Blame the system for FinCen files, not the banks, experts urge

LONDON — The leaked FinCen files which sent banking stocks tumbling on Monday should be viewed as exposing flaws in the regulatory system, not wrongdoing by banks, several financial crime experts have told CNBC. 

The files, obtained by Buzzfeed and the International Consortium of Investigative Journalists and released over the weekend, contain Suspicious Activity Reports (SARs) filed with the U.S. Department of Treasury’s Financial Crimes Enforcement Network, or FinCen, between 1999 and 2017. The suspicious transactions outlined in the documents total $2 trillion. 

The SARs were filed by several of the world’s largest banks and financial institutions in relation to transactions they were making on clients’ behalf. They have emphasized increased expenditure on compliance systems in recent years and denied any conscious wrongdoing. 

However, Octavio Marenzi, CEO of capital markets consultancy Opimas, told CNBC on Monday that the ire directed towards the banks “missed the point entirely,” since banks filing SARs is evidence of them working within the regulatory system. 

“To claim that the very regulatory reports the banks are required to make is proof that the banks have been violating the regulation reveals a basic lack of understanding of anti-money laundering rules,” Marenzi said, adding that the implication that banks are “knowingly and willingly helping terrorists is just a bit silly.” 

“Action has been taken, it has been taken repeatedly, and it has cost the banks billions in fines. All banks that we know of are very eager to obey both the spirit and letter of the law and have gone to great lengths to do so, investing large amounts in personnel and technology to identify any problematic cases,” he said. 

Financial institutions are legally obligated to alert regulators when they detect any suspicious activity, such as money laundering or sanctions violations. However, these SARs reports are not necessarily evidence of any criminal conduct.  

Daniel Tannebaum, who leads Oliver Wyman’s Anti-Financial Crime Practice for the Americas and has worked with a number of major banks on compliance and regulation, said the outcry caused by the files risks vilifying the people within the financial sector trying to do the right thing. 

Speaking to CNBC via telephone Tuesday, Tannebaum suggested that some cases included in the leaked documents would have led to banks terminating client relationships, since most lenders have internal risk appetite policies whereby a certain number of SARs constitutes a red flag. 

He said we were at a “critical inflection point” of understanding how FinCen and the U.S. financial crime mechanism interacts with regulated industries to, “really get at the heart of the issue of not just satisfying regulators but to actually identify bad money and to keep it out of the global monetary system.” 

He suggested that the U.S. government had been more hands-off than governments in Europe and elsewhere, which interact more directly with regulators to establish transaction monitoring frameworks and closer working relationships between public and private institutions. 

Tannebaum also argued that the regulatory pressure and scrutiny on compliance professionals meant the focus had shifted away from making the best use of resources in identifying suspicious activity, towards simply avoiding further punitive measures. 

“You are performing these functions and cross-purposes in part because banks just don’t want to constantly keep getting hit over the head by regulators,” he added. 

Tom Keatinge, director of the Centre for Financial Crime and Security Studies at RUSI, told CNBC’s “Squawk Box Europe” on Tuesday that banks’ spending on compliance and the fines and scrutiny already imposed for past failings indicated that the issues raised by the leaks are largely being dealt with. 

Keatinge highlighted that under the current regulatory framework, a bank is able to file a SAR to engage in “backside covering,” without worrying about whether the client is subsequently identified as having been involved in wrongdoing. 

“Millions of SARs are filed with FinCen every year, half a million are filed with the NCA (National Crime Agency) in the U.K. every year, and law enforcement authorities just can’t react, they can’t look at all of those,” he said. 

“We are still running a system that was built 25 years ago when it took five days to clear a payment, but yet now money is moving at the touch of an app or a button, so the system I think is what we need to be looking at here, more than the banks themselves.”