FinCEN Stresses Transparency, BSA Filing Data, and Perils of “Under- Regulating” to Securities Industry

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Last Thursday, FinCEN Deputy Director Jamal El-Hindi appeared at the 20th annual Anti-Money Laundering (AML) and Financial Crimes Conference hosted by the Securities Industry and Financial Markets Association (SIFMA) in New York City. His prepared remarks covered three main topics at the intersection of the securities industry and FinCEN’s enforcement goals: (i) AML compliance trends and current challenges; (ii) the value of Bank Secrecy Act (BSA) filing data; and (iii) the current regulatory landscape.

El-Hindi not surprisingly stressed transparency and information sharing, the value of BSA reporting data, and the need for legislation regarding the collection of beneficial ownership at the corporate formation stage. El-Hindi also suggested – perhaps without the complete agreement of his audience – that regulators tend to under-regulate, rather than over-regulate. He stated: “But in an area such as ours where we have developed a strong partnership with industry and where we believe that you are just as vested in our mission to thwart bad actors as we are, it is important for us to use our authorities fully.”

His remarks are particularly relevant given the 2020 Examination Priorities recently issued by the SEC’s Office of Compliance Inspections and Examinations (OCIE), which states that the OCIE will prioritize examining broker-dealers and investment companies “for compliance with their AML obligations in order to assess, among other things, whether firms have established appropriate customer identification programs and whether they are satisfying their SAR filing obligations, conducting due diligence on customers, complying with beneficial ownership requirements, and conducting robust and timely independent tests of their AML programs.”

AML Compliance Trends and Current Challenges

El-Hindi began by recalling the dominating issue when he first joined FinCEN in 2006: implementing rules under the PATRIOT Act for special due diligence for foreign accounts. Issuing guidance to the securities and financial markets space posed a special challenge due to the many layers of actors and actions that might be linked to an ultimate customer. Almost 15 years later, El-Hindi sees similar challenges involving transparency in the industry today.

Specifically, he focused on Section 314(b) information sharing, which allows financial institutions to share information about customers with one another to identify and report possible money laundering or terrorist activities. El-Hindi stated that the complexity of transactions in the securities and futures sector can undermine transparency, which is enhanced through Section 314(b) information sharing. However, he acknowledged a tension between transparency, the core value of AML compliance, and the competitive nature of the securities industry: the more institutions reveal their customer data, the more their competitors might be able to use – or at least be perceived as using – that information to gain a competitive edge.

El-Hindi provided a statistic to support his general concern: depository institutions have a 40 percent participation rate in the Section 314(b) program. By contrast, securities sector institutions have only a 14 percent participation rate. El-Hindi wondered aloud whether there is a cultural fear of losing a competitive edge that led to the differences in participation rates. El-Hindi suggested – without offering details – that it is possible to both share customer information through the Section 314(b) program and still protect valuable information from competitors.

Depository institutions have a 40 percent participation rate in the Section 314(b) program. By contrast, securities sector institutions have only a 14 percent participation rate.

Another challenge to effective AML compliance has been the historical lack of coordination and communication among regulators. From El-Hindi’s perspective, inter-agency cooperation has increased greatly over the years, allowing for heightened compliance and effective relationships.

El-Hindi used a slightly ironic example of bad actors engaging in adaptive behavior to extol the benefits of increased inter-agency cooperation. He stated that some illicit activity has migrated from the securities sector to the banking sector because offshore brokers seeking to use omnibus accounts for illegal activity were reacting to greater scrutiny by securities regulators by moving to banks. El-Hindi stated that one method to combat such adaptive, cross-industry behavior was inter-agency cooperation and coordination – specifically, coordination by FinCEN, the SEC and FINRA, in order to collectively identify institutions of concern.

The Value of BSA Filing Data

El-Hindi reiterated a now-familiar message from FinCEN: the real-world value to law enforcement and regulators of BSA filing data – particularly, of course, Suspicious Activity Reports (SARs). He again referenced some statistics, noting that although the number of SARs filed annually by the securities sector has increased “roughly eight-fold” from 2003 through 2019, that number still only represents “a small fraction of the roughly two million SARs filed per year.” El-Hindi further stated that FinCEN, law enforcement, and other regulators query BSA reporting data approximately 30,000 every day – or about 7.4 million queries per year.

Stressing that BSA reporting protects the integrity of the financial system, the rule of law and national security, El-Hindi invited the audience to “[t]hink of how much easier it would be for criminals to spend and move their ill-gotten gains if you were not doing what you are doing in terms of identifying and scrutinizing your customers and their activities.” He further stated that FinCEN’s BSA Value project “is focused on chronicling all the ways in which BSA information is used, and coming up with a way to translate that value into metrics that will help us further refine our regulations and other efforts.”

As we have blogged (here, here, here and here), FinCEN repeatedly has touted the investigatory value of SARs and other filings – understandably so, but likely also in part to blunt the critiques of a growing reform movement which questions the investigatory utility and mounting costs to industry of the current SAR reporting regime, and any legislative changes which may ensue.

The AML Regulatory Landscape: Under-Regulation, Virtual Currency, and Beneficial Ownership Reporting at the Corporate Formation Stage

As we noted in the introduction of this post, El-Hindi proposed a concept which he described as “relatively straightforward,” but which might not be met with universal acceptance by the regulated community: “given the dynamic in which they operate, regulators may tend to under-regulate to avoid over-regulating. In other words, they may tend to under-utilize their authorities out of fear of over-regulating, or out of fear of raising new questions or potential challenges to their authority.”

“[G]iven the dynamic in which they operate, regulators may tend to under-regulate to avoid over-regulating. In other words, they may tend to under-utilize their authorities out of fear of over-regulating, or out of fear of raising new questions or potential challenges to their authority.”

El-Hindi made clear that he does not believe in under-regulating. He mentioned certain tactics FinCEN has utilized over the past four years as examples of a “forward-leaning” approach: increased use of Section 314(a) information sharing with the government; promotion of Section 314(b) information sharing amongst industry, Geographic Targeting Orders regarding real estate transactions; increased direct outreach to particular institutions; and the issuance of guidance, advisories and conditional excepted relief from regulations.

The compliance and enforcement goals that propelled FinCEN to employ these tactics, according to El-Hindi, similarly will motivate FinCEN to grapple with the “evolutionary state with respect to ways in which our financial sector is dealing with new technologies and new payment systems, such as those that involve virtual currency.” As we’ve previously blogged, it is clear that FinCEN acutely desires to ensure BSA/AML regulatory oversight over virtual currency systems, and other new technologies for moving value. Here, however, El-Hindi issued a warning seemingly aimed directly at Facebook and its proposed digital currency Libra:

On that point, let me take this opportunity to emphasize that actors working in these new systems for moving value are subject to the same AML principles and requirements as other financial institutions. Social media and messaging platforms and others now focusing on the establishment of cryptocurrencies cannot turn a blind eye to illicit transactions that they may be fostering. As we’ve said on other occasions, to the extent that the financial sector chooses to move forward with the opportunities that some of these emerging systems present, we are not going to allow it to slide backward on the protections and appropriate transparency that we have collectively worked so hard to weave into the financial system.

Finally, El-Hindi discussed a key topic about which we blog extensively: identifying the beneficial ownership of entities, and collecting beneficial ownership information at the corporate formation stage. As we have blogged, the U.S House of Representatives – but not the Senate – passed last year H.R. 2513, a two-part Act which sets forth in its initial section the Corporate Transparency Act, or CTA. If passed into legislation, the CTA would require certain, defined U.S. companies to report identifying information regarding their beneficial owners to the Treasury Department at the formation stage – so that such information would be available to both the government and financial institutions carrying out their own AML duties. This would differ from FinCEN’s existing Beneficial Ownership rule (about which we blog frequently and have provided practical tips for compliance here and here), which requires certain financial institutions to collect such information when an entity customer opens up a new account. El-Hindi strove to ameliorate industry concerns regarding additional regulatory burden by stressing that if such a new reporting rule was passed, FinCEN “would work with trade associations and others to ensure that any requirements and exemptions are as clear as possible; that filings are promptly acknowledged; that high risk and low risk situations are dealt with commensurately, and that the value of, and protections associated with, the information collection are well understood.”

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