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The Meaning of the FinCEN Files

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By Katherin Alfonso, Trevor Sutton, June 23, 2022

First, the bureaucratic actors tasked with policing the world’s financial plumbing are simply overwhelmed. FinCEN received about 2.3 million SARs in 2019 alone. Even for a well-resourced FIU (FinCEN has only about 300 staff), this would be an immense quantity of data to sift through and analyze. Furthermore, as the journalists behind the FinCEN files observed, the “narrative” element of SARs, which sets out the reasons the transaction is being reported, vary greatly in detail and scope and don’t lend themselves to software analysis. As a result, even highly troubling indications of wrongdoing are frequently overlooked or ignored. Law enforcement officials who work on corruption-related crimes, such as those in the Justice Department’s Fraud Section, are comparatively better staffed relative to their missions, but they depend on reporting from the private sector and do not have jurisdiction over all of the financial crime that involves U.S. institutions. 

Second, as with other efforts to curb risk in the financial system, the U.S. approach to rooting out illicit finance has emphasized regulatory compliance over criminal penalties and other sanctions that might actually deter institutions from engaging in undesired behaviors. What is perhaps most striking about the FinCEN Files is how often financial institutions continued to process transactions for clients whose suspicious behavior triggered SARs. In practice, many of the institutions appear to have viewed formal compliance with regulatory reporting requirements as immunizing them from any penalties associated with the transaction itself. And for good reason: More often than not U.S. law enforcement appears to have taken no action in response to SARs that reflected a high likelihood of criminal activity. This incentive structure has proven self-reinforcing: Covered entities are inclined to report any activity that could conceivably justify an SAR rather than focusing on the most genuinely concerning transactions, inundating FinCEN with a glut of low-salience, poor quality data to sift through. In Europe and other financial centers, which prosecute far fewer white-collar criminals than American authorities, the situation is, if anything, much worse.

Third, information exchange across national borders, while improved relative to even a decade ago, is still cumbersome, slow, and riddled with inaccuracies and dead-ends. Investigations into complex financial crimes, which usually involve complex cross-jurisdictional transactions and layers of shell companies and other vehicles designed to obscure the real beneficiaries of capital flows, tend to fall victim to bureaucratic inertia: Even where governments are in principle amenable to sharing sensitive financial data, they may not do it quickly or consistently enough for overtaxed investigators to follow up on even a fraction of the evidence of malfeasance that crosses their desks. Furthermore, even where financial data is made available in a timely and responsive manner, the underlying integrity of that data is only as good as the due diligence efforts of the banks that collect it. As a result, dirty money flows through (but rarely comes to rest in) countries with lax oversight, where financial institutions face few repercussions for failing to adequately investigate the ultimate beneficiaries of the transactions they facilitate. 

One striking example of the latter problem, documented in the FinCEN Files, is the well-known case of the Estonian branch of Danske Bank, Denmark’s largest bank. As has been reported on extensively, Danske allowed billions of dollars linked to Russian intelligence services and even the family of Vladimir Putin to transit its accounts in what has come to be known as the “Russian Laundromat.” What was less clear, until now, was the central role played by UK shell firms in the Russian Laundromat operation, whose dubious provenance and questionable—something outright false—declarations of their beneficial owners and business activities went unquestioned by Danske’s Estonian bankers. As a result, thousands of suspicious transactions linked to the Russian Laundromat went largely overlooked until a whistleblower inside Danske came forward with explosive revelations.

Fourth, notwithstanding eye-popping headlines about large fines, U.S. and other national authorities have tended to go wobbly when it comes to holding financial institutions accountable. In pursuing civil and criminal actions against banks that have abetted foreign corruption, money laundering, and other financial crimes, U.S. law enforcement in particular has overwhelmingly favored quasi-settlements known as deferred prosecution agreements and non-prosecution agreements. Such resolutions avoid individual accountability for negligent executives, let alone criminal sanctions against the entity itself, with predictable results: Banks and other institutions treat breaches and associated penalties as the cost of doing business, and are disinclined to cut off relationships with lucrative but high-risk clients. 

“Banks and other institutions treat breaches and associated penalties as the cost of doing business, and are disinclined to cut off relationships with lucrative but high-risk clients.”

To take one depressing example: after HSBC paid nearly $2 billion to the Department of Justice in 2012 over allegations it had laundered vast sums for drug cartels and terrorist groups, one of its executives admitted that the bank was “cast iron certain” to engage in future transgressions. Unsurprisingly, the FinCEN Files reflect that HSBC continuedto bank exactly the kind of customers that got it into trouble in the first place, including firms associated with a multimillion-dollar Ponzi scheme and individuals connected to the same Russian Laundromat that ensnared Danske Bank.

A similar story can be told with respect to FinCEN, which, in addition to its financial intelligence functions, is the bureaucratic actor charged with enforcing one of the most powerful tools in the anti-money laundering arsenal: the “special measures” of Section 311 of the USA PATRIOT Act, which allows the Secretary of the Treasury to designate an entity or even an entire country as a “special money laundering concern.” A Section 311 designation can serve as a kind of death sentence for banks and other problematic actors; it can also bring extraordinary pressure on obdurate jurisdictionsthat serve as sinks for dirty money. Given its potential to unleash chaos in the financial system, it is understandable that FinCEN would seek to use its powers under Section 311 judiciously. But even under that standard, the agency has been extraordinary timid. Over 18 years, FinCEN has proposed only 24 rulemakings under the provision, mostly against obscure banks and marginal jurisdictions like Nauru. 

One episode discussed in the FinCEN Files gives some insight into this pattern of non-enforcement: According to Buzzfeed, efforts to sanction a gold trader linked to a range of transnational criminal activities under Section 311 foundered because the provision had never been used against a precious metals company. That novelty meant “the case was never a slam dunk,” according to an anonymous Treasury official quoted by Buzzfeed. Meanwhile, major banks, including HSBC and Deutsche Bank, held accounts for the trader for years before eventually concluding they were too risky to maintain. Such a deeply conservative approach to using far-reaching powers means the United States is fighting corruption and money laundering with one hand tied behind its back.

The cumulative lesson of all these challenges and stumbles is that the global fight against dirty money is not so much a failure as an unrealized vision, rendered incomplete by under-resourcing, lack of political will, and a cohort of white collar criminals that have carved out a lucrative niche staying one step ahead of national authorities. Closing the gap will require strengthened tools and a scaling up of anticorruption and financial intelligence bureaucracies. Just as importantly, it will also require a new, less compliance-driven approach to reining in the reckless practices of banks and other economic actors that have presided over an epidemic of money laundering and fraud. Such an approach must be more adversarial than the one taken to date—in that it must be willing to serve real punishments on culpable firms and executives—but also less cumbersome than the expensive and inefficient regulatory regime under which banks now labor. None of these solutions will be easy; some will require political courage. But the alternative is a world in which money buys impunity and impunity begets more money, while ordinary citizens suffer. Policymakers should ask themselves if that is a world they are prepared to live in. 

SUMMARY
The FinCEN Files shows that the system as currently designed and enforced is not doing an effective job of keeping criminals and corrupt officials out of the global economy.

Originally published by the Offshore Initiative on October 8, 2020.

There is a comforting story to be told about the prevalence of crime in the global economy. Since the end of the Cold War, the story goes, the world’s leading nations and most influential economic institutions have mounted an increasingly aggressive campaign to rid the international financial system of dirty money—that is, funds acquired by, or used for, prohibited activities such as drug trafficking, terrorism, bribery, and, under some definitions, tax evasion. Such illicit financial flows and the crimes that enable them (like money laundering) will never be eliminated entirely, we are told, but it is now easier than ever to detect and disrupt them. Thanks to the sustained efforts of policymakers and transparency advocates, the world’s financial criminals are being pushed further and further out of the economic centers where they once thrived. 

This optimistic narrative is supported by a profusion of domestic laws, international agreements, and global standards relating to illicit finance and corruption that have come into being since the early 1990s. Today, near all of the world’s governments have adopted stringent anti-money laundering rules under the scrutiny of a task force based in Paris. Many countries—including all developed countries—have made it a crime for their citizens to bribe a foreign official, something unimaginable as recently as the 1980s. On the level of international cooperation, 165 national financial intelligence units (FIUs) now participate in an intergovernmental mechanism for exchange of confidential information about suspicious financial transactions. Last but not least, all but three sovereign states in the international system have ratified the United Nations Convention Against Corruption, which pledges its signatories to a broad range of anticorruption commitments, including technical standards and mutual assistance with asset recovery. The list goes on.

“The United States occupies a uniquely important place in this global effort to rid the world of dirty money.”

The United States occupies a uniquely important place in this global effort to rid the world of dirty money. As the regulator of world’s largest economy and the issuer of the global reserve currency, the U.S. government exercises disproportionate regulatory and law enforcement power over the global economy and has unparalleled visibility into its workings. U.S. laws against bribery, fraud, and money laundering have an exceptionally long extraterritorial reach. Just as significantly, the role of U.S. correspondent banks in facilitating dollar-denominated transactions means that their regulator, the Treasury Department, can at the stroke of pen exclude foreign actors from the U.S. financial system. Such designations can make an economic pariah out of individuals and firms that would otherwise be beyond the reach of U.S. law. 

At first blush, the United States seems to be pulling no punches. In 2019 alone, U.S. fines issued in connection with non-compliance with money laundering, customer due diligence, and sanctions regulations exceeded $8 billion. Fines under the Foreign Corrupt Practices Act, which criminalizes bribes to non-U.S. officials, totaled $2.6 billion, the highest figure since the law was passed in 1979. These numbers dwarf those of any other country, even accounting for the size of the U.S. economy. Since 2017, furthermore, the United States has for the first time been imposing economic sanctions on individuals who engage in corrupt activities abroad, a practice that other countries are now seeking to emulate. When it comes to deterring and punishing corruption and illicit finance, America is in a class of its own.

But is it enough? Recent reporting by Buzzfeed and the International Consortium of Investigate Journalists suggests the answer is no. The two news organizations obtained thousands of “suspicious activity reports” (SARs) and other documents filed by banks and other financial institutions with the Financial Crimes Enforcement Network (FinCEN), the U.S. FIU, in connection with regulatory requirements under the Bank Secrecy Act and other anti-money laundering laws. The documents, dubbed the “FinCEN Files,” depict a financial system that is both flooded with the proceeds of crime and also itself a playground for money launderers, Ponzi schemers and other financial criminals. They offer a window into a world in which well-known kleptocrats, arms dealers with unsavory political connections, drug cartels, traffickers in stolen art and antiquities, and a rogue’s gallery of high-profile scammers succeed in moving funds through the United States and other advanced economies despite obvious red flags. The institutions banking these scofflaws, moreover, are not shadowy fly-by-night institutions, but some of the most prestigious and well-known names in the industry: J.P. Morgan Chase; Bank of America; Citibank; American Express, as well as a host of major European and Asian banks.

How does one square the troubling impression of a global—and American—economy awash with dirty money, as seen in the FinCEN files, with the substantial anticorruption and anti-money laundering apparatus erected over the past 40 years? There is good reason to approach the question with caution: Illicit finance is by its nature clandestine, and the situation may seem worse now than in the past because we have gotten better at spotting money laundering and the crimes it enables. Furthermore, the concerning activities documented in the FinCEN Files are only known to us because regulated financial entities complied with their legal obligations by reporting suspicious behavior to authorities. In other words, dirty money may seem more prevalent now than in the past because we have gotten better at detecting it.

Even so, one would be hard pressed to come away from the FinCEN Files with the observation that the system as currently designed and enforced is doing an effective job of keeping criminals and corrupt officials out of the global economy. This is a depressing takeaway given the vast sums that banks and other firms spend on compliance each year and the sizeable fines extracted by national authorities for breaches of anti-money laundering and anticorruption rules. With so much money and so many man-hours now devoted to preventing abuse of the financial system, why aren’t things better?

Unfortunately there is no single, straightforward answer to this question. Many shortcomings and missteps made possible the world described in the FinCEN Files. The global economy is dizzyingly complex and highly interconnected; taming it was never going to be an easy task, especially in an age where capital zips instantly across borders with the click of a mouse button, while regulation and law enforcement still happen at the level of the nation state. This being said, there are a few contributing factors that deserve special attention. 

“…one would be hard pressed to come away from the FinCEN Files with the observation that the system as currently designed and enforced is doing an effective job of keeping criminals and corrupt officials out of the global economy.”

First, the bureaucratic actors tasked with policing the world’s financial plumbing are simply overwhelmed. FinCEN received about 2.3 million SARs in 2019 alone. Even for a well-resourced FIU (FinCEN has only about 300 staff), this would be an immense quantity of data to sift through and analyze. Furthermore, as the journalists behind the FinCEN files observed, the “narrative” element of SARs, which sets out the reasons the transaction is being reported, vary greatly in detail and scope and don’t lend themselves to software analysis. As a result, even highly troubling indications of wrongdoing are frequently overlooked or ignored. Law enforcement officials who work on corruption-related crimes, such as those in the Justice Department’s Fraud Section, are comparatively better staffed relative to their missions, but they depend on reporting from the private sector and do not have jurisdiction over all of the financial crime that involves U.S. institutions. 

Second, as with other efforts to curb risk in the financial system, the U.S. approach to rooting out illicit finance has emphasized regulatory compliance over criminal penalties and other sanctions that might actually deter institutions from engaging in undesired behaviors. What is perhaps most striking about the FinCEN Files is how often financial institutions continued to process transactions for clients whose suspicious behavior triggered SARs. In practice, many of the institutions appear to have viewed formal compliance with regulatory reporting requirements as immunizing them from any penalties associated with the transaction itself. And for good reason: More often than not U.S. law enforcement appears to have taken no action in response to SARs that reflected a high likelihood of criminal activity. This incentive structure has proven self-reinforcing: Covered entities are inclined to report any activity that could conceivably justify an SAR rather than focusing on the most genuinely concerning transactions, inundating FinCEN with a glut of low-salience, poor quality data to sift through. In Europe and other financial centers, which prosecute far fewer white-collar criminals than American authorities, the situation is, if anything, much worse.

Third, information exchange across national borders, while improved relative to even a decade ago, is still cumbersome, slow, and riddled with inaccuracies and dead-ends. Investigations into complex financial crimes, which usually involve complex cross-jurisdictional transactions and layers of shell companies and other vehicles designed to obscure the real beneficiaries of capital flows, tend to fall victim to bureaucratic inertia: Even where governments are in principle amenable to sharing sensitive financial data, they may not do it quickly or consistently enough for overtaxed investigators to follow up on even a fraction of the evidence of malfeasance that crosses their desks. Furthermore, even where financial data is made available in a timely and responsive manner, the underlying integrity of that data is only as good as the due diligence efforts of the banks that collect it. As a result, dirty money flows through (but rarely comes to rest in) countries with lax oversight, where financial institutions face few repercussions for failing to adequately investigate the ultimate beneficiaries of the transactions they facilitate. 

One striking example of the latter problem, documented in the FinCEN Files, is the well-known case of the Estonian branch of Danske Bank, Denmark’s largest bank. As has been reported on extensively, Danske allowed billions of dollars linked to Russian intelligence services and even the family of Vladimir Putin to transit its accounts in what has come to be known as the “Russian Laundromat.” What was less clear, until now, was the central role played by UK shell firms in the Russian Laundromat operation, whose dubious provenance and questionable—something outright false—declarations of their beneficial owners and business activities went unquestioned by Danske’s Estonian bankers. As a result, thousands of suspicious transactions linked to the Russian Laundromat went largely overlooked until a whistleblower inside Danske came forward with explosive revelations.

Fourth, notwithstanding eye-popping headlines about large fines, U.S. and other national authorities have tended to go wobbly when it comes to holding financial institutions accountable. In pursuing civil and criminal actions against banks that have abetted foreign corruption, money laundering, and other financial crimes, U.S. law enforcement in particular has overwhelmingly favored quasi-settlements known as deferred prosecution agreements and non-prosecution agreements. Such resolutions avoid individual accountability for negligent executives, let alone criminal sanctions against the entity itself, with predictable results: Banks and other institutions treat breaches and associated penalties as the cost of doing business, and are disinclined to cut off relationships with lucrative but high-risk clients. 

“Banks and other institutions treat breaches and associated penalties as the cost of doing business, and are disinclined to cut off relationships with lucrative but high-risk clients.”

To take one depressing example: after HSBC paid nearly $2 billion to the Department of Justice in 2012 over allegations it had laundered vast sums for drug cartels and terrorist groups, one of its executives admitted that the bank was “cast iron certain” to engage in future transgressions. Unsurprisingly, the FinCEN Files reflect that HSBC continuedto bank exactly the kind of customers that got it into trouble in the first place, including firms associated with a multimillion-dollar Ponzi scheme and individuals connected to the same Russian Laundromat that ensnared Danske Bank.

A similar story can be told with respect to FinCEN, which, in addition to its financial intelligence functions, is the bureaucratic actor charged with enforcing one of the most powerful tools in the anti-money laundering arsenal: the “special measures” of Section 311 of the USA PATRIOT Act, which allows the Secretary of the Treasury to designate an entity or even an entire country as a “special money laundering concern.” A Section 311 designation can serve as a kind of death sentence for banks and other problematic actors; it can also bring extraordinary pressure on obdurate jurisdictionsthat serve as sinks for dirty money. Given its potential to unleash chaos in the financial system, it is understandable that FinCEN would seek to use its powers under Section 311 judiciously. But even under that standard, the agency has been extraordinary timid. Over 18 years, FinCEN has proposed only 24 rulemakings under the provision, mostly against obscure banks and marginal jurisdictions like Nauru. 

One episode discussed in the FinCEN Files gives some insight into this pattern of non-enforcement: According to Buzzfeed, efforts to sanction a gold trader linked to a range of transnational criminal activities under Section 311 foundered because the provision had never been used against a precious metals company. That novelty meant “the case was never a slam dunk,” according to an anonymous Treasury official quoted by Buzzfeed. Meanwhile, major banks, including HSBC and Deutsche Bank, held accounts for the trader for years before eventually concluding they were too risky to maintain. Such a deeply conservative approach to using far-reaching powers means the United States is fighting corruption and money laundering with one hand tied behind its back.

The cumulative lesson of all these challenges and stumbles is that the global fight against dirty money is not so much a failure as an unrealized vision, rendered incomplete by under-resourcing, lack of political will, and a cohort of white collar criminals that have carved out a lucrative niche staying one step ahead of national authorities. Closing the gap will require strengthened tools and a scaling up of anticorruption and financial intelligence bureaucracies. Just as importantly, it will also require a new, less compliance-driven approach to reining in the reckless practices of banks and other economic actors that have presided over an epidemic of money laundering and fraud. Such an approach must be more adversarial than the one taken to date—in that it must be willing to serve real punishments on culpable firms and executives—but also less cumbersome than the expensive and inefficient regulatory regime under which banks now labor. None of these solutions will be easy; some will require political courage. But the alternative is a world in which money buys impunity and impunity begets more money, while ordinary citizens suffer. Policymakers should ask themselves if that is a world they are prepared to live in. 

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