SIFMA Anti-Money Laundering & Financial Crimes Conference
February 4, 2019
Good morning. Thank you for having me today. It is a pleasure to be at the SIFMA Anti-Money Laundering and Financial Crimes Conference. There are several things I would like to cover this morning:
First, I will talk about our regulatory reform efforts, to include our focus on innovation and information sharing.
Second, I will talk about the value of the suspicious activity reports that you file, including as it relates to elder financial exploitation.
And the third and final topic, I will talk about a recent enforcement action undertaken by FinCEN that is of particular relevance to your industry, and underscores the importance of financial institutions that provide bank-like services to mitigate Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) risks.
So let’s get to it:
As I have mentioned many times over the last year, in order to protect our national security and keep our communities and families safe from harm, we must ensure that our AML/CFT framework remains strong and effective to protect the U.S. financial system, and prevent criminals, terrorists, and other bad actors from using it to commit their despicable deeds, or benefit from its powerful ability to create wealth.
We at FinCEN recognize that to remain strong and effective, we must keep pace with evolving forms of illicit finance threats and related crimes, and close any regulatory gaps that expose our financial system to money laundering and the other underlying illicit activities that threaten our financial system and put our nation, communities, and families in harm’s way.
To that end, we are taking a close look at the Bank Secrecy Act (BSA) and our broader AML/CFT regime.
We want to upgrade and modernize our system where needed in order to make sure that we build and maintain the right framework—one that appropriately leverages innovative approaches undertaken by financial institutions and others, to have the highest quality information available to combat money laundering, the associated crimes that go with it, including terrorist financing, and illicit finance risks.
I personally participate in high-level meetings devoted expressly to improving the effectiveness and efficiency of our BSA/AML regime. And, our FinCEN staff at all levels meet weekly to move forward on these issues. Together we are actively working on important efforts to improve the BSA/AML regime, including, among other things:
- Reviewing ways in which financial institutions can take innovative and proactive approaches to identify, detect, and report financial crime and meet BSA/AML regulatory obligations;
- Reviewing the risk-based approach to the examination process;
- Reviewing the agencies’ approach to BSA/AML supervision and enforcement;
- Identifying better ways to communicate priorities and feedback to financial institutions, regulators, and law enforcement; and
Identifying concrete ways to understand and quantify the value and use of financial institution reporting.
On this last point, FinCEN is undertaking a thorough, data-driven analysis of BSA reporting to inform our decision-making.
While we are eager to engage in regulatory reform, we believe it is important to ensure that any change is supported by such an assessment and a clear understanding of how to measure the effectiveness of BSA data. This is not an easy task.
As part of our efforts, late last year we issued a joint statement on Sharing BSA Resources.
In that joint statement, we clarify that banks may enter into certain collaborative arrangements to meet their individual BSA obligations through the sharing of human, technological, and other resources, in order to better protect against illicit actors seeking to abuse those types of institutions.
We recognize that banks, particularly smaller institutions that often face greater resource challenges, can share certain resources to reduce costs associated with BSA compliance, while also enhancing their ability to monitor for and defend against money laundering or terrorist financing threats to their institutions.
FinCEN would like to hear from other industries, such as those in this audience, as to how a similar statement might be useful outside the banking industry.
I encourage all of you, both regulators and the private sector, to think about those issues and provide us with any questions and comments relating to how sharing resources in your industry could create additional efficiencies.
On December 3, 2018, FinCEN issued a Joint Statement on Innovation to promote responsible innovation and creative solutions to combat money laundering and terrorist financing. This was done in coordination with our regulatory partners.
When we say innovation, we are not only talking about the use of new financial or regulatory technology, but also new approaches to how we are doing things. We recognize that financial institutions have become more proactive in their AML/CFT approach. In some cases, they are building sophisticated internal financial intelligence units devoted to identifying strategic and crosscutting financial threats.
Financial institutions have been improving their ability to identify customers and monitor transactions by experimenting with new technologies that rely on advanced analytical techniques including artificial intelligence and machine learning. Many institutions are also working closer together to share information to get a more accurate picture of risks and illicit activity.
FinCEN encourages these types and other financial services-related innovation that advances the underlying purposes of the BSA to enhance financial transparency and to deter, detect, and disrupt financial and related crime; protecting our national security and keeping us safe.
To assist financial institutions in developing and implementing innovative AML/CFT technologies and approaches, FinCEN is committed to engaging with the private sector and providing regulatory clarity, as needed.
Two months ago, we announced that FinCEN is launching an innovation initiative to foster a better understanding of the opportunities and challenges of BSA/AML-related innovation in the financial services sector.
As part of this initiative, FinCEN will engage in outreach efforts that include dedicated times for financial institutions, technology providers, and other firms involved in financial services innovations to discuss the implications of their products and services, and their future applications or next steps.
There will be more details to come, but this will build upon the substantial private sector engagements that we have been doing over the years—formalizing the best practices that we have distilled both from those discussions and from working closely with our partner banking regulators on their innovation work.
As we explore leveraging innovation in the financial sector, it is important to remember these efforts do not mean that financial institutions can be lax in implementing existing BSA requirements or substitute completely untested products for existing compliance efforts. Compliance with the BSA regulations is critically important in protecting our financial system.
While I am open to all ideas, the first question I will ask is how does this proposed innovative approach make our country safer? How does it keep us safe, how does it make us safer?
While most innovative efforts will likely result in greater efficiencies, at the end of the day, the most important goal is to be as effective as possible at protecting our financial system and combating the underlying illicit activity that threatens our safety.
It is a national security issue.
We are dedicated to evolving right along with the financial services industry and continue to look for ways to hone our engagement as well as our guidance to support responsible and effective innovation.
To that end, I would like to quickly highlight one other area where we are collaborating closely with our partners across the government that impact innovation and emerging technology: virtual currencies.
Working closely with our partners in the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC), FinCEN has been at the forefront of ensuring that companies doing business in virtual currency meet their AML/CFT obligations regardless of the manner in which they do business.
While the application of particular AML/CFT obligations will vary depending on the type of operations of the business in question, regardless of how you operate, you will have some obligation to combat illicit finance.
Our expectations remain that financial institutions assess and understand whether new financial products and services may be vulnerable to exploitation for financial crime and related crimes or bad acts.
We will continue to work with the SEC and CFTC to ensure compliance in this space and will not hesitate to take action when we see disregard for obligations under the BSA.
Collaboration and better communication between the public and private sectors is critical to our mutual efforts. Financial institutions are often the first to detect and block illicit financing streams, combat financial crimes and related crimes and bad acts, and manage risk.
Enhancing public-private partnerships that reveal and mitigate vulnerabilities is one of my top priorities. One way we accomplish this is through FinCEN Exchange. Through FinCEN Exchange, we bring together financial institutions, FinCEN, and law enforcement to facilitate greater information sharing between the public and private sectors.
Providing financial institutions with broader typologies associated with specific illicit activity can help them identify and report illicit activity which, in turn, provides FinCEN and law enforcement with critical information to disrupt money laundering and other financial and related crimes and bad acts.
We are also working with Treasury’s Office of Critical Infrastructure Protection to help identify and share cyber security red flags and emergent threat indicators, not only to AML compliance personnel, but also to cyber security personnel within financial institutions, helping converge those two silos within the private sector, as we have been advocating.
All of these efforts—including the use of advisories to increase effective SAR reporting, the establishment of FinCEN Exchange as an information sharing mechanism, and 314B—help financial institutions protect themselves, their customers, our financial system, our national security, our communities, and families.
The Value of SARS: Elder Financial Exploitation
I would like to take a few minutes to discuss FinCEN’s work with other governmental partners on the SARs you file for elder financial exploitation, because it exemplifies the value of SARs for the 11,000 law enforcement and regulatory officials who access your SARs regularly.
Some of you may have attended our webinar on elder financial exploitation last June, hosted by FinCEN, the Consumer Financial Protection Bureau (CFPB), the Department of Justice’s (DOJ) Consumer Protection Branch, and the New Jersey Department of Justice.
The elder financial exploitation SARs are large and growing: your industry filed more than 2,200 elder SARs in 2018, up 16% each year since 2014.
All of FinCEN’s regulated industries combined filed nearly 62,000 SARs on elder financial exploitation in 2018, up 25% each year since 2014.
When FinCEN analyzed the elder SARs last year, we noted that financial institutions reported two main types of activity. One was theft of elders’ assets, largely perpetrated by individuals that the elders trusted, such as family members, caregivers, and fiduciaries. The vast majority of elder SARs (89%) reported by your industry addressed these types of theft.
The other common typology in SARs was scams against elders, such as romance or lottery or tech support scams, which we know from working with law enforcement are often originated overseas. Scams accounted for the majority of SARs filed by money services businesses, and for 11% of SARs filed by your industry. As a result of this work, FinCEN has written two advisories for financial institutions on elder financial exploitation, including a joint memorandum with the CFPB and other regulators in 2017.
In addition, there has been a coordinated effort to use these SARs to better support criminal cases at the federal, state, and local level. For example, almost a year ago today, the DOJ reported a sweep of more than 250 elder fraud defendants. This was the largest sweep of elder cases ever, and we expect to see more of this in 2019.
Federal and state prosecutors have told FinCEN that your SARs are instrumental to initiating and prosecuting these cases, and we thank you for filing them.
I hope this provides some insights on elder financial exploitation SAR trends and how valuable the SARs are to the governmental users. I also want to acknowledge the great work being done within the Financial Industry Regulatory Authority (FINRA) through their guidance and rulemakings, which provide the first uniform, national standards to protect senior investors.
I would now like to draw your attention to our recent enforcement action against UBS Financial Services (UBSFS).
In December 2018, FinCEN, along with our partners the SEC and FINRA, assessed a $14.5 million penalty against UBSFS for its failure to implement an adequate AML program and to implement an adequate due diligence program for foreign correspondent accounts.
UBSFS failed to develop and implement an appropriate, risk-based AML program that adequately addressed the risks associated with its core business: accounts that included both traditional brokerage and banking-like services.
Broker-dealers providing banking-like services must properly mitigate the AML risks associated with this kind of service.
These services enable the flow of funds through mechanisms such as wire transfers, check writing, and ATM withdrawals, creating AML risks that need to be properly addressed.
Although brokerage firms may provide such services to their clients, those doing so need to apply commensurate diligence to ensure that the firm does not become a conduit for movement of illicit funds creating a haven for criminals and other malign actors to benefit from, and to further, their illicit activity.
For more than a decade, UBSFS failed to implement sufficient policies and procedures that adequately addressed the risks associated with the products and services it offered—particularly the money laundering risks associated with its cash management brokerage accounts.
In addition, financial institutions are required to provide adequate staffing, training, and resources to the compliance function.
In this case, UBSFS failed to provide sufficient resources to ensure day-to-day AML compliance. UBSFS reduced its AML headcount, despite a dramatic increase in the volume and complexity of AML investigations over that same period. Inadequate staffing led to a significant backlog of alerts and decreased UBSFS’s ability to file SARs in a timely manner.
Over several years, UBSFS processed, through certain of its brokerage accounts, hundreds of transactions that exhibited red flags associated with shell company activity. UBSFS failed to adequately monitor foreign currency-denominated wire transfers—amounting to tens of billions of dollars—that were conducted through its commodities accounts and retail brokerage accounts.
UBSFS’s AML monitoring system failed to capture critical information about these foreign currency-denominated wires, including sender and recipient information and the country of origin and destination. As a result, it was unable to identify and investigate potentially suspicious transactions based on the presence of important risk factors, such as jurisdiction and the involvement of politically exposed persons.
My purpose for mentioning the UBSFS matter is to highlight and remind industry of the obligation of financial institutions to fully evaluate and identify the specific AML risks of the business and services they offer to their customers, so they can proactively develop and implement an appropriate AML program to mitigate those risks.
As I conclude, I want to make clear a few things that I have said here today:
FinCEN supports and encourages innovation that is reasonable and effective, and we ask you to take advantage of our new innovation initiative.
Our regulatory reform efforts are robust and ongoing; I encourage you to come to us with your ideas.
Be thoughtful and reasonable. Be careful what you ask for, as you might get it.
Always ask yourself, how does this new approach make us safer? Be able to explain how it does so.
When we talk about reform, this must always be at the forefront of our minds.
3. Understand and know that the SARs you are filing are making a difference. Not only in the area of elder financial exploitation, but across the board. They really do.
4. Financial institutions providing bank-like services must take steps to mitigate AML/CFT risks. A failure to do so creates a haven for bad actors to profit from their illicit activity.
Thank you again for including me in your discussions today.
Andrea Sharrin, our Associate Director within our Policy Division, will be joining the next panel and will be here throughout the day to answer any questions you may have for us.