Prepared Remarks of FinCEN Deputy Director Jamal El-Hindi, delivered at the SIFMA 20th Anti-Money Laundering (AML) and Financial Crimes Conference




SIFMA 20th Anti-Money Laundering (AML) and Financial Crimes Conference

New York City


On behalf of FinCEN Director Kenneth A. Blanco and the rest of the staff at FinCEN, I want to thank SIFMA for asking us to participate in SIFMA’s 20th annual AML conference.  We view it as an excellent opportunity to engage with an important group of industry stakeholders.  Yesterday, you heard from Laura Richardson from FinCEN’s Intelligence Division on how we use financial institution reporting, particularly in the case of identifying trends in elder fraud.  I also am happy to note that we have two other FinCEN staffers here:  Ted Vlahakis and Danica Hames from FinCEN’s Enforcement Division. 

I first came to this conference in 2007, about a half year after starting at FinCEN.  It became one of my favorite annual events because it provided a good opportunity for me to learn about a component of the financial sector that I did not know well.  As a group of professionals, the SIFMA community was very welcoming.  They also were very giving, particularly with their opinions on how our AML regime needed to be improved.  They also were quite passionate about making sure that I understood that not all financial institutions are banks.  They reflected what they perceived as a need for more particular guidance from—and attention of—FinCEN with respect to the nuances of the securities and futures industry. 

I want to do three things in my remarks this morning.  First, at SIFMA’s request, I want to reflect on some issues that I have seen with respect to BSA/AML in this sector since I first came to FinCEN.  Second, I want to reiterate the importance of what you do by highlighting the value of BSA information.  Finally, I want to share with you some thoughts about our current regulatory landscape.


Through the years

When I first came to FinCEN in 2006 and to this conference in 2007, I had a couple of primary observations with respect to your industry and our regulation of it. 

The first observation involves the nature of this industry.  I recognized that the securities and futures sector includes a very complex group of inter-related parties handling various aspects of your transactions.  Different entities wear different hats at different times, depending on the types of activities.  FinCEN’s regulations in this space, then and now, only reference broker-dealers, mutual funds, introducing brokers in commodities, and futures commission merchants. But those broad categories cover an amazingly complex set of relationships.  Introducing firms, clearing firms, primary brokerages, executing dealers, transfer agents, give-up agreements, piggy-backing arrangements, and more. 

I joined FinCEN after the finalization of rules imposing special due diligence for certain foreign accounts under Section 312 of the PATRIOT ACT.  FinCEN was then in the midst of a series of guidance pieces directed to your community that had to spell out which parties were obligated to do what in terms of information collection and due diligence, and who could reasonably rely on whom to collect relevant information, given the various layers of actors and actions in your space that might all be linked to an ultimate customer.  I have learned a lot throughout this process through my interactions with SIFMA, its members, including many of you here, and many FinCEN staffers, past and present.  And through this, I have observed one issue in particular that still troubles me.

Our AML principles generally revolve around promoting appropriate transparency of transactions for the benefit of both the financial institutions processing them and FinCEN’s law enforcement stakeholders.  But the complexity of the transactions and relationships in your space present a challenge to transparency.  And when we talk about the concept of “knowing your customer,” we have to recognize that the culture of any highly competitive industry may discourage sharing customer information for the purpose of anti-money laundering or other financial crime prevention, when it could result in potentially losing a customer to a competitor.

I think that this dynamic continues to make your sector challenging from an AML regulatory perspective.  Currently, about 40 percent of depository institutions are registered to participate in business-to-business information sharing through the 314(b) program.  By comparison, only 14 percent of all entities in the securities sector that are eligible to register for this important information sharing mechanism do so.  Here is my question to you:  Does this lower registration rate reflect a culture that is more fearful of information sharing in your competitive environment?  

We are hopeful that at a time when we are all recognizing the importance of appropriate information sharing, your businesses will work toward the sharing of more information with one another, either bilaterally or through associations under 314(b), to root out illicit activity, while at the same time figuring out how to protect the information you share from being used to steal each other’s customers.  Where there is a will, there is a way.  There are those in this room who are leading the way toward better sharing of information in this sector.  It is our hope that others in this room will follow their lead, and we are happy to work with you.

The second observation involves the regulatory community in your space where we have made positive strides in terms of better communication and collaboration with one another.  When I first joined FinCEN, there were clearly disconnects in our relationships with our fellow regulators. 

Through the years, I have seen greater coordination and communication.  FinCEN has always promoted such coordination and continues to do so.  This is particularly important given that enforcement initiatives and heightened compliance in one part of the financial sector may result in illicit activity migrating to other sectors.  We have seen bad activity migrate from the banking sector to the capital markets.  We also have seen migration of bad activity from your sector to the banking sector.  Only through cross-agency coordination on these issues can each regulator do its best to advise and supervise its constituents.

Recently, staff at FinCEN, the SEC, and FINRA got together with the banking regulator staff to discuss the potential migration of specific illicit activity to the banking sector as a result of greater scrutiny by the securities regulators with respect to offshore brokers attempting to use omnibus accounts for illicit purposes.  It is an example of the type of cross-regulator awareness and focus necessary to keep up with the various new ways in which illicit actors are trying to abuse the financial system. And with respect to cross-regulator collaboration, it is also important that each regulator sharing jurisdiction in this space focuses on what it can do best.  At FinCEN, our Enforcement Division has been emphasizing our own analysis and special information collection authorities to identify institutions of concern in addition to receiving referrals from our regulatory partners.  This enables us to initiate our own investigations and examinations or bring matters to the attention of our delegated examiners.  This focus is leading to increasing coverage of FinCEN in areas of greater concern with less overlap of efforts.

I hope that you have also recognized greater coordination among the regulators through the years with respect to rulemaking and guidance.  The implementation of the Customer Due Diligence (CDD) and Beneficial Ownership rule is an example of this.  The rulemaking itself took several years of cross-agency coordination, and now in the first year and a half of its implementation, such coordination is again needed.  

FinCEN has always recognized that once a new rule goes into effect, it takes time for both the regulated and the regulator to address particular circumstances under the rule.  In rulemaking, even a rulemaking with robust notice and comment, including public sessions and other input from industry such as the CDD and Beneficial Ownership rule, there will be unanticipated situations after the rulemaking goes into effect. 

Last summer, FinCEN issued additional guidance on some of those situations and issued some appropriate exceptive relief to the requirements, and we continue to engage with industry and the regulatory community to identify other issues that may be arising in the implementation of and examination for compliance with the rule.


BSA Value

I want to now spend some time reiterating the value of the information that you provide to us and the value of your efforts more broadly to make the financial system resilient to illicit activity.  Part of a strong culture of compliance is understanding how the information that you provide under the BSA is used.  The more we communicate how BSA data is used to root out illicit financial activity and support law enforcement, the more we hope to motivate you to provide this vital information.  It is not always a regulatory enforcement action that prompts compliance in this space.  We understand through countless discussions with industry that you are looking for feedback to enable you to do a better job at a task in which you as AML professionals take pride.

As part of our feedback, let me provide you with some statistics: 

From the year that the first SAR-SF was filed in 2003, through the 2019 calendar year, the number of SARs filed annually by your sector has increased roughly eight-fold.  This still represents a small fraction of the roughly two million SARs filed per year.

FinCEN grants direct access to critical information reported by financial institutions to more than 13,000 agents, analysts, and investigative personnel from over 450 unique federal, state, and local agencies across the United States.

In addition, there are more than 100 Suspicious Activity Report (SAR) review teams and financial crimes task forces across the country, bringing together prosecutors and investigators from different agencies to review BSA reports.

Each day, FinCEN, law enforcement, regulators, and others query this data approximately 30,000 times—that equates to an average of 7.4 million queries per year.  Those queries touch an average of 18.2 million filings that are responsive or useful to ongoing investigations, examinations, victim identification, analysis and network development, sanctions development, and U.S. national security activities, among many, many other uses.

The data is used to initiate investigations, expand existing investigations, and identify trends and focus resources, much as you saw yesterday in Laura Richardson’s discussion on what we can see in SARs on elder fraud.  And while not every piece of reporting may contribute to a specific law enforcement action, FinCEN has on its website roughly 500 specific examples of how financial institution reporting has aided law enforcement cases.  A portion of those examples were generated as a result of FinCEN’s annual Director’s Law Enforcement Awards. Since 2015, FinCEN has held an annual ceremony to recognize law enforcement agencies who have successfully used BSA reporting in their criminal investigations.  Each year, FinCEN receives nominations from Federal, state, local, and tribal law enforcement agencies all over the country, with the criteria being that the law enforcement agencies must have utilized the BSA data to successfully pursue and prosecute their case.  Reporting of institutions in this room has contributed to nominated and award winning cases, and FinCEN now sends out letters to those contributing financial institutions to make them aware of those contributions and to specifically thank them for their efforts.

And don’t forget the deterrent value that your reporting and AML program efforts have.  Think 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.  At FinCEN, our 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.

So please understand how much what you do matters.  Without your efforts, there would be more victims of fraud, more victims of drug-related crimes and human trafficking, and more corruption.  The integrity that you are responsible for maintaining in our financial system is a fundamental part of the rule of law that is so crucial to the success and security of our nation.


Regulatory Landscape

In shifting to a discussion about our current regulatory landscape, I want to share with you something that I raised on another occasion four years ago about what regulators experience when they encounter a changing landscape.  It’s something to think about whenever we go through a period of change—whether the calls for change arise from a crisis of confidence in our system, or whether they stem from a round of new and rapid development in the industries that we regulate.  

It hinges on the inevitable discussions as to whether government over-regulates or under-regulates industry.  The popular perception is that whenever government steps into an issue, it tends to over-regulate, and that whenever it fails to step into an issue, it is under-regulating.  From a regulator’s perspective, it is challenging to find the right balance. 

I picked up an idea on this topic several years ago from a training program for law enforcement and regulators.  The idea is relatively straightforward:  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.  

There is some wisdom to this approach.  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.  

So many of the things that FinCEN has been emphasizing over the past few years—our increased use of 314(a) and promotion of 314(b) to enhance information sharing between government and industry and among industry participants themselves; our increasing use of Geographic Targeting Orders (GTOs); our increasing and more direct outreach to particular financial institutions; the way that we are using our advisories, guidance, and conditional excepted relief—all of these things reflect a decision at FinCEN to continue to think creatively about how we use our statutory authorities, our regulations, and our status as the USG’s Financial Intelligence Unit and the administrator of the Bank Secrecy Act.  In each of these situations, we’ve chosen to be forward-leaning in our use or interpretation of our authorities.  

No system is perfect, and every system is in a perpetual state of evolution.  We are right now in an 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.

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. 

We will judge emerging financial institutions on whether and how they make their systems resilient to, and report on, money laundering, terrorist financing, sanctions evasion, human and narco-trafficking, and other illicit activity.

Make no mistake about it, whether it is through existing rules and guidance or future rules and guidance, we will regulate in this space consistent with the existing principles underlying the BSA/AML regime.  Industry will have to develop its new products and services to ensure appropriate transparency for law enforcement and national security purposes.  And where that doesn’t happen, we have the ability to protect our financial system. 

Something else that I want to bring to your attention with respect to trends in our regulatory environment is the focus on having more data and more metrics behind any changes that we make.  I earlier mentioned the BSA Value project, which we began last year and which is still proceeding.  The BSA Value project, through which many in industry have been asked to provide input, is our most comprehensive approach to date to measure all of the ways in which the data you provide is used.  

We need to have a thorough understanding of this as we consider future changes to the regulatory landscape.  We want to make sure that industry efforts are well spent, and that we have a more efficient system for getting important and valuable information from industry to law enforcement and regulatory stakeholders.  FinCEN’s steps in this regard are consistent with broader efforts in government to ensure data driven rulemaking and rational decision-making.  We need firmer metrics to make better decisions.  In the short term, this may slow the progress of certain categories of rulemaking and the issuance of certain types of guidance.  However, in the long run, focusing on metrics that support our actions may actually lead to more streamlined rulemaking processes in the future.

However, there continues to be situations where we have limited information, despite a need for appropriate regulatory oversight.  Collection of beneficial ownership information at the corporate formation stage is an example.  We know through significant anecdotal information that legal entities can be attractive avenues for facilitating illicit activity because of the current lack of transparency in beneficial ownership information.  

But because no beneficial ownership information is collected at the corporate formation stage, we really don’t have firm baselines as to what types of situations may be more or less risky.  Solving the issue of appropriate collection and maintenance of beneficial ownership information is very much on the minds of Congress, and we continue to work with Congress on potential legislative solutions. 

To the extent that beneficial ownership legislation results in a requirement to report to FinCEN, FinCEN, as it always does, would work with the reporting community to address concerns that the community may have.  We do not take reporting efforts for granted and we strive to make the collections as painless and as efficient as possible.  We 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.  

I want to close today by again reminding you of the importance of what you do.  You are a critical part of maintaining the integrity of our financial system, which is a critical part of maintaining respect for the rule of law.  The work that you do every day enables law enforcement to identify and take action against illicit actors from terrorists, to rogue regimes, to drug lords, to kleptocrats, to human traffickers, to fraudsters ripping off the elderly and abusing our health care system, and many others.  What you do saves lives directly, and makes our lives better.

And in terms of making our lives better, I want to share a story with you.  I have friends and family in different parts of the world.  One time I was visiting a close friend in one country, whom I hadn’t seen for a while.  I noticed that he seemed troubled when he was talking about his work.  I asked him to tell me what was going on.  He said he was involved in a public works project where he realized that substandard materials were being used illicitly, and when he raised it to his boss’s attention he was told to look the other way.  In the jurisdiction where he was working, he had to look the other way.  There were no protections for him and he had no faith that the system would eventually catch up with those that were cheating on the project. 

You might think that he would be able to shrug it off because it was taken for granted that it was just a part of life there, and that it wouldn’t bother him.  The point is that it did bother him.  Even though there was nothing he could do about it and he himself was not responsible, it weighed him down and eroded his faith in society.  Don’t underestimate the costs of such an erosion, and don’t underestimate the value of your own roles in preventing it.   

The work that you do to safeguard our financial system, and as partners in our efforts to assist law enforcement, is part of the reason that we have more faith in our system than my friend had in his.  No system is perfect and we have to deal with crime, fraud, and corruption here as they do elsewhere in the world, but you are an important and successful component in our efforts to fight it and to make the world a better place.  Thank you for your efforts and thank you for your time this morning.