December 19, 2018

December 18, 2018

Subscribe to Latest Legal News and Analysis

December 17, 2018

Subscribe to Latest Legal News and Analysis

FinCEN, OCC and FBI Offer Diverging Views on AML Reform in U.S. Senate Testimony

Regulators Spar Over BSA Reporting Thresholds and Regulatory Review for FinCEN

First Post in a Two-Part Series

Late last week, the U.S. Senate Committee on Banking, Housing, and Urban Affairs (the “Banking Committee”) met in open session to conduct a hearing on “Combating Money Laundering and Other Forms of Illicit Finance: Regulator and Law Enforcement Perspectives on Reform.” The Banking Committee heard the testimony of, and questioned, representatives from FinCEN, the OCC, and the FBI. This was the fourth hearing held in 2018 by the Banking Committee on the state of the Bank Secrecy Act (“BSA”) framework and its effective implementation by regulators and law enforcement. The partial backdrop for this hearing is that Congress is considering a draft bill, the Counter Terrorism and Illicit Finance Act(“CTIFA”), which proposes the most substantial overhaul to the BSA since the PATRIOT Act, and which contains provisions regarding many of the same issues discussed during the hearing.

In this hearing, we heard from three individuals:

  • Kenneth A. Blanco, Director of FinCEN (written remarks here);

  • Steven D’Antuono, Section Chief of the FBI’s Financial Crimes Section (written remarks here); and

  • Grovetta Gardineer, Senior Deputy Comptroller for Compliance and Community Affairs of the OCC (written remarks here).

In this post, we will discuss the issues which appeared to generate the most sparks between the OCC—which emphasized attempting to ease BSA regulatory burdens, particularly for small- to medium-sized community banks—and FinCEN and the FBI, which stressed the value of BSA filings to law enforcement. In our next post, we will discuss some of the less contentious (although still critical) issues addressed at the hearing, which broadly canvassed many of the most pressing BSA/AML issues currently facing financial institutions and the government.  These issues are: (i) the exploration by financial institutions of technological innovation, including artificial intelligence, in order to comply more efficiently with their BSA/AML obligations; (ii) the identification of the beneficial owners of legal entities; and (iii) the role of real estate in money laundering schemes.

The tension during the hearing between FinCEN and OCC at times was palpable, and the divides in partisan thinking on the direction of certain aspects of AML reform were apparent. Although there seemed to be consensus on the importance of the beneficial ownership rules and other issues, senators and regulators alike disagreed about increasing the $5,000 and $10,000 respective reporting threshold for the filing of Suspicious Activity Reports (“SARs”) and Currency Transaction Reports (“CTRs”).

The Committee Debates Regulatory Duties and Burdens: Setting SAR and CTR Filing Monetary Thresholds

In his opening remarks, the Chairperson of the Banking Committee, Senator Mike Crapo (R- Idaho), generally stressed the importance of the topic at hand, and also acknowledged the recent scandal of a FinCEN employee arrested for, allegedly, unlawfully disclosingSARs to the media. However, the written and verbal remarks of Ranking Member Senator Sherrod Brown (D–Ohio), were more pointed, and preemptively addressed two inter-related issues discussed throughout the hearing: potentially raising the monetary thresholds for the filing of SARs and CTRs, and reducing the BSA compliance burden imposed upon small- to medium-sized banks:

But the kind of discussions we’ve sometimes had in the past, as we’ve talked about creating different rules for global and community banks, does not fit as well here.

Money launderers are looking for the weakest link . . . and will migrate to smaller banks as necessary to hide their crimes.

Community and regional banks play a crucial role alongside our biggest banks in monitoring transactions across the country—their efforts are essential to federal efforts to monitor, deter, prosecute, and punish illicit finance-related activity across our economy.

            . . . .

Some preliminary analysis has already been done. Bipartisan committee staff have been told by FinCEN and the FBI, for example, that increasing SAR and [CTR] thresholds to the levels contained in the House Republican bill would eliminate around 80% of the data available to federal law enforcement.

We cannot throw 80% of the data, including on suspicious activity, out the window. That is irresponsible; it makes no sense. And it could cost lives.

For context, the CTIFA proposes that the monetary threshold that triggers a duty to file a CTR should be raised from $10,000 to $30,000. Similarly, the CTIFA proposes that the monetary threshold triggering a duty to file a SAR, assuming that a transaction or series of transactions has been deemed “suspicious,” should be raised from $5,000 to $10,000. As we have blogged, the current SAR filing regime has been criticized by some as producing over time an ever-increasing barrage of SAR filings by risk-adverse financial institutions inclined to engage in “defensive filing,” which is costly to the institutions and can lead to SARs of limited value to law enforcement.  Further, many provisions in the CTIFA track reforms proposed in a detailed paper published in 2017 by The Clearing House, a banking association and payments company. That paper, titled A New Paradigm: Redesigning the U.S. AML/CFT Framework to Protect National Security and Aid Law Enforcement (“The New Paradigm”), analyzes the effectiveness of the current AML and Combatting the Financing of Terrorism (“CFT”) regime in the U.S., identifies problems with that regime, and proposes reforms.  As we have bloggedThe New Paradigm has argued in part that the regime for filing SARs is outdated, that “the combined data set [from filed SARs] has massive amounts of noise and little information of use to law enforcement,” and that “the SAR database includes no feedback loop [and] . . . there is no mechanism for law enforcement to provide feedback on whether a given SAR produced a lead or was never utilized.”

The majority of questions during the hearing were directed to Director Blanco, who held common ground with Mr. D’Antuono throughout the hearing. They both stressed the value of BSA filings to law enforcement, and offered anecdotal examples of how BSA filings have led to investigations and eventual prosecutions. It appeared that Ms. Gardineer, on behalf of the OCC, had a divergent goal: making compliance with BSA regulations more manageable, particularly for small- to medium-sized banks.

Clearly, both FinCEN and the FBI believe that the filing thresholds should remain the same, despite the costs imposed upon banks to comply with the current standards. Director Blanco emphasized that banks and politicians should view the time, money, and resources spent on SAR/CTR reporting not as costs, but as an investment into the security of our country. His testimony was consistent with comments which Director Blanco has made previously, strongly emphasizing the value of BSA filings to law enforcement. Likewise, Mr. D’Antuono described BSA filings in his testimony as “priceless,” and that it was hard to put a value on them.

Senator Brown generally appeared to side with FinCEN and the FBI, going so far as to interrupt Ms. Gardineer’s testimony at one point to call the OCC’s proposals a way to weaken the rules to make the requirements easier for community bankers rather than focus on “serial law breakers.” However, Senators Mark Warner (D—VA) and Pat Toomey (R—PA) appeared to take a more pragmatic approach. After Senator Toomey remarked that law enforcement always wants additional information, both senators asked if FinCEN or the FBI had any actual data regarding the real-world utility of SARs and CTRs filed regarding transactions totaling between $10,000 and $30,000 (they did not), so that a cost-benefit analysis could be performed which weighed the law enforcement value of the filings at issue against the costs imposed upon industry of filing them. Ms. Gardineer commented that “boiling the ocean” with multitudinous BSA filings will produce only “white noise” rendering law enforcement’s job more difficult, and that the emphasis should be on identifying what information has true quality—a goal perhaps easier to articulate than attain.

It did seem clear that the OCC is genuinely interested in easing the regulatory burdens facing smaller banks, which are disproportionately affected by the costs of BSA/AMLcompliance than larger institutions, which may benefit from certain economies of scale. At one point, Ms. Gardineer explicitly referred to the Interagency Statement released in October concerning when smaller financial institutions can share resources to manage their BSA/AML obligations. Although these reforms would benefit financial institutions of all sizes, Ms. Gardineer also referenced reforms proposed under the CTIFA to enhance both the “safe harbor” protection from any civil liability for financial institutions filing SARs, and to expand the safe harbor protections for institutions sharing BSA information amongst themselves under Section 314(b) of the USA PATRIOT Act.

The Committee Debates Regulatory Duties and Burdens: Subject FinCEN to the EGRPRA?

Ms. Gardineer suggested that FinCEN should participate in the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) hearing process, which Ms. Gardineer painted as a great opportunity for FinCEN to hear commentary and ask questions. The suggestion that FinCEN avail itself of the EGRPRA process also is set forth in Ms. Gardineer’s written remarks, which observe that (i) one of the regulatory issues raised most frequently by the financial industry is BSA/AML regulations, and (ii) “[a]s the agency with rule-writing authority for most of the current BSA/AML regulatory regime, FinCEN could benefit from recommendations for regulatory improvement and to respond to public concerns about BSA/AML regulations.”

EGRPRA requires the “federal banking agencies” within the Federal Financial Institutions Examination Council (the OCC, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation — but not the National Credit Union Administration or the Consumer Financial Protection Bureau) to review the regulations promulgated by these agencies at least once every ten years. The purpose of the review is to identify—with input from the public—outdated, unnecessary, or unduly burdensome regulations and consider how to reduce the regulatory burden without compromising the effectiveness of the regulatory scheme. The review process culminates in a Report to Congress, like the most recent Report published in March 2017. In compiling the 400-plus page report, the EGRPRA agencies held six outreach meetings across the United States to compile the requisite public input. Notably, FinCEN is not bound by EGRPRA; accordingly, FinCEN does not have to participate in these outreach meetings, nor must it participate in the review process at all.

Director Blanco appeared to bristle at this suggestion, stating that FinCEN already collaborates with industry by way of a BSA working group, referring to the Bank Secrecy Act Advisory Group. According to Director Blanco, the OCC’s suggestion would add an unnecessary, additional layer of “bureaucracy” to the AML regime, and would divert valuable resources away from criminal law enforcement efforts to respond to legislative requirements. Director Blanco also criticized the OCC for articulating a position apparently unknown to him, quipping “[i]t would have been nice to have had this conversation before the hearing today.”

In our second post, we will discuss the other primary issues addressed at the hearing: (i) the exploration by financial institutions of technological innovation, including artificial intelligence, in order to comply more efficiently with their BSA/AML obligations; (ii) the identification of the beneficial owners of legal entities; and (iii) the role of real estate in money laundering schemes.

Copyright © by Ballard Spahr LLP

TRENDING LEGAL ANALYSIS


About this Author

Juliana Carter, Litigator, Civil, Criminal Disputes, Philadelphia, Ballard Spahr Law Firm
Associate

Juliana B. Carter is an associate in the Litigation Department. Ms. Carter has trial experience with a range of civil and criminal disputes. She has also defended clients in tort litigation and arbitration proceedings.

Ms. Carter completed internships in the offices of the Philadelphia District Attorney, the Education Law Center of Pennsylvania, and the Southeastern Pennsylvania Transportation Authority (SEPTA). Ms. Carter was also appointed a mediator within the Philadelphia Municipal Court, helping to facilitate the settlement of small-claims and landlord-tenant disputes between...

215-864-8112
 Peter D. Hardy, Ballard Spahr, Philadelphia lawyer, White Collar Defense lawyer, Internal Investigations, Consumer Financial Services, Privacy and Data Security, Tax
Partner

Peter Hardy advises corporations and individuals in a range of industries against allegations of misconduct—including tax fraud, money laundering, Bank Secrecy Act, mortgage fraud and lending law violations, securities fraud, health care fraud, public corruption, Foreign Corrupt Practices Act violations, and identity theft and data breach.

Mr. Hardy has extensive trial and appellate court experience. He oversees internal investigations, advises in potential disclosures to the Internal Revenue Service, and has litigated complex criminal matters at the trial and appellate levels. He also counsels clients through every stage of a tax controversy – from audit through administrative appeal to litigation and collection.

Before entering private practice, Mr. Hardy spent more than a decade as a federal prosecutor. He served as an Assistant U.S. Attorney in Philadelphia, where he focused on fraud and tax cases. He also served as a trial attorney for the Department of Justice’s Tax Division in Washington, D.C., where he tried cases in a number of federal districts and helped write the Department's Criminal Tax Manual.

A national thought leader on the subject of criminal tax and money laundering law, Mr. Hardy is the author of  Criminal Tax, Money Laundering, and Bank Secrecy Act Litigation, a well-reviewed and comprehensive legal treatise on the litigation of criminal tax, money laundering, and Bank Secrecy Act cases, published by Bloomberg BNA. He also serves as an adjunct professor at Villanova University School of Law, where he teaches a class on criminal and civil tax penalties in the graduate law program.

215.864.8838