The leak and subsequent investigation of the FinCEN Files hit the financial services industry hard this past week - resulting in sharp declines in banking shares on Monday and a flurry of leaders calling for reform. The FinCEN Files are documents obtained by Buzzfeed and the International Consortium of Investigative Journalists (ICIJ) that contain Suspicious Activity Reports (SARs) filed with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).
For those outside the financial crime industry, the headline from the leaks was incredibly shocking: Large financial institutions who were acting within the confines of the law moved $2T in illicit funds on behalf of terrorists, human traffickers, corrupt officials and drug cartels. This left the public asking: How can this be possible, who is responsible and how do we prevent it from happening in the future?
Financial institutions are legally obligated to file SARs with FinCEN and their domestic Financial Intelligence Units (FIUs) as a means to alert the regulator when they detect any “suspicious” transactions that suggest possible criminal activity, such as money laundering or sanctions violations. Yet, some such as Paul Pelletier, a former senior U.S. Justice Department official and financial crimes prosecutor quoted by the ICIJ, believe that financial institutions “operate in a system that is largely toothless.” Technical compliance with the law allows financial institutions to file a SAR and still process a transaction despite having the knowledge that it is suspicious. The FinCEN Files have publicly demonstrated what many within the financial crime industry have expressed concern about for some time: that required legal requirements don’t always align with desired ethical outcomes and the ultimate mission of financial crime compliance – to stop corrupt and illicit activity from traveling through the global financial system.
Fortunately, an industry shift from technical compliance with regulations towards a focus on effective compliance is already underway.
On September 17, before the files were publicly released, FinCEN announced that they were seeking comments on new regulatory initiatives to collectively re-examine the anti-money laundering (AML) regulatory framework and the broader national AML regime. These initiatives are focused on increasing effectiveness in the regime. Defining effective compliance has long been a challenge for regulators and financial institutions alike and a regulatory focus on clearly defining this is a needed and welcome initiative.
And, thanks to technology pioneers, we don’t have to wait for regulations to change to start seeing improvements in effectiveness today. Broader adoption of existing regtech technologies that bring more transparency to suspicious actors within the system can help achieve greater effectiveness goals immediately. Institutions who are genuinely interested in fighting financial crime no longer need to be satisfied with tools that allow them to simply “check the box” of regulatory requirements and can instead, use tools that give them more information while also making it faster, easier and more efficient to uncover illicit activity. In other words, seeing the full picture is increasingly at one’s fingertips.
In Sigma commentary from early 2020, we highlighted several of the compliance challenges raised by the FinCEN Files including the role that uncovering shell companies plays in effective compliance and the improvements that technology can deliver in SAR filing processes. Sigma addresses effectiveness concerns by focusing on transparency through data. By using technology to link information across multiple public data sets and to deliver a unified view of risk on an entity, Sigma enables its users to better identify, assess and minimize risk in their relationships.
We founded Sigma on the belief that it is possible to cut ties with corrupt and unethical businesses, and instead, reward trustworthy players. At the heart of this is data driven transparency. And by embracing transparency through technology, it is possible to go beyond regulation to accomplish what’s right and create a more honest world for everyone.
COO & Founder, Sigma Ratings