Where Are We Now?
Hamad Alhelal & Stuart Jones, Jr.

Read Part 1: 5.4+ Million Hours of Work?

The age-old question within compliance functions is whether it’s in their interest to spend time justifying why a case should be mitigated instead of escalating and reporting. If the justification can’t be defended, then the consequences could be detrimental.

The result?

An ever-increasing deluge of suspicious reporting, which increased nearly 15% in the last year for depository institutions in the United States. After all, no one has ever gotten fined for reporting suspicious activity, even if it lacked merit and is ironically both resource intensive and costly for compliance functions.

While FinCEN hopes to reduce “respondent burden,” regulators everywhere stand to benefit from reforming both the SAR and the wider AML regimes. For FinCEN, the Cato Institute notes that the “agency is relatively under resourced despite its leading role in writing and enforcing the Bank Secrecy Act’s many rules.” The agency, with its 333 employees and $118 million budget, possesses approximately 10% of the employees and budget as the Office of the Comptroller of the Currency (OCC). In fact, financial institutions spend more processing alerts than the combined budget responsible for reviewing the work.

According to a study by RUSI, on a global basis, “80–90% of suspicious reporting is of no immediate value to active law enforcement investigations, according to interviews conducted with past and present financial intelligence unit (FIU) heads as part of this project,” with the number as high as 97% for one jurisdiction. In the United States, according to McKinsey, “95% of investigations submitted in response to information-sharing requests by FinCEN yield positive results”. From their experience, McKinsey noted that a “leading institution that set up an intelligence-based investigations unit reports productive outputs in excess of 80 percent. Without such information sharing or tangible leads of some kind, less than 2 percent of alerts achieve productive results”. In addition to reinforcing the idea that current transaction monitoring and alert reviews is ineffective, despite the high cost, their findings further underscore the importance of information sharing and access to actionable insight.

Yet, with the rising volume of reports, coupled with the increasing strain on law enforcement resources in the midst of an unprecedented pandemic, each suspicious report will inevitably receive less attention from law enforcement. This further underscores necessary calls for reform, which was most clearly articulated by The Clearing House (TCH) in a 2017 publication.

TCH an association of several of the largest banks, stated that the current framework is “outdated and thus ill-suited for apprehending criminals and countering terrorism in the 21st century,” and listed the core problems that needed to be addressed. In addition to barriers to information sharing and feedback, one of the most critical areas highlighted is the examination standards and processes. TCH notes that while law enforcement, the chief beneficiary of SARs, focus on the quality of the reporting, examiners, on the other hand, focus on auditable processes, which TCH states disincentivizes banks from developing innovative methods. With this mind, the TCH called on the U.S. Treasury to “strongly encourage innovation, and [for] FinCEN to propose a safe harbor rule allowing financial institutions to innovate in a Financial Intelligence Unit (FIU) “sandbox” without fear of examiner sanction.”

So where are we?

Approximately 2 years later, the compliance community welcomed a statement by FinCEN and its regulatory partners encouraging financial institutions to take innovative approaches to illicit finance. In their statement, FinCEN and its regulatory partners (e.g., Federal Reserve, OCC, etc.) recognized that adopting new technology can enhance the effectiveness and efficiency of BSA/AML compliance programs. Notably, the joint statement said that innovative pilot programs in and of themselves should not subject banks to supervisory criticism, even if the pilot programs ultimately prove unsuccessful. Likewise, pilot programs that expose gaps in a BSA/AML compliance program will not necessarily result in supervisory action with respect to that program.

The trick is to have a plan. Fortunately, in our experience, a number of leading financial institutions do. They are willing to try new things, keeping in mind that the prevailing anti-money laundering approaches globally were developed and deployed before the Internet existed. Sure, innovation takes time and carries risk, but given current circumstances, documented inefficiencies and a rise in COVID-19 related financial crime, can we really afford not to try?

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