September 29, 2020
ICYMI: SUPERINTENDENT LINDA A. LACEWELL'S OP-ED IN LAW360: WE MUST HOLD BANKS ACCOUNTABLE TO STOP MONEY LAUNDERING
The so-called FinCEN Files investigation from the International Consortium of Investigative Journalists and BuzzFeed News showing $2 trillion in suspicious activity reports from global banks over a period of years has generated significant news coverage, and the stock markets shivered.
You might think cash is dead in a digital society but it is the lifeblood of criminal activity. The Federal Reserve reports $1.98 trillion in currency circulation, but only 5% sits in bank vaults. Half of existing currency is held abroad. The United Nations' Office on Drugs and Crime estimates the amount of money laundered globally in one year to be $800 billion to $2 trillion.
Banks have shrugged and said this is old news. They are right but not for the reasons you think. Insiders have known for decades that the financial system is awash with trillions of dollars in dirty money running through the system.
Banks say they did not actually know the money was criminally derived, yet they have been permitting massive transactions to run through shell companies to money laundering havens, with no apparent business purpose, notifying the Financial Crimes Enforcement Network and taking their cut in fees.
Individual bankers are rarely held accountable, so money laundering becomes a source of profits and bank fines become a cost of doing business. When the profits exceed the fines, the business choice is easily corrupted.
"Sunlight is the best disinfectant," as Justice Louis Brandeis famously said, and now with this new spotlight, we must act.
Getting dirty money out of the system is a critical step toward a more resilient financial system, apart from it being the right thing to do and required by law.
We must recognize the problem to tackle it. How did we get here? Over decades we have allowed the problem to metastasize so that it's endemic in the system and wrapped within the guts of financial institutions.
The suspicious activity report — originally intended to alert law enforcement to potentially criminal activity — has become a free pass for banks. The report itself is frequently riddled with the names of anonymous shell companies that make it practically impossible to determine the identity of the perpetrators.
Therefore as a first step, we must all move to require disclosure of beneficial owners of corporations and limited liability companies in financial transactions.
Second, as Transparency International advocates, let's impose sanctions on the bankers who allow these corrupt transactions if the facts and the law don't warrant prosecution. If global banks won't devise concrete and effective anti-money laundering programs, regulators should prescribe them, including the use of automated transaction monitoring where needed.
Third, the boards and senior management of every financial institution must foster and implement a sustainable strong culture of compliance, as it is the foundation of the entire organization. Compliance cannot continue to be a back-office function. It is the first line of defense to prevent the facilitation of crime through the financial system and effectively monitor risky customers.
To do this, leadership needs to empower compliance officers and put them on par with the bankers. They need to be independent — fully supported and properly resourced. It is the responsibility of senior management to ensure that compliance recommendations are appropriately reviewed and given substantial weight.
Compliance officers and regulators share a common goal — we both want to protect financial institutions from criminals entering their banks and using the financial system to launder their financial crime proceeds.
Regulators and banks seek to protect society from the devastating impact of money laundering, drug trafficking, terrorist financing, human trafficking and other serious crimes.
Ultimately, boards of directors and senior management should be accountable.
Foreign regulators should also require their banks with branches in the U.S., most often here in New York, to make compliance a priority and to fund compliance departments at a proportionate and effective level. And European regulators and the newly created European Public Prosecutor's Office should make money laundering prevention and prosecution a central priority.
Given the size of the problem and our financial system's interconnectivity, banks and regulators in the U.S. and around the globe must work together to stop this polluted cash from flowing freely through our networks. If we don't mandate and enforce compliance, we are all complicit.
Linda A. Lacewell is the superintendent of the New York State Department of Financial Services and is an adjunct professor at New York University.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of Portfolio Media Inc. or any of its respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.