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FinCen, FBI and OCC Questioned in Fourth Hearing

FinCen, FBI and OCC Questioned in Fourth Hearing

Regulators Spar Over BSA Reporting Thresholds and Regulatory Evaluation for FinCEN

First Publish in a Two-Half Collection

Late final week, the U.S. Senate Committee on Banking, Housing, and City Affairs (the “Banking Committee”) met in open session to conduct a listening to 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 listening to held in 2018 by the Banking Committee on the state of the Financial institution Secrecy Act (“BSA”) framework and its efficient implementation by regulators and regulation enforcement. The partial backdrop for this listening to is that Congress is contemplating a draft invoice, the Counter Terrorism and Illicit Finance Act(“CTIFA”), which proposes probably the most substantial overhaul to the BSA because the PATRIOT Act, and which incorporates provisions relating to most of the similar points mentioned in the course of the listening to.

On this listening to, we heard from three people:

  • Kenneth A. Blanco, Director of FinCEN (written remarks right here);
  • Steven D’Antuono, Part Chief of the FBI’s Monetary Crimes Part (written remarks right here); and
  • Grovetta Gardineer, Senior Deputy Comptroller for Compliance and Group Affairs of the OCC (written remarks right here).

On this submit, we’ll talk about the problems which appeared to generate probably the most sparks between the OCC—which emphasised trying to ease BSA regulatory burdens, notably for small- to medium-sized group banks—and FinCEN and the FBI, which burdened the worth of BSA filings to regulation enforcement. In our subsequent submit, we’ll talk about a number of the much less contentious (though nonetheless essential) points addressed on the listening to, which broadly canvassed most of the most urgent BSA/AML points at present dealing with monetary establishments and the federal government.  These points are: (i) the exploration by monetary establishments of technological innovation, together with synthetic intelligence, in order to conform extra effectively with their BSA/AML obligations; (ii) the identification of the useful house owners of authorized entities; and (iii) the position of actual property in cash laundering schemes.

The strain in the course of the listening to between FinCEN and OCC at occasions was palpable, and the divides in partisan considering on the path of sure features of AML reform have been obvious. Though there appeared to be consensus on the significance of the useful possession guidelines and different points, senators and regulators alike disagreed about growing the $5,000 and $10,000 respective reporting threshold for the submitting of Suspicious Exercise Studies (“SARs”) and Foreign money Transaction Reviews (“CTRs”).

The Committee Debates Regulatory Duties and Burdens: Setting SAR and CTR Submitting Financial Thresholds

In his opening remarks, the Chairperson of the Banking Committee, Senator Mike Crapo (R- Idaho), usually burdened the significance of the subject at hand, and additionally acknowledged the current scandal of a FinCEN worker arrested for, allegedly, unlawfully disclosingSARs to the media. Nevertheless, the written and verbal remarks of Rating Member Senator Sherrod Brown (D–Ohio), have been extra pointed, and preemptively addressed two inter-related points mentioned all through the listening to: probably elevating the financial thresholds for the submitting of SARs and CTRs, and decreasing the BSA compliance burden imposed upon small- to medium-sized banks:

However the sort of discussions we’ve typically had in the previous, as we’ve talked about creating totally different guidelines for international and group banks, doesn’t match as nicely right here.

Cash launderers are in search of the weakest hyperlink . . . and will migrate to smaller banks as essential to cover their crimes.

Group and regional banks play an important position alongside our largest banks in monitoring transactions throughout the nation—their efforts are important to federal efforts to watch, deter, prosecute, and punish illicit finance-related exercise throughout our financial system.

            . . . .

Some preliminary evaluation has already been executed. Bipartisan committee employees have been informed by FinCEN and the FBI, for instance, that growing SAR and [CTR] thresholds to the degrees contained in the Home Republican invoice would remove round 80% of the info out there to federal regulation enforcement.

We can’t throw 80% of the info, together with on suspicious exercise, out the window. That’s irresponsible; it is senseless. And it might value lives.

For context, the CTIFA proposes that the financial threshold that triggers an obligation to file a CTR must be raised from $10,000 to $30,000. Equally, the CTIFA proposes that the financial threshold triggering an obligation to file a SAR, assuming that a transaction or collection of transactions has been deemed “suspicious,” ought to be raised from $5,000 to $10,000. As we’ve got blogged, the present SAR submitting regime has been criticized by some as producing over time an ever-increasing barrage of SAR filings by risk-adverse monetary establishments inclined to interact in “defensive filing,” which is expensive to the establishments and can result in SARs of restricted worth to regulation enforcement.  Additional, many provisions in the CTIFA monitor reforms proposed in an in depth paper revealed in 2017 by The Clearing Home, a banking affiliation and funds firm. That paper, titled A New Paradigm: Redesigning the U.S. AML/CFT Framework to Shield Nationwide Safety and Assist Regulation Enforcement (“The New Paradigm”), analyzes the effectiveness of the present AML and Combatting the Financing of Terrorism (“CFT”) regime in the U.S., identifies issues with that regime, and proposes reforms.  As we have now blogged, The New Paradigm has argued in half that the regime for submitting 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.”

Nearly all of questions through the listening to have been directed to Director Blanco, who held widespread floor with Mr. D’Antuono all through the listening to. They each harassed the worth of BSA filings to regulation enforcement, and provided 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 aim: making compliance with BSA laws extra manageable, notably for small- to medium-sized banks.

Clearly, each FinCEN and the FBI consider that the submitting thresholds ought to stay the identical, regardless of the prices imposed upon banks to adjust to the present requirements. Director Blanco emphasised that banks and politicians ought to view the time, cash, and assets spent on SAR/CTR reporting not as prices, however as an funding into the safety of our nation. His testimony was in line with feedback which Director Blanco has made beforehand, strongly emphasizing the worth of BSA filings to regulation enforcement. Likewise, Mr. D’Antuono described BSA filings in his testimony as “priceless,” and that it was onerous to place a worth on them.

Senator Brown usually appeared to aspect with FinCEN and the FBI, going as far as to interrupt Ms. Gardineer’s testimony at one level to name the OCC’s proposals a method to weaken the principles to make the necessities simpler for group bankers somewhat than concentrate on “serial law breakers.” Nevertheless, Senators Mark Warner (D—VA) and Pat Toomey (R—PA) appeared to take a extra pragmatic strategy. After Senator Toomey remarked that regulation enforcement all the time needs further info, each senators requested if FinCEN or the FBI had any precise knowledge relating to the real-world utility of SARs and CTRs filed relating to transactions totaling between $10,000 and $30,000 (they didn’t), so that a cost-benefit evaluation might be carried out which weighed the regulation enforcement worth of the filings at situation towards the prices imposed upon business of submitting them. Ms. Gardineer commented that “boiling the ocean” with multitudinous BSA filings will produce solely “white noise” rendering regulation enforcement’s job harder, and that the emphasis ought to be on figuring out what info has true high quality—a aim maybe simpler to articulate than attain.

It did appear clear that the OCC is genuinely in easing the regulatory burdens dealing with smaller banks, that are disproportionately affected by the prices of BSA/AMLcompliance than bigger establishments, which can profit from sure economies of scale. At one level, Ms. Gardineer explicitly referred to the Interagency Assertion launched in October regarding when smaller monetary establishments can share assets to handle their BSA/AML obligations. Though these reforms would profit monetary establishments of all sizes, Ms. Gardineer additionally referenced reforms proposed underneath the CTIFA to reinforce each the “safe harbor” safety from any civil legal responsibility for monetary establishments submitting SARs, and to broaden the protected harbor protections for establishments sharing BSA info amongst themselves underneath Part 314(b) of the USA PATRIOT Act.​

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

Ms. Gardineer recommended that FinCEN ought to take part in the Financial Progress and Regulatory Paperwork Discount Act (EGRPRA) listening to course of, which Ms. Gardineer painted as an amazing alternative for FinCEN to listen to commentary and ask questions. The suggestion that FinCEN avail itself of the EGRPRA course of additionally is about forth in Ms. Gardineer’s written remarks, which observe that (i) one of many regulatory points raised most often by the monetary business is BSA/AML laws, 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” inside the Federal Monetary Establishments Examination Council (the OCC, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance coverage Company — however not the Nationwide Credit score Union Administration or the Shopper Monetary Safety Bureau) to evaluate the laws promulgated by these businesses at the very least as soon as each ten years. The aim of the assessment is to determine—with enter from the general public—outdated, pointless, or unduly burdensome laws and contemplate the best way to scale back the regulatory burden with out compromising the effectiveness of the regulatory scheme. The evaluate course of culminates in a Report back to Congress, like the newest Report revealed in March 2017. In compiling the 400-plus web page report, the EGRPRA businesses held six outreach conferences throughout america to compile the requisite public enter. Notably, FinCEN is not sure by EGRPRA; accordingly, FinCEN doesn’t should take part in these outreach conferences, nor should it take part in the evaluate course of in any respect.

Director Blanco appeared to bristle at this suggestion, stating that FinCEN already collaborates with business by means of a BSA working group, referring to the Financial institution Secrecy Act Advisory Group. In response to Director Blanco, the OCC’s suggestion would add an pointless, further layer of “bureaucracy” to the AML regime, and would divert beneficial assets away from felony regulation enforcement efforts to answer legislative necessities. Director Blanco additionally criticized the OCC for articulating a place apparently unknown to him, quipping “[i]t would have been nice to have had this conversation before the hearing today.”

In our second submit, we’ll talk about the opposite main points addressed on the listening to: (i) the exploration by monetary establishments of technological innovation, together with synthetic intelligence, in order to conform extra effectively with their BSA/AML obligations; (ii) the identification of the useful house owners of authorized entities; and (iii) the position of actual property in cash laundering schemes.