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22 September 2020 5 min read

Revelation or regurgitation: Do the FinCEN Files actually tell us anything new?

Chris Nott

Chris Nott
Partner, Financial services

Richard Elliot-Cooke

Richard Elliot-Cooke
Financial Crime and Compliance expert

Trillions of dollars of illicit funds are flowing around the world and are being processed by our biggest banks. Fact. But we have known this for a long time. Do the so called FinCEN Files actually include any new information? And, if they do, what is the appropriate response?

Are these revelations new?

The cases of Bernie Madoff, Dr. Phil, and 1MDB, referred to in the International Consortium of Investigative Journalists (ICIJ) report, are all well-known criminal cases within the financial crime prevention industry. And, the fact that large banks were involved in them is hardly a surprise, given that the majority of money that moves around the world does so through the financial system.

However, it has to be acknowledged that these cases may not be known more broadly amongst the general public, particularly the scale of illicit funds they involve. If nothing else, the fact the FinCEN Files have hit the mainstream media may serve to heighten awareness of illicit activities going on, and increase the pressure on governments and financial institutions to do more to stop them.

The FinCEN Files do shed some light on the level of involvement specific institutions had in processing the transactions related to these scandals. This information may be considered of ‘public interest’. Perhaps more interesting, though, are some of the trends in behaviour which have been brought to light. For example, the fact that some banks were regularly taking in excess of three years to report suspicious behaviour is clearly a breach of the regulatory requirement to submit a Suspicious Activity Report (SAR) in a timely manner.

Whilst the findings of the FinCEN Files may not be considered as significant revelations, we cannot rule out that further information may come to light as a result of this leak.

Should banks be stopping transactions instead of reporting them?

The ICIJ suggest that banks have two options when it comes to processing criminal funds:

  • Option 1: Knowingly processing illicit funds, taking a transaction fee, and reporting this incident to the government after the event, or
  • Option 2: Stopping the funds and not receiving a transaction fee.

They imply that banks almost always choose Option 1 and that, morally, they ought to choose Option 2. Whilst there is some truth to this description of how banks are handling funds, the implication that this, in and of itself, makes them complicit in facilitating financial crime is mistaken, on two accounts:

1. Through the very act of reporting the transaction, as they are obliged to if they suspect money laundering, financial institutions are helping the authorities to identify potentially criminal behaviour.

2. In many cases, authorities expect financial institutions not to stop the transaction because they want to ‘follow the money’, so that more serious crimes and the ultimate perpetrators of these crimes can be detected.

Is it material that banks have recently been fined or were subject to Deferred Prosecution Agreements (DPAs) when they processed these funds?

The ICIJ report also implies that banks which had recently been fined and / or subject to a DPA for AML failings should have been doing even more to prevent these funds from being processed. However, as mentioned above, the right course of action is not necessarily to stop the transaction if the intent is to identify the crime. Furthermore, the fact that banks reported these transactions to the authorities after they had recently been subject to regulatory action might suggest that they had made improvements as they were in a position to identify and report these transactions.

How should financial institutions respond?

Whilst the FinCEN Files report may confuse some of the underlying issues, it is likely to heighten awareness of illicit activities taking place, and increase pressure on financial institutions and governments alike to do more to address them.

The SAR regime is limited and it is important that financial institutions and governments go beyond this in order to really make an impact on reducing financial crime.

Financial institutions should use this as an opportunity to reflect on the controls they have in place to identify their exposure to, and take appropriate action to mitigate, serious cases of organised crime. Many institutions still do not have an effective Financial Intelligence Unit (FIU) in place that allows them to holistically monitor activities of their customer base, an important tool for managing such cases.


How Baringa can help:

Our team have extensive knowledge of how criminals carry out financial crime, having worked with investigations teams in financial institutions and government departments around the globe. We regularly carry out comprehensive research on the topic and recently published Baringa’s Top 10 Financial Crime Risks Report. We support institutions to manage cases of serious organised crime, and in setting up Financial Intelligence Units (FIUs) to enable them to be proactive in their response to financial crime. Please contact us if you would like to find out more.

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