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FinCEN Files seem unlikely to alter US approach to BSA/AML enforcement


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According to Market Intelligence, April 2023

FinCEN Files seem unlikely to alter US approach to BSA/AML enforcement

A long-awaited rewrite of U.S. anti-money laundering rules could offer banks some additional clarity on regulatory expectations, but legal experts said the business of ferreting out criminal activity will likely remain in law enforcement's hands.

Banks' role in preventing money laundering activity entered the media spotlight following the Sept. 20 publication of the FinCEN Files, a sweeping investigation led by Buzzfeed in the U.S. in coordination with the International Consortium of Investigative Journalists. The articles disclose details from suspicious activity reports that banks submitted to the Treasury Department's Financial Crimes Enforcement Network, or FinCEN. Four days prior to the main article's publication, FinCEN issued an advance notice of proposed rulemaking to amend the government's anti-money laundering regime, which is governed by the Bank Secrecy Act.

While the FinCEN Files have garnered extensive media coverage, the reporting might have little impact on FinCEN's rulemaking process, said Marc-Alain Galeazzi, a partner with Morrison & Foerster who advises financial institutions on BSA/AML compliance.

The FinCEN Files articles suggest banks should have played a more active role in stopping financial transactions, but BSA/AML regulations are written such that banks are required to alert law enforcement of potential money-laundering, not detect and prevent money-laundering themselves. And that is likely to remain the case, Galeazzi said in an interview.

"I don't think this will change because banks are banks. They're not the police," he said. "They collect the information, and they give it to FinCEN and law enforcement authorities so that they can investigate and indict. And that is how it should work."

In recent years, banks' refusal to process certain transactions have attracted congressional scrutiny. During President Barack Obama's second term, Republicans launched numerous investigations into the Justice Department's "Operation Choke Point," which targeted certain industries as high-risk for money-laundering or other illicit activity. Several banks shuttered all accounts related to those industries — such as payday lenders — without evidence of criminality. Republicans have also criticized banks for refusing to service gun dealers.

Regulators said banks' decision to shutter accounts for entire industries was a misinterpretation of a letter that labeled the businesses as higher-risk. Lawyers who represent banks say those sorts of judgment calls typify anti-money laundering compliance. Through that lens, banks might find room for optimism in FinCEN's reconsideration of its AML programs.

"The trickiest part is getting the transaction monitoring correct," said Peter Hardy, practice leader of the anti-money laundering team for law firm Ballard Spahr. "There is just a fire hose of data going through any decent-sized financial institution on any given day."

Morrison & Foerster's Galeazzi noted that a suggestion in FinCEN's proposal to automate high-frequency and low-complexity suspicious activity reports could make a meaningful difference, both for banks and law enforcement.

The advanced notice suggests the agency would issue a list of law enforcement priorities every two years, which could provide banks more clarity in which transactions should be flagged. FinCEN's AML overhaul also suggests that "effective and reasonably designed" programs would be based on a financial institution's own risk assessment programs.

While industry lawyers welcomed FinCEN's press for additional clarity, there were concerns the changes would not make a meaningful difference.

"I would have expected an explicit definition to bring more clarity, and I frankly find what's proposed to be a little vague," said Brad Resnikoff, a partner for law firm Mayer Brown. "It doesn't address a lot of the judgment calls or grey areas that financial institutions have to address."

Resnikoff also said the definition's focus that banks' programs should be "effective" was notable considering the Federal Financial Institutions Examination Council, an interagency body composed of the five major banking regulators, updated its BSA/AML manual in April to focus on programs' "adequacy."

Further, lawyers said regulators already largely expect banks to design AML compliance programs with attention to their own assessment of risk. And Ballard Spahr's Hardy said there was potential exposure for banks when regulators codify that programs should be risk-based.

"On one hand, it's obviously true and it's good to have the flexibility," he said. "I'm just a little skeptical of the risk-based mantra because I think a downside is it allows a regulator down the road to make subjective judgments about whether something was sufficiently risk-based."

Ultimately, it seems unlikely either the media's FinCEN Files reporting or the FinCEN agency's rulemaking will change the fundamentally murky nature of AML compliance.

"BSA/AML is a space where there are always going to be judgment calls," Resnikoff said.