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The fallout from the FinCEN files
Julian Dixon
September 25, 2020

Berating the banks is nothing new. In fact, bank-bashing has probably been around as long as banks have. However, these mighty financial institutions – particularly those in the Western world – have been subjected to some particularly stinging criticism over the last few weeks, thanks to the evidence of thousands of suspicious activity reports (SARs) leaked from the United States’ Financial Crimes Enforcement Network (FinCEN). They have been dubbed the FinCEN files.

The fallout from these files could prove to be extremely damaging indeed. BuzzFeed News – the news website that exposed them – claims they indicate weaknesses in banking safeguards, and suggests that “profits from deadly drug wars, fortunes embezzled from developing countries, and hard-earned savings stolen in a Ponzi scheme were all allowed to flow into and out of these financial institutions”. A subsequent BBC Panorama documentary, broadcast in late September, added fuel to the fire.

Although there is definitely cause for worry, we at Napier believe some of these reports are sensationalist; dare we say even scurrilous. They lay too much blame at the door of our banks and further tarnish their already stained reputation with the wider public.

Banks are easy targets. Of course they are, since they are among the wealthiest financial institutions on the planet. But to suggest they are being lackadaisical in their reporting of suspicious activity by their customers, or complicit by default in money laundering, is frankly ludicrous.  

Anyone who has ever worked in a bank – especially a tier 1 bank – will know that these institutions expend huge amounts of time and money on monitoring client transactions. Most do their utmost to spot suspicious activity. Even when they report it via SARs to regulators such as FinCEN (in the United States) or the National Crime Agency and the Financial Conduct Authority (in the UK), they receive precious little feedback.

Besides, their responsibility is simply to highlight suspicious activity – which most of them do very thoroughly – not to police it or pursue the money launderers behind it. That is the role of the regulators and, beyond that, the law courts.

Herein lies a further problem. Since the regulators have far less financial clout than the banks, they are unfortunately under-funded and under-staffed. We at Napier don’t wish to denigrate the work they do, but sometimes they appear toothless.

Increased funding would obviously help. The salary gap between the regulators and leading firms in the financial sector is enormous. It will always be difficult for the regulators to recruit the finest financial minds if they’re not able to offer competitive pay.

One way to motivate them, perhaps, is to offer them a share of the spoils. When fines are imposed on banks, why shouldn't the regulators who brought them to account enjoy a portion of the monies levied? This could act as a valuable incentive.

For the regulators, staying one step ahead of the money launderers is a constant weapons race. Every time new loopholes appear, they must scramble to plug them.

The FCA is a particularly industrious regulator. In August 2020 they published a report called Extension of Annual Financial Crime Reporting Obligation. In it they point out how obligations for British companies to provide them with financial crime information currently apply only to banks, building societies or companies with total annual revenues of £5million or more.  

Now, however, they propose to extend these obligations to a wider range of firms, including all electronic money institutions, all multilateral trading facilities, all organised trading facilities, all cryptoasset exchange providers and custodian wallet providers, most payment institutions, and FSMA-authorised firms that hold client money or assets.

“This information will help us improve the focus and effectiveness of our approach, with risk-based supervision and better use of our supervisory tools,” they claim. “This means our resources are targeted at firms that carry on activities that pose potentially higher money-laundering risks. We consider that this approach will result in improving firms’ money laundering systems and controls, reduce actual risks of money laundering and help improve the overall integrity of the UK financial system.”  

While, at Napier, we believe any new anti-money laundering regulations should be commended, this doesn’t go far enough.  

Take the SARs regime, for example. In 2019, in its Economic Crime Plan, the UK government laid out plans to overhaul the entire regime. But it’s a gargantuan task that has been further complicated by the impact of the global coronavirus pandemic.

There are thousands of SARs regularly being filed, and ideally each one must be checked. What would really improve the regime and crack down on the financial crime behind it is digital automation. Let’s leave the human regulators to focus on the high priority investigations, while all the dirty work of checking the myriad SARs can be carried out by automated software systems.  

This is where Napier can help. We are happy to offer both the NCA and the FCA free licences for our anti-money laundering software. For an industry drowning in paperwork, this will save time, energy and manpower.  

It’s our hope that, ultimately, this will allow the regulators to foil all types of financial crime. In the end, this would be great news for the regulators and great news for the banks they regulate.

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Find out how our award-winning AML solution can help solve your institutions compliance needs, by contacting one of our experts, or requesting a demo.

Julian has more than 20 years of financial services experience gained at major investment banks including Deutsche Bank, JP Morgan and Commerzbank. His roles have ranged from front-office sales leadership to private equity. Julian has extensive knowledge of financial services processes and technology.