FinCEN – fall out from latest leak of confidential corporate records

In September, investigative journalists uncovered more than 2,500 reports of suspicious transactions carried out over the last two decades. The leak has led to major controversies, revealing that banks have assisted in moving trillions of dollars for criminals. Bearing that in mind, it’s little wonder the so-called FinCEN files are already having impacts on legislative policies.

Over the course of the last decade, there’s been a phenomenal amount of regulatory convergence surrounding anti-money laundering (AML) rules.

Although many countries across the globe have starkly contrasting political ideologies and strategic agendas, the vast majority of legislators do all seem to agree on one key point: banks and corporations should be doing everything they can in order to prevent criminals from laundering money

And it’s this overwhelming international consensus that has made the fallout from September’s FinCEN leak all the more worse.

On 20 September 2020, a joint-investigation compiled by Buzzfeed and the International Consortium of Investigative Journalists (ICIJ), leaked more than 2,500 Suspicious Activity Reports (SARs) that had been filed to the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) between 2000 and 2017.

Those papers have subsequently revealed a number of cash scams, dodgy transactions and illegal money laundering that banks and other financial institutions failed to act on. As a result, campaigners are now making numerous calls for urgent AML reforms in the US, UK, Germany and further afield.

But in order to fully understand the long-term ramifications of this financial scandal, it’s worth first revisiting the context surrounding the leak.

What is FinCEN and what does it do?

The US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) is the government bureau responsible for stopping money laundering, terrorist financing and other financial crimes.

One of FinCEN’s key roles is to gather Suspicious Activity Reports (SARs) that are filed by banks, other financial services companies and regulators all over the globe. The bureau then submits those documents to the relevant authority so that crimes can be investigated.

In most countries, a SAR must be completed and submitted by a company’s compliance officer within 60 days of detecting a suspicious transaction that could involve economic crime, money laundering or other illegal activities.

For reference, laundering money is the process in which individuals take so-called ‘dirty money’ (income generated from criminal activity or corruption) and move it to a respectable financial corporation or institution where the money will no longer be associated with that crime.

Generally speaking, it’s expected that financial institutions will take action to stifle this sort of activity after it has been identified.

But September’s FinCEN leak has since revealed that despite identifying suspicious activity and reporting it to FinCEN, a worrying number of banks, companies and authorities failed to stop the activities in question.

What have the FinCEN files revealed?

September’s unprecedented leak of SARs from FinCEN have since come to be labelled by politicians and the media as the ‘FinCEN files’.

This set of files includes the more than 2,500 SARs reports and other documents filed to the US Department of Treasury between 2000 and 2017, and they’ve raised major concerns about what banking clients have been allowed to get away with over the course of the last two decades. These files cover approximately $2 trillion worth of transactions, and they only represent a small proportion of the total number of suspicious transactions reported over that 17-year period

It is important to note that SARs reports are not necessarily a judgement and they do not prove crimes have taken place.

A SAR report simply highlights transactions that a bank or financial institution thinks could be suspicious. In some cases, there may be a perfectly legal and reasonable explanation behind a transaction that has been reported to FinCEN.

So, what has the FinCEN leak revealed to investigators?

  • The files indicate that multinational bank HSBC knowingly allowed criminals to move £62 million worth of stolen money from the US to Hong Kong between 2013 and 2014. The laundering activity was part of a Ponzi scheme, and HSBC reportedly continued to facilitate cash movements after investigators had informed the bank that a scam was taking place.
  • America’s largest bank, JP Morgan, moved over $1 billion for a suspected Russian mobster between 2002 and 2013. This was done via the use of an offshore company, and it was found that JP Morgan transferred cash despite failing to verify who owned the company.
  • Evidence was found indicating that UK bank Barclays was likely used by close associates of Russian President Vladimir Putin to allow the regime to circumnavigate western sanctions that should have prevented them from using UK-based financial service companies.
  • Germany’s Deutsche Bank accounted for 62% of all SARs in the leak, and reports indicate the bank moved more than $1 trillion worth of suspicious money. This included millions of dollars in questionable transfers that were ultimately linked to Iranian-Turkish gold trader Reza Zarrab, who pled guilty to a US federal court in 2017 for transferring cash to help the Iranian regime avoid western sanctions.
  • Standard Chartered processed around £9.4 million worth of payments for Jordan’s Arab Bank between 2014 and 2016, despite accounts associated with the transfer having been previously used to finance terrorist activity.

But that’s just the tip of the iceberg. There are more than 2,500 papers that journalists, lawmakers and enforcement agencies are still sifting through. The suspicious activities within range from illegal football transfers and corporate embezzlement to tax avoidance and more.

Bearing in mind the many revelations that have been made public since September, legislators and members of the public are now left wondering: what happens next?

What are the implications of the FinCEN files?

It’s worth pointing out that September’s publishing of the FinCEN files isn’t the first big financial leak to occur in recent years.

In 2017, the Paradise Papers revealed a string of big name politicians, celebrities and business leaders were moving money offshore to avoid paying taxes. This came only a year after 2016’s Panama Papers offered similar revelations, and two years after the 2015 Swiss Leaks that found HSBC’s private Swiss bank had assisted clients in using the country’s laws on banking privacy to avoid paying taxes.

But analysts all seem to agree the FinCEN files are different for a number of reasons.

Above all else, the FinCEN files are different from previous financial leaks because of the sheer volume of information. This particular leak didn’t pertain to just one bank or a single corporation. The SARs named a dizzying range of large multinational banks, financial institutions and other corporations as having reported or even facilitated suspicious transactions.

Second, the FinCEN files stand out from previous financial leaks because they demonstrate how banks and companies will often notice and report suspicious economic activity – but then allow that activity to continue unhampered despite it being suspicious. This was highlighted in the subsequent defence several banks implicated in the FinCEN leak made, which was that they had fulfilled all of their legal obligations in reporting the activity.

In many situations, that appears to ring true. Although companies are obligated to report suspicious transactions, they aren’t legally required to prevent those suspicious transactions from being carried out. In some cases banks may choose to as a point of reputational integrity. But because a SAR report is not a legal verdict, the transaction being reported may not actually be illegal in the first place.

That’s what makes dealing with the current situation and subsequent fallout such a migraine for regulators and officials.

Moving forward, campaigners are now arguing that the FinCEN leak proves that further legislation needs to be passed in order to hold banks and other financial companies to account. Simply put: it’s being argued that it is not enough for banks to simply report suspicious behaviour. They’ve got to act on it, too.

It appears that frame of mind is already impacting US policy decisions. FinCEN has since announced a number of proposals that will overhaul its AML programmes.

The latest announcement was made at the end of October, when FinCEN launched a consultation on plans to introduce more stringent reporting requirements so that banks would be required to keep records on all cross-border transfers exceeding $250 (versus the current reporting threshold of $3,000). Notably, the rule change would also incorporate cryptocurrency transactions and transfers of other digital assets.

Other jurisdictions are following suit, indicating that very real legislative changes are bound to occur in the coming months as a result of the FinCEN files. But at this point, it’s clear that both regulators and financial institutions have a long way to go in terms of restoring public faith in AML enforcement.

Check out the Linnear COSEC knowledge centre to ensure your business stays up-to-date on the latest industry news, or get in touch to find out how our company secretarial services can drastically reduce your costs and free up your time to help you focus on running your business.

About the author

Nicholas joined in 2018 to set up the Company Secretarial Department in the group’s company formation divisions. After establishing the department, he was a key stakeholder in the development of Linnear CoSec. Prior to joining the group, Nicholas worked in a variety of client-facing positions at an international provider of corporate services, caring for a diverse portfolio of companies. He is a Chartered Secretary and Governance Professional, and holds a bachelor's degree in Politics as well as a Masters in Corporate Governance.

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