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Senate Banking Committee Hearing on AML Reform

Senate Banking Committee

“Combating Money Laundering and Other Forms of Illicit Finance: Regulator

And  Law Enforcement Perspectives on Reform”

Thursday, November 29, 2018

Key Topics & Takeaways

  • Reporting Thresholds: Blanco said that increasing thresholds would result in a lack of information and fewer investigations. D’Antuono noted that no one can predict what useful information could come in via those reports, so it is difficult to know what information could be lost by changing the thresholds. He added that senior financial exploitation, a priority for law enforcement, would often fall below the increased threshold.
  • Beneficial Ownership: Blanco, D’Antuono, and Gardineer agreed that legislation on beneficial ownership would be helpful, with Blanco calling it “critical” and a national security issue.
  • Review of BSA/AML Rules: Gardineer said that BSA/AML compliance burdens are heaviest for community banks and small institutions, and there is no unwillingness to strengthen the regime. Blanco stated FinCEN has good relationships with other regulators and works with them on exams, their staff meets regularly, and FinCEN is always willing to give feedback to both the OCC and stakeholders directly.

Witnesses

Opening Statements

Sen. Mike Crapo (R-Idaho), Chairman

In his opening statement, Crapo expressed his interest in assessing the current Bank Secrecy Act/Anti-Money Laundering (BSA/AML) framework, as well as risks posed by “constant” money laundering, sanctions evasion and terrorist financing. He stressed the need to search for ways to more effectively monitor such activities while minimizing the burden on the U.S. financial system. Crapo explained the need to find innovation to combat terrorist financing and increase inter-agency cooperation and information sharing, as the AML regime has to “constantly evolve to keep up with the bad actors.” He noted that with the big data available for law enforcement, there is a need for all custodians of sensitive information to comply with the rules of BSA and the government needs to ensure they take all necessary steps to protect such data.

Sen. Sherrod Brown (D-Ohio), Ranking Member

In his opening statement, Brown stated that “huge” amounts of laundered funds continue to flow through the financial system and stressed how critical it is to find ways to update and strengthen the AML regime, including requiring new beneficial ownership rules. He noted that many banks have violated AML laws by knowingly facilitating illegal financials or by doing business with drug cartels and other groups, stressing the need for law enforcement to share more information with bank compliance teams.

Testimony

Kenneth A. Blanco, Director, Financial Crimes Enforcement Network (FinCEN), U.S. Department of Treasury

In his testimony, Blanco discussed the importance of the BSA in keeping the financial system safe and communities free from harm, noting that BSA obligations are responsible for law enforcement’s ability to stop many crimes and apprehend bad actors, and that they are “key components” in efforts to target and investigate crime, including terrorism. Financial institutions, Blanco said, play a “key role” in keeping illicit actors from exploiting the financial system. Blanco said that FinCEN information is used every day by law enforcement, with an estimated 11,000 active users of BSA data and 149 Suspicious Activity Report (SAR) review teams. This data has resulted in hundreds of active investigations, new listings on terrorism sanctions lists, and visa revolcations. Blanco said FinCEN also helps financial institutions develop better insights, and helps develop a strong and effective framework to keep bad actors out of the financial system. Blanco stressed the importance of ensuring the BSA framework can meet current and evolving challenges, including the misuse of legal entities for money laundering and other illicit uses. Blanco noted the need for a review of beneficial ownership rules, calling it a “open and obvious” gap in the system. Blanco said FinCEN is also reviewing the use of BSA reporting, as well as evaluating SAR and Currency Transaction Report (CTR) requirements.

Steven D’Antuono, Section Chief, Financial Crimes Section, Federal Bureau of Investigation (FBI)

In his testimony, D’Antuono noted the vast work of the FBI, including data analysis on BSA filings, SAR review teams in all 94 U.S. Attorney’s offices across the U.S., and “critical” partnerships with financial institutions. D’Antuono noted that financial institutions face significant AML challenges but have “robust” programs. D’Antuono said that the FBI has relationships with financial institutions through which they share typologies and trends that has led to targeted analysis of illicit activity, improved quality of filings, and increased morale and motivation of SAR filing teams. D’Antuono stressed that BSA filings are “priceless” to law enforcement, and financial institutions provide “vital” intelligence to detect and pursue criminal activity, which hinges on the strength of BSA requirements and the AML regime.

Grovetta Gardineer, Senior Deputy Comptroller for Compliance and Community Affairs, Office of the Comptroller of the Currency (OCC)

In her testimony, Gardineer discussed the need to ensure BSA compliance programs are effective to prevent bad actors from using the financial system for illicit purposes. Gardineer noted that the OCC is working to improve its system for examining AML programs, including reviewing supervisory policies, exam procedures, and focusing resources where they will be most effective in an ongoing effort to balance the interests of all stakeholders. Gardineer said that the OCC participates in a working group along with the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, National Credit Union Administration (NCUA), Treasury Department, and FinCEN to review the AML regime, adding that they have recently issued a joint statement clarifying how community banks can increase their efficiency and reduce compliance burdens by sharing AML resources. She said that the OCC supports the exploration of new technologies in this space, including artificial intelligence (AI) and machine learning, to develop better methods and reduce false positives. Gardineer said the OCC is also reviewing ways to update SAR and CTR processes, including tailoring content and evaluating the appropriateness of certain thresholds to maximize their usefulness to law enforcement. Gardineer urged the committee to consider directing a regular review, including public notice and comment, on how BSA/AML regulations could be strengthened and refined.

Question & Answer

Regulatory Coordination

When asked about the OCC’s recommendation to have legislative direction to get agencies to work together under an Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA)-type process, Blanco stated his opposition, explaining that it would add “another layer of unnecessary bureaucracy.” He continued that FinCEN communicates with law enforcement, the private industry and other regulators already, so a formal process is not needed. Gardineer noted the agencies do have a working group, but an EGRPRA process would allow FinCEN and other stakeholders the opportunity to participate in a public notice and comment process to allow stakeholders to share their experiences in implementing rules, as well as ideas for solutions.

Review of BSA/AML Rules

Brown noted that many of the big banks have faced “major” enforcement actions for AML violations and asked Gardineer why the OCC was advocating for a review of the burdens of the rules rather than for strengthening them. Gardineer replied that the burdens are heaviest for community banks and small institutions, and there is no unwillingness to strengthen the regime.

In response to a question from Brown about engaging with the OCC, Blanco stated FinCEN has good relationships with other regulators and works with them on exams, their staff meets regularly, and FinCEN is always willing to give feedback to both the OCC and stakeholders directly.

Sen. Catherine Cortez Masto (D-Nev.) asked about risk-based approaches and targeting monitoring. Blanco said they are working on that through FinCEN Exchange. Gardineer said the OCC and other agencies are undertaking a review of current policies and examination approaches to make sure they are reflective of supervisory expectation and reflect a risk-based approach.

Reporting Thresholds

Sens. Jerry Moran (R-Kan.) and Pat Toomey (R-Pa.) asked about the possible effects of increasing reporting thresholds. Blanco said that increasing thresholds would result in a lack of information and fewer investigations. D’Antuono noted that no one can predict what useful information could come in via those reports, so it is difficult to know what information could be lost by changing the thresholds. He added that senior financial exploitation, a priority for law enforcement, would often fall below the increased threshold. Blanco added that FinCEN plans to bring in a private vendor to evaluate the BSA data that is being collected to examine the effectiveness and efficiency of what is currently being collected.

Marijuana

Sen. Bob Menendez (D-N.J.) asked if FinCEN has plans to improve/clarify how financial institutions can provide services to legal marijuana businesses, noting the importance that they are banked in the regular system rather than dealing entirely in cash. Blanco said they are having inter-agency conversation, but currently financial institutions should follow the 2014 BSA guidelines.

Terrorist Financing

Cortez Masto asked if there should also be a focus on domestic terrorist financing in additional to international. Blanco agreed, calling it a “glitch” that needs to be repaired.

Cryptocurrencies

Cortez Masto asked if the agencies have the authority to monitor emerging technologies and cryptocurrencies.  Blanco said they do, and they are taking the lead and working with the OCC and other agencies, as cryptocurrencies fall in their jurisdiction and others depending on how they are being used.

Beneficial Ownership

Multiple senators asked about the need for stronger rules on beneficial ownership. Blanco, D’Antuono, and Gardineer agreed that legislation on beneficial ownership would be helpful, with Blanco calling it “critical” and a national security issue. Gardineer noted that there may be problems with implementation, as there is not a universal way to collect and validate beneficial ownership information across the states.

For more information about this hearing, click here.