FinCEN Identifies Significant Threats, Signals Closer Oversight

The financial industry doesn’t need a crash course in anti-money laundering and countering the financing of terrorism (AML/CFT) regulations. They have been in place and evolving since the U.S. Bank Secrecy Act of 1970. But recent steps taken by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) raise the compliance bar in terms of priority-setting and accountability.

In accordance with the Anti-Money Laundering Act of 2020, FinCEN in June 2021 issued the first government-wide statements identifying and prioritizing the most significant AML/CFT threats, including corruption, cybercrime, fraud, transnational criminal organizations, drug trafficking, and human trafficking and smuggling.

In January this year, a Treasury rulemaking agenda published in the Federal Register underscored the breadth and seriousness of regulatory oversight in these areas. It also said that FinCEN intended “to establish that all financial institutions subject to an AML/CFT program requirement must maintain an effective and reasonably designed AML/CFT program, and that such a program must include a risk assessment process.”

Ned Kulakowsi of Fenergo

Ned Kulakowski, senior financial crime consultant at client lifecycle and regulatory compliance technology company Fenergo, said that beyond calling attention to the prominent threats, “what is significant here is that the rule will establish a review process to measure the effectiveness of financial institutions’ AML and CFT programs and will make it a requirement for risk assessments to be conducted.

“All financial institutions will now be held to an ‘effectiveness’ standard,” Kulakowski continued, “and this will likely require significant adjustments to their programs – for some more than others. Risk assessments and the ongoing measure of compliance with the FinCEN priorities may require an incredibly subjective call by regulators. As such, it will be paramount for financial institutions to closely monitor upcoming rules and guidance from FinCEN to ensure they are as compliant as possible with these new standards.”

Meanwhile, the AML enforcement beat goes on, with USAA Federal Savings Bank paying $140 million in civil money penalties to FinCEN and the Office of the Comptroller of the Currency for failing to report suspicious transactions and to remediate when notified by regulators. “Today’s action signals that [business] growth and compliance must be paired, and AML program deficiencies, especially deficiencies identified by federal regulators, must be promptly and effectively addressed,” FinCEN acting director Himamauli Das said on March 17.

Art and Antiquities

Along with implementation of the AML Act, risk and compliance departments are attending to red flags related to economic sanctions (see Restrictions on Russia Highlight Growing Complexity of U.S. Sanctions Regime) and concerns about money laundering in peripheral sectors such as the art market.

David Stewart, director of financial services in the fraud and security intelligence global practice at analytics company SAS, noted that a 2020 Senate Permanent Subcommittee on Investigations staff report, The Art Industry and U.S. Policies that Undermine Sanctions, “goes so far as to call the art market ‘the largest legal, unregulated market in the United States.’ If corruption is truly a priority for our National Money Laundering Strategy, then including art and antiquities dealers as covered institutions is a useful tool. The challenge for financial institutions will be the impact on their know your customer (KYC) processes.”

Stewart, however, says that the U.S. and many other governments lack consistent beneficial ownership information to detect illicit transactions among affiliated entities.

David Stewart of SAS

"As we saw in the release of the Pandora Papers, offshore financial institutions enable the use of shell corporations that exist to avoid taxes and obfuscate ultimate beneficial owners,” Stewart said. “Should private art dealers be considered high-risk customers by financial institutions? What is the financial impact of yet another high-risk category on their enhanced due diligence [EDD] processes?”

The industry needs a more robust digital identification standard, he said, adding, “Given the move to digital commerce, we’re investing heavily in real-time authentication of clients, basically establishing a digital identity.”

National Security

David Sullivan, a partner with McCarter & English and a former assistant U.S. attorney for the District of Connecticut, said that military and geopolitical conflicts are another lens through which to view money laundering and the importance of vigilance.

“Corruption, domestic and international terrorist financing, drug trafficking organizations, human trafficking/smuggling, along with transnational criminal organizations, remain constant threats to our national security,” Sullivan said. “In addition, state-sponsored terrorism must be added to the mix as tensions with Russia, China and Iraq escalate.

“In a world of growing uncertainty, one thing is certain: AML/CFT programs must remain proactive. The success of these programs depends upon the cooperation and shared commitment from legislators, regulators and law enforcement, as well as receiving input from the financial institutions that will be tasked with complying with any new or revised AML/CFT requirements.”

Regarding how to define a high-risk client, Sullivan pointed out that the 2020 law directs financial institutions to focus on “higher-risk customers,” consistent with an institution’s risk profile. The high-risk designation may take new shape, given events abroad.

Crypto Dimension

Firms will have to re-evaluate what constitutes a high-risk client and re-define their risk profiles in light of geopolitical and macroeconomic developments. And with growth in digital currencies, Sullivan said, those transactions have to be monitored, which “will require the Treasury and Internal Revenue Service to provide greater guidance to the private sector as to how the government intends to treat the tax implications of the possession and use of cryptocurrencies.”

The proposed changes further magnify the need for firms be on alert and assess risks relative to stated priorities. They must have plans to be in full compliance with what the authorities are signaling.

“Banks and traditional nonbank institutions such as securities and commodities market participants are used to robust AML compliance programs,” said Braden Perry, an attorney and partner with Kennyhertz Perry in Mission Woods, Kansas. “This is a signal that all covered companies must thoroughly assess their risk and evaluate which of the FinCEN priorities are applicable, while proactively monitoring their business for risk. A targeted and tailored plan is required and should be updated as the business and the environment evolve.”