Funds Society Interview with Carlos Gonzalez-Stawinski: FinCen Files: Regulatory Implications

TRANSLATION

1. First, one may wonder about the scope of the leaked documents. Reports of suspicious activity sent to U.S. authorities between 2000 and 2017 are reported. It is a fairly long period in which regulatory changes continued to occur in the United States and around the world. So, what kind of documents are we talking about?

It is correct, in that period of time there were fundamental changes to the Anti-money Laundering Regulation and controls associated with this. We must remember that terrorist attacks on the United States happen in that period and, as a result, the USA Patriot Act was implemented.

However, we are primarily talking about the Suspicious Activity Reports (SAR) that financial institutions in the United States must file under the Bank Secrecy Act (BSA). These reports are and continue to be one of the most important tools the United States has in its efforts to detect and prevent money laundering, terrorist financing activities, and other criminal activities. The SAR is the method that the rules provide so that financial institutions can disclose in a safe and confidential manner any activity that is unusual, out of character (or profile) of a client or possibly illegal. So sensitive is a SAR that disclosing its contents is a criminal act (even within the same institution) and, moreover, the person who files have judicial immunity against the person implied in the SAR.

The important thing about SAR is the narrative in which the institution explains its research, the activity they identified and why it is suspicious. Also, this is where they explain the relationship between accounts, transactions, and customer history.

Therefore, even if we are talking about a single document, it is an extensive, transparent document, which has many details of how the person operates. SAR’s are usually shared among the main criminal agencies of the United States.

2. Leaked documents belong to the banks themselves and are used by these entities to report suspicious behavior of their clients. So who does this leak really affect? Is it mostly a complaint against the financial institutions, the U.S. control system, or the individuals or organizations involved?

Yes, you are correct, the documents are from the banks that files the SAR's. When reading the published articles, I understand that it is natural that there is criticism towards financial institutions mainly because the perception is, they had all that information and, perhaps, they did not act quickly. But I think that criticism is not entirely right since financial institutions fulfilled their duty to report conducts that was deemed suspicious. A SAR does equate to a crime, a SAR is a statement of regarding a conduct based on the institution's knowledge of its client. It is the responsibility of the relevant authorities to investigate these facts and to conclude whether there was a crime. It seems to me that the real criticism is against the system itself, since the impression is that these people got away without punishment, if they actually committed a crime.

3. From the analysis of the 2,121 reports of leaked suspicious activity, can it be inferred that financial institutions merely reported suspicious activities as a formality, without actually avoiding money laundering?

It seems to me that this is where the real controversy lies and where it is important to understand the mechanics of the SAR and, more importantly, of an Anti-Money Laundering Program. The SAR is a photo at a time in time. The reality is that a SAR alone does not give you information or context about which other actions (if any) were taken by the institutions or the government when they received the information.

It is important to remember that, under current regulations, banks are required to report any activity they understand to be suspicious yet they are not in an obligation to close a client's account or refuse to execute a transaction. This mainly because an activity considered unusual or suspicious does not mean that there is an illegal activity or an attempt to launder money. With that said, an Anti-Money Laundering Program should detail under what circumstances a relationship will be investigated, reported, and closed.

Having been in the position of trying to identify suspicious activities I can understand how complicated it is. In fact, I always remember a case from my Compliance Officer days, where we realized that a client with very small movements of funds suddenly withdrew about $25,000 USD in cash. In a single day and in small amounts. What in our eyes seemed to be a structuring of withdrawals which would have led to filing of a SAR, turned out to be that the client was celebrating with his wife their 25th wedding anniversary and were on vacation (and shopping) in New York.... Therefore, although the activity was not customary, we concluded that it was not suspicious as it reasonable.

4. This new leak adds to well-known ones, such as the Panama Papers in 2016: what does all this tell us about the global financial system? Have practices improved or are we still at the same point as in 2016?

The Panamá Papers dealt a very hard blow, especially for financial centers in Latin America and for those participating in the international sphere. So much so, that you still feel the effects. By way of example, European Community 5th Directive makes it more difficult to maintain trade relations with individuals (or entities) in countries classified as high risk and one of those is Panama.

The FinCen Files teach us several things: the complexity and sophistication of those who try to use the financial system to launder assets, the challenges faced to detect and prevent money laundering and how much remains to be done. The global financial system is fragmented and its nature of having so much regulatory and participant diversity does not make it easier. This presents an incredible opportunity for individuals who feed the criminal activity.

However, I believe that the financial industry in general has been making efforts and adopting practices to improve its controls. Particularly around due diligence efforts and Know Your Customer (KYC). But, like everything, this is going to be a process of reflection and analyzing how it can be improved.

5. FINCEN Files reveal information about all kinds of organizations, often criminal. What criminal consequences can these disclosures have for the banks involved?

It is difficult to predict what criminal or regulatory consequences banks or their officers will have because of the FinCen Files leak. This, as I mentioned earlier, because we do not know essential facts that happened before, during and after those SAR's were filed. Now, I think this is going to result in greater scrutiny on how the entities and their officers acted before, during and after the SAR filing and investigation. In case of finding any gross negligence, omission, or intention to help clients then I certainly believe that we will see regulatory actions and, depending on the case, criminal proceedings.

I think it is important to point out the FinCen Files are going to have other serious repercussions such as reputational damage to the aforementioned entities and regulatory repercussions.

On this last point, it is disconcerting that no one has spoken of two communications that FinCen made last week about new regulations. Last Friday, September 17, FinCen announced the implementation of new rules applicable to banks that do not have a federal functional regulator (US). Therefore, as of March 2021, all requirements of the BSA and patriot ACT will apply to these entities. In addition, and separately, on September 16, FinCen announced that it would begin the regulatory process to receive public opinions on the effectiveness and how to modernize its Anti-money Laundering rules. This with a view to developing new updated Anti-money laundering rules.

Although these regulatory processes are not necessarily triggered or related to FinCen Files, there is no doubt that they will have an influence on how the agency acts and the future rules it implements.