6 money laundering reforms that experts say need to happen right now

Failures exposed by the FinCEN Files inves­ti­ga­tion require urgent inter­ven­tion, reg­u­la­tors, experts and politi­cians say.

The biggest banks in the world are mov­ing vast amounts of mon­ey for drug car­tels, cor­rupt regimes, arms traf­fick­ers and oth­er inter­na­tion­al crim­i­nals after hav­ing pledged repeat­ed­ly to do more to staunch the flow of dirty money.

The sys­tem-wide fail­ures exposed by the FinCEN Files, a 16-month inves­ti­ga­tion by more than 400 jour­nal­ists, have led to calls for reform from promi­nent politi­cians and gov­ern­ment bod­ies. The report­ing even prompt­ed the Financial Crimes Enforcement Network, the U.S. agency known as FinCEN tasked with over­see­ing bank com­pli­ance with mon­ey laun­der­ing laws, to ask for ideas about how to “enhance the effec­tive­ness” of its operations.

So what’s to be done? A more robust enforce­ment sys­tem is with­in reach, say finance, legal and off­shore experts inter­viewed by the International Consortium of Investigative Journalists. Here’s where to begin.

End ‘too big to jail’ for U.S. banks and bankers

The deferred pros­e­cu­tion agree­ment, or DPA, has become the go-to tool in the U.S. government’s efforts to force banks to crack down on crim­i­nal pay­ments mov­ing through their accounts. A finan­cial insti­tu­tion in the cross-hairs of law enforce­ment agrees to some­thing like pro­ba­tion: crim­i­nal charges are tabled, and in return, the bank pays a fine and agrees to reforms over­seen by a monitor.

But crit­ics say overuse and under­en­force­ment of the DPA has let banks off the hook for egre­gious vio­la­tions of mon­ey-laun­der­ing statutes with few long-term con­se­quences. “They’ve become in effect the cost of doing busi­ness rather than a real pun­ish­ment,” Jed Rakoff, a senior fed­er­al judge in Manhattan, told ICIJ.

Over the last decade at least 18 finan­cial insti­tu­tions signed DPAs for anti-mon­ey laun­der­ing or sanc­tions vio­la­tions, an analy­sis by BuzzFeed News found. Four were fined a sec­ond time for vio­lat­ing the law — twice, the U.S. gov­ern­ment respond­ed to the repeat offense by sim­ply renew­ing the same agree­ment that failed the first time.

ICIJ’s exam­i­na­tion found that four glob­al banks — JPMorgan Chase, HSBC, Standard Chartered Bank and Bank of New York Mellon — kept prof­it­ing from pow­er­ful and dan­ger­ous play­ers after pay­ing fines as part of DPAs.

How to con­vince finan­cial insti­tu­tions to take mon­ey laun­der­ing more seri­ous­ly? Go after cul­pa­ble lead­ers, Rakoff said. “To my mind the sin­gle great­est objec­tion is that the ulti­mate­ly respon­si­ble exec­u­tives nev­er get pros­e­cut­ed at all,” he said. “I was a crim­i­nal defense lawyer for 15 years doing most­ly white col­lar defense and the only thing that ever scared my client was prison, and boy that scared them.

Tighten suspicious transaction reporting requirements

Suspicious activ­i­ty reports that banks are required to file with reg­u­la­tors often lack cru­cial infor­ma­tion, includ­ing the most basic facts regard­ing who is actu­al­ly behind sus­pect mul­ti-mil­lion-dol­lar mon­ey flows. This reflects crip­pling igno­rance on the part of com­pli­ance offi­cers, who told ICIJ they can­not prop­er­ly do their jobs with­out this infor­ma­tion — and it also hob­bles law enforce­ment and bank reg­u­la­tors who use these SARs to inform their own investigations.

Compliance staffers’ ques­tions to col­leagues in pri­vate bank­ing and oth­er client-fac­ing divi­sions “are often ignored, not answered to sat­is­fac­tion, not answered in a time­ly man­ner,” Ross Delston, a Washington-based attor­ney who spe­cial­izes in anti-mon­ey laun­der­ing sys­tems, said. “Compliance offi­cers expe­ri­ence a great deal of frus­tra­tion when it comes to requests for infor­ma­tion with­in their own organization.”

Delston says that a full solu­tion will like­ly require mas­sive reg­u­la­to­ry changes. The most effec­tive fix: force banks to keep cus­tomer infor­ma­tion in a cen­tral­ized data­base that com­pli­ance staff could access auto­mat­i­cal­ly, end­ing the trou­bled request-for-infor­ma­tion process. In oth­er words, bankers would no longer be the gate­keep­ers to infor­ma­tion about cus­tomers they prof­it from.

Empower bank compliance officers

Bank staff tasked with mon­i­tor­ing trans­ac­tions and rais­ing red flags when nec­es­sary are the front line in the glob­al fight against mon­ey laun­der­ing. But com­pli­ance offi­cers told ICIJ that they often felt pow­er­less to com­pel their own insti­tu­tions to close accounts that appeared to be con­nect­ed to crim­i­nal activ­i­ty. Former HSBC com­pli­ance offi­cer Alexis Grullon said that the sus­pi­cious activ­i­ty reports he spent his days com­plet­ing did lit­tle to stop con­cern­ing activity.

Why are we fil­ing SARs?” Grullon recalls won­der­ing. “The account is still open. Nothing is actu­al­ly being done.”

Stories like this are not new to Rick McDonell, the exec­u­tive direc­tor of the Association of Certified Anti-Money Laundering Specialists (ACAMS). McDonell says that banks must give com­pli­ance offi­cers a mean­ing­ful voice with­in their insti­tu­tions. Specifically, he said, there should be clear, unob­struct­ed path­ways for com­pli­ance offi­cials to ele­vate con­cerns over finan­cial crime to offi­cials with­in the bank with the pow­er to close accounts or take oth­er action.

McDonell said that while many banks have made strides to bet­ter empow­er their com­pli­ance peo­ple, oth­ers have not. Government reg­u­la­tors must use their super­vi­so­ry pow­er to exam­ine obsta­cles that keep bank com­pli­ance offi­cers’ con­cerns from being act­ed upon, he said. “On a glob­al scale, there is still a long way to go in terms of effec­tive super­vi­sion and effec­tive com­pli­ance,” McDonell said.

End tax haven U.S.A.

U.S. juris­dic­tions such as Delaware, Wyoming and South Dakota can be even eas­i­er to abuse than the Caribbean tax havens of pop­u­lar imag­i­na­tion. Some states don’t require any infor­ma­tion on a company’s own­er or man­ag­er to open a new busi­ness — less paper­work than what is often need­ed to obtain a library card.

Experts and reg­u­la­tors respond­ed to the FinCEN Files inves­ti­ga­tion with calls to end the easy cre­ation of “anony­mous” com­pa­nies – enti­ties whose own­ers are not pub­licly record­ed or shared with fed­er­al author­i­ties – as a first step. “Anonymous shell com­pa­nies … make it prac­ti­cal­ly impos­si­ble to deter­mine the iden­ti­ty of the per­pe­tra­tors,” said Linda A. Lacewell, super­in­ten­dent of the New York State Department of Financial Services, in an op-ed respond­ing to the FinCEN Files inves­ti­ga­tion and its exposés of crim­i­nal activity.

Bills to require U.S. com­pa­nies to dis­close their own­er or own­ers to FinCEN are before both cham­bers of Congress and have the sup­port of President Donald Trump’s admin­is­tra­tion. The Senate bill would boost penal­ties for repeat offend­ers and require cer­tain com­pa­nies to dis­close their true own­ers, includ­ing those with at least a 25% stake or who own a con­trol­ling inter­est. It would not cre­ate a pub­lic reg­istry of own­ers, as some advo­cates and experts had hoped.

The FinCEN Files series revealed long­stand­ing prob­lems [involv­ing] will­ful vio­la­tors of our nation’s laws,” said Ohio Sen. Sherrod Brown, the Democratic co-spon­sor of the bill, in an inter­view with ICIJ. “We’re hope­ful this new bill, that once it comes into law — and I think it will — it will be a lot hard­er for them to vio­late these laws and that they’ll pay a price when they do.”

Close the United Kingdom’s giant secrecy loophole

The U.K. is a mon­ey laun­der­ing hotbed. According to one esti­mate, more than 90 bil­lion in dirty mon­ey is laun­dered each year through the City of London. A cen­tral prob­lem has been the rise and mis­use of anony­mous com­pa­nies known as LLPs and LPs incor­po­rat­ed through Companies House, the U.K.’s reg­is­trar of busi­ness­es, by peo­ple with ties to cor­rup­tion, crime and even terrorism.

In 2016, the gov­ern­ment moved to require most British com­pa­nies to dis­close indi­vid­u­als with more than 25% con­trol. While the rules apply to all LLPs and to some LPs, the law con­tains no ver­i­fi­ca­tion or enforce­ment mech­a­nism, and many don’t pro­vide own­er­ship information.

An ICIJ analy­sis of LLP com­pa­nies reg­is­tered in England and Wales revealed an excess of $4.5 bil­lion in funds, com­pared to the fig­ures report­ed in a selec­tion of LLP com­pa­ny accounts, filed with Companies House, cast­ing doubts over the reli­a­bil­i­ty and accu­ra­cy of their accounts data.

Days before the pub­li­ca­tion of the FinCEN Files, Companies House announced a litany of new reforms intend­ed to clamp down on fraud and mon­ey laun­der­ing, includ­ing pre­vent­ing com­pa­ny direc­tors from being appoint­ed until their iden­ti­ties are ver­i­fied by Companies House.

Graham Barrow, an anti-mon­ey laun­der­ing expert, thinks that a few changes could rad­i­cal­ly alter the land­scape of mon­ey laun­der­ing in the U.K. and stop the use of shell companies.

First would be to intro­duce a require­ment that at least one offi­cer of any U.K. enti­ty should be locat­ed here in the U.K. and accept account­abil­i­ty for the fil­ings made by the com­pa­ny. Two would be to exclude from the reg­is­ter of Persons with Significant Control [i.e. the own­ers of the com­pa­ny] any enti­ty that does not meet the cur­rent requirements.”

Europe has 27 different approaches to fighting financial crime. It’s time for the continent to work together.

The European Union’s 27 coun­tries have pri­ma­ry respon­si­bil­i­ty for super­vis­ing and enforc­ing anti-mon­ey laun­der­ing laws. Persistent weak­ness­es led the European Commission to man­date stricter dirty mon­ey con­trols. Some coun­tries, includ­ing Cyprus, Spain and the Netherlands, have been slow to intro­duce new rules, includ­ing over­hauls that would make it eas­i­er to iden­ti­fy the own­ers of com­pa­nies and trusts. Others, includ­ing Latvia and Malta, have long attract­ed crim­i­nals and bil­lions of dol­lars in dirty money.

Responding to FinCEN Files, European politi­cians called for uni­form reg­u­la­tionsand for stronger super­vi­sion in the form of a new European agency or greater pow­ers for the exist­ing over­sight body, the European Banking Authority.

The exist­ing Anti-Money Laundering (AML) sys­tem sim­ply does not work,” said Eero Heinäluoma, a Finnish mem­ber of the European Parliament dur­ing a debate on the FinCEN Files. “It is a Swiss cheese, full of holes.”

Correction, Oct. 28: This sto­ry has been updat­ed to remove Deutsche Bank from a list of glob­al banks that have entered into deferred pros­e­cu­tion agree­ments with the U.S. gov­ern­ment. Deutsche Bank has not entered into any DPAs, but has paid hun­dreds of mil­lions of dol­lars in set­tle­ments to U.S. author­i­ties for anti-mon­ey-laun­der­ing fail­ures, includ­ing a $258 mil­lion civ­il set­tle­ment in 2015 over busi­ness deal­ings involv­ing Iranian, Libyan, Syrian, Burmese and Sudanese finan­cial insti­tu­tions and oth­er enti­ties sanc­tioned by the U.S.

Ben Hallman, Spencer Woodman, Will Fitzgibbon and Karrie Kehoe, ICIJ

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