An increasing number of states have either enacted or are considering enacting legislation requiring financial institutions to provide persons (both existing customers and prospective customers) who are not ordinarily protected by the federal anti-discrimination statutes with “fair access” to financial services.
For example, and as we
We are very fortunate to have Nick St. John, Director of Federal Compliance at America’s Credit Unions, as our guest speaker in this podcast on the Notice of Proposed Rulemaking issued by the Financial Crimes Enforcement Network and federal banking regulators regarding the enhancement and modernization of anti-money
As we previously blogged, a Florida law (Fla. Stat. § 655.0323, entitled “Unsafe and unsound practices”) which became effective July 1, 2024 prohibits federal and state depository institutions conducting business in the state from denying services based on religion or political beliefs and activities. Every year, financial institutions must attest to their compliance with the Florida law. When he signed the bill into law, Governor Ron DeSantis said, “We are not going to allow big banks to discriminate based on someone’s political or religious beliefs, and we will continue to fight back against indoctrination in education and the workplace.”
As we will discuss, the Florida law also prohibits a financial institution acting on the basis of “any factor if it is not a quantitative, impartial, and risk-based standard, including any such factor related to the person’s business sector[.]” This prohibition in particular creates a clear challenge for implementing an anti-money laundering/countering the financing of terrorism (“AML/CFT”) compliance program, which inherently involves subjective judgments and an assessment of the risk presented by a customer based on its line of business. The problematic implications of the Florida law did not go unnoticed by the U.S. Congress or the U.S. Department of the Treasury (“Treasury”).
On July 3, the Financial Crimes Enforcement Network (FinCEN) published a notice of proposed rulemaking (NPRM) as part of a broader initiative to “strengthen, modernize, and improve” financial institutions’ anti-money laundering and countering the financing of terrorism (AML/CFT) programs. In addition, the NPRM seeks to promote effectiveness, efficiency, innovation, and flexibility with respect to AML/CFT programs; support the establishment, implementation, and maintenance of risk-based AML/CFT programs; and strengthen the cooperation between financial institutions (“FIs”) and the government.
This NPRM implements Section 6101 of the Anti-Money Laundering Act of 2020 (the “AML Act”). It also follows up on FinCEN’s September 2020 advanced notice of proposed rulemaking soliciting public comment on what it described then as “a wide range of questions pertaining to potential regulatory amendments under the Bank Secrecy Act (‘BSA’) . . . . to re-examine the BSA regulatory framework and the broader AML regime[,]” to which FinCEN received 111 comments.
As we will discuss, the NPRM focuses on the need for all FIs to implement a risk assessment as part of an effective, risk-based, and reasonably designed AML/CFT program. The NPRM also focuses on how consideration of FinCEN’s AML/CFT Priorities must be a part of any risk assessment. However, in regards to addressing certain important issues, such providing comfort to FIs to pursue technological innovation, reducing the “de-risking” of certain FI customers and meaningful government feedback on BSA reporting, the NPRM provides nothing concrete.
FinCEN has published a five-page FAQ sheet which summarizes the NPRM. We have created a 35-page PDF, here, which sets forth the proposed regulations themselves for all covered FIs.
The NPRM has a 60-day comment period, closing on September 3, 2024. Particularly in light of the Supreme Court’s recent overruling of Chevron deference, giving the courts the power to interpret statutes without deferring to the agency’s interpretation, this rulemaking, once finalized, presumably will be the target of litigation challenging FinCEN’s interpretation of the AML Act.
Today we are very pleased to welcome, once again, guest blogger Dr. Kateryna Boguslavska of the Basel Institute on Governance (“Basel Institute”), who will discuss the Basel Institute’s release of the 12th annual Public Edition of the Basel AML Index (the “Index”). The data-rich annual Index is a research-based ranking that assesses countries’ risk exposure to money laundering and terrorist financing. It is one of several excellent online tools developed by the Basel Institute to help both public- and private-sector practitioners tackle financial crime. We are excited to continue this annual dialogue between the Basel Institute and Money Laundering Watch.
Established in 2003, the Basel Institute is a not-for-profit Swiss foundation dedicated to working with public and private partners around the world to prevent and combat corruption, and is an Associated Institute of the University of Basel. The Basel Institute’s work involves action, advice and research on issues including anti-corruption collective action, asset recovery, corporate governance and compliance, and more.
Dr. Kateryna Boguslavska is Project Manager for the Basel AML Index at the Basel Institute. A political scientist, she holds a PhD in Political Science from the National Academy of Science in Ukraine, a master’s degree in Comparative and International Studies from ETH Zurich as well as a master’s degree in Political Science from the National University of Kyiv-Mohyla Academy in Ukraine. Before joining the Basel Institute, Dr. Boguslavska worked at Chatham House in London as an Academy Fellow for the Russia and Eurasia program.
This blog post again takes the form of a Q & A session, in which Dr. Boguslavska responds to several questions posed by Money Laundering Watch about the 12th Basel AML Index. We hope you enjoy this discussion of global money laundering risks — which addresses terrorist financing, de-risking, non-profits, forfeiture, emerging technologies, and more. – Peter Hardy
Continue Reading The Basel AML Index: Forfeiture, Non-Profits, Crypto, and More. A Guest Blog.
Farewell to 2023, and welcome 2024. As we do every year, let’s look back.
We highlight 10 of our most-read blog posts from 2023, which address many of the key issues we’ve examined during the past year: criminal money laundering enforcement; compliance risks with third-party fintech relationships; the scope of authority of bank regulators; sanctions
The Department of Treasury (“DOT”) recently released its first ever strategy report (the “Strategy”) on the topic of de-risking, taking the form of a 54-page document that combines a summary of the problem of de-risking with an overview of recommended steps to solve it. While the Strategy is the first document of its kind issued by the U.S. government, it is not unexpected – Section 6215 of the Anti-Money Laundering Act of 2020 (“AMLA”) requires the DOT to develop a strategy to mitigate the adverse effects of de-risking after conducting interviews with regulators, non-profit organizations and other public and private stakeholders.
As we’ve discussed over the years, “de-risking” is a practice taken by financial institutions (FIs) to restrict certain categories of customers from accessing their services – typically due to the perception that the compliance risk associated with such customers would outweigh the benefits, financial or otherwise, of servicing them. It is important to note that the concept of de-risking is not about a customer’s individual risk profile; rather, de-risking involves a FI making a wholesale or indiscriminate determination about a category of customers, and failing to use an individualized risk-based approach favored by the anti-money laundering/countering the financing of terrorism (AML/CFT) regulatory framework. As we have discussed, and as global watchdog groups have noted, de-risking often has a disproportionate impact on developing countries. The Strategy itself notes that de-risking “prevent[s] low- and middle-income segments of the population, as well as other underserved communities, from efficiently accessing the financial system[.]” Thus, the issue of de-risking is intertwined with concerns regarding economic and ethnic disparities.
As the Strategy notes, de-risking also can undermine development, humanitarian and disaster relief funds flowing to other countries. Finally, de-risking can threaten the U.S. financial system because driving funds outside of the regulated financial system makes it harder to detect and deter illicit finance, and increases the risk of sanctions evasion.
According to the Strategy, the profit motive of FIs is the main driver behind the ongoing problem of de-risking: because the cost of compliance for risky categories of customers would be too high, FIs cannot justify providing services to them from a profitability perspective.
Arguably, this claim in the Strategy suffers from, at best, a certain lack of self-awareness and, at worst, a degree of hypocrisy, used to deflect a Congressional demand that the DOT address and ameliorate the problem of de-risking. Increasingly onerous BSA/AML regulations, the occasionally haphazard enforcement of those regulations, and the practical disconnect between the expectations of AML examiners and law enforcement agents arguably represent the true source of the compliance-related fears and costs that drive FIs to de-risk. If banks and other FIs are rejecting certain customers wholesale, it’s often because they fear that they will get “dinged” during a regulatory examination for servicing such customers if perceived problems develop after the application of 20/20 hindsight, and because the compliance hoops can range from the onerous to the practically impossible. Similar considerations are partially why FIs now file over four million Suspicious Activity Reports (“SARs”) annually, regardless of whether any given SAR is actually helpful to law enforcement: no one has been subjected to an enforcement action for filing too many SARs.
Continue Reading Department of Treasury Issues Strategy on De-Risking
On July 6, the Financial Crimes Enforcement Network (“FinCEN”), The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency (collectively, “the Agencies”) issued a Joint Statement to “remind” banks that they, of course, should apply a risk-based approach to assessing customer relationships and conducting customer due diligence (“CDD”).
The Joint Statement appears to echo FinCEN’s June 22 Statement on Bank Secrecy Act Due Diligence for Independent ATM Owners or Operators (“ATM Statement”), in which FinCEN also “reminded” banks that “that not all independent ATM owner or operator customers pose the same level of money laundering, terrorist financing (ML/TF), or other illicit financial activity risk, and not all independent ATM owner or operator customers are automatically higher risk.”
Combined – and although generally worded – these publications appear to urge financial institutions (“FIs”) to not pursue broadly-applied “de-risking” strategies. De-risking is the term for a FI’s decision to terminate a business relationship, or refuse to do business, with a type of customer because that type is associated with a perceived heightened risk of involvement in money laundering or terrorist financing. Indeed, both new publications caution FIs against turning away potential customers, or closing the accounts of existing customers, on the basis of general customer types. However, regulators themselves have been criticized for encouraging de-risking by driving highly risk-adverse decisions by FIs, who are unwilling to take the chance and assume the compliance costs of doing business with specific customers who may in fact be “legitimate,” but whose risk profile is deemed to be high due to their group affiliation. Some front-line regulatory BSA/AML examiners arguably may review a FI’s compliance in a narrow and check-the-box manner versus a more holistic approach, and will not truly value broader societal and equity issues such as the need for equal access to the global financial system, particularly by certain industries and persons living in less-developed countries. Accordingly, although these new publications are welcome, it might have been better if they had been more explicit – particularly because it is arguably ironic for regulators to be chiding FIs for conforming to de-risking behavior that regulators themselves have encouraged.
Continue Reading FinCEN and Federal Functional Regulators Issue Coded Warnings Against De-Risking
We blogged previously on the significant steps the European Union (“EU”) recently has taken toward implementing a rigorous new transnational anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”) enforcement framework. This included, inter alia, EU-wide guidelines proposed by the European Banking Authority (“EBA”) for AML/CFT compliance officers. The need for competent, experienced, and sufficiently empowered AML/CFT compliance teams was further underlined by an Opinion and Report (“Opinion”) issued by the EBA last week on the potentially problematic trend of widespread “de-risking” across the EU.
“De-risking” is the term for a financial institution’s decision to terminate a business relationship, or refuse to do business, with an individual or category of individuals associated with a heightened risk of involvement in money laundering or terrorist financing. The EBA was impelled to address this institutional behavior, which, even if consistent with existing Authority guidance, “can be unwarranted and a sign of ineffective ML/TF risk management,” if done “without due consideration of individual customers’ risk profiles.”
The Opinion points out that indiscriminate de-risking can have the unintended effect of excluding certain (non-criminal) categories of individuals and entities from the financial system. This is framed, if not explicitly labeled, as a civil rights issue: the Opinion states that “access to at least basic financial products and services is a prerequisite for participation in modern economic and social life.” In some cases, the Opinion notes, financial institutions themselves have found themselves the targets of de-risking because of their regions’ reputations for ML/TF problems. De-risking these institutions essentially disqualifies them from participation in the EU transnational financial system, potentially affecting the socioeconomic stability of their home EU member state.
Such de-risking also, paradoxically, has the potential to exacerbate risk for the EU as a whole. The Report notes that “customers affected by de-risking may resort to alternative payment channels in the EU and elsewhere to meet their financial needs. As a result, transactions may no longer be monitored, making the detection and reporting of suspicious transactions and, ultimately, the prevention of ML/TF more difficult.” Because, as noted previously, entities need to access “at least basic financial products and services” to participate in modern society, restricting their access to such services may push them to seek alternatives in the so-called “shadow banking system,” an unregulated web of lenders which the EBA has attempted to weaken.
Continue Reading A Paradox: “De-Risking” Can Increase AML/CFT Risks By Driving People into the “Shadow Banking System”
Meaningful Overlap or Superficial Similarities?On October 3, the release of the Pandora Papers flooded the global media, as millions of documents detailed incidents of wealthy and powerful people allegedly using so-called offshore accounts and other structures to shield wealth from taxation and other asset reporting. Data gathered by the International Consortium of Investigative Journalists, the architect of the Pandora Papers release, suggests that governments collectively lose $427 billion each year to tax evasion and tax avoidance. These figures and the identification of high-profile politicians and oligarchs involved in the scandal (Tony Blair, Vladimir Putin, and King Abdullah II of Jordan, to name a few) have grabbed headlines and spurred conversations about fairness in the international financial system – particularly as COVID-19 has highlighted and exacerbated economic disparities.
Much of the conduct revealed by the Pandora Papers appears to involve entirely legal structures used by the wealthy to – not surprisingly – maintain or enhance wealth. Thus, the core debate implicated by the Pandora Papers is arguably one of social equity and related reputational risk for financial institutions (“FIs”), rather than “just” crime and anti-money laundering (“AML”). Media treatment of the Pandora Papers often blurs the distinction between AML and social concerns – and traditionally, there has been a distinction.
This focus on social concerns made us consider the current interest by the U.S. government, corporations and investors in ESG, and how ESG might begin to inform – perhaps only implicitly – aspects of AML compliance and examination. ESG, which stands for Environmental, Social, and Governance, are criteria that set the foundation for socially-conscious investing that attempts to identify related business risks. At first blush, the two are separate fields. But as we discuss, there are ESG-related issues that link concretely to discrete AML issues: for example, transaction monitoring by FIs of potential environmental crime by customers for the purposes of filing a Suspicious Activity Report, or SAR, under the Bank Secrecy Act (“BSA”). Moreover, there is a bigger picture consideration regarding BSA/AML relating to ESG: will regulators and examiners of FIs covered by the BSA now consider – consciously or unconsciously – whether FIs are providing financial services to customers that are not necessarily breaking the law or engaging in suspicious activity, but whose conduct is inconsistent with ESG principles?
If so, then ESG concerns may fuel the phenomenon of de-risking, which is when FIs limit, restrict or close the accounts of clients perceived as being a high risk for money laundering or terrorist financing. Arguably, and as we discuss, there also would be a historical and controversial analog – Operation Chokepoint, which involved a push by the government (not investors) for FIs to de-risk certain types of customers. Regardless, interest in ESG means that FIs have to be even more aware of potential reputational risk with certain clients. Even if the money in the accounts is perfectly legal, the next data breach can mean unwanted publicity for servicing certain clients.
These concepts are slippery, involve emerging trends that have yet to play out fully, and the similarities between AML and ESG can be overstated. Nonetheless, it is possible that these two fields, both of which are subject to increasing global interest, may converge in important respects. A preliminary discussion seems merited, however caveated or subject to debate.
Continue Reading ESG, AML Compliance and the Convergence of Social Concerns