
- Standard Chartered facilitated transfers for customers of Arab Bank a decade after those customers’ accounts were found to have been used to fund terrorism.
- Many US financial institutions reported transactions involving a Kazakh politician currently wanted by INTERPOL.
While previous high-profile document leaks have exposed institutional corruption and criminal activity, those incidents were not on the scale of those revealed in the FinCEN Files. Leaks such as the Panama Papers (2016) and the Paradise Papers (2017) exposed wrongdoing from one or two firms in relative isolation: by contrast, the FinCEN Files involve multiple leading financial institutions from across the world, exposing structural legislative weaknesses and patterns of wrongdoing that span decades.
More seriously, the leaks from FinCEN suggest that many global firms are not acting on the suspicious activity that their AML controls uncover, instead allowing it to continue even after submitting reports to the authorities. While SARs are not indicative of criminal activity, the FinCEN leaks also reveal that regulators are not acting on the reports that they receive and are failing to investigate the potential criminal activity that banks are reporting.
That inaction in the face of suspicious activity suggests that current AML regulations are not having their desired effect in the global fight against money laundering. Once a firm fulfills its compliance obligation by submitting a SAR to FinCEN, it is effectively no longer criminally liable for the potential money laundering taking place and has no incentive to block transactions or freeze customer accounts.
Reacting to the leaked documents, FinCEN has warned that the revelations could impact ongoing AML investigations, compromise US national security and even threaten the safety of employees of the institutions named in the documents. Nonetheless, FinCEN has moved to overhaul US AML regulations, issuing an Advance Notice of Proposed Rulemaking to invite industry input on changes to the Bank Secrecy Act (BSA). Similarly, the UK has announced plans to clamp down on fraud and money laundering through reforms to Companies House, including requirements for compulsory identity verification and greater powers to “query, investigate and remove false information” from customer records.
International regulators are expected to follow the US and UK in tightening their AML frameworks, with enhanced scrutiny for tax havens and high-risk countries. Those legal changes may range from an increased focus on AML to fundamental changes to the SAR process. However, while the FinCEN Files represent an opportunity for the AML landscape to reform, observers have pointed out that regulatory changes are not a silver bullet and are often shaped by the compliance costs that large financial institutions are capable or willing to take on.
Whatever the eventual impact, the FinCEN Files have made clear the scale of the challenge that money laundering poses to global financial systems. Addressing that challenge will require not only legislative effort but a wider cultural shift from both financial authorities and institutions.
Regtech represents a solution to compliance costs in a reformed AML landscape. Smart AML technology featuring automated artificial intelligence (AI) and machine learning systems can help firms manage the vast amounts of data that AML compliance requires and adapt to changes in customer behavior that conventional monitoring measures might miss.
Practically, smart technology could enhance a range of crucial AML processes, including customer due diligence, adverse media checks and sanctions screening. In addition to the speed and efficiency benefits AI and machine learning offer, firms would also be able to connect and communicate more effectively with regulators such as FinCEN, ensuring that SARs are remediated and investigated in a more timely, consistent and effective manner.
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