From Anti-Money Laundering to Immigration Enforcement: Time to Reassess the Law Enforcement Role of Banks, Credit Unions and Other Financial Intermediaries. 

“Credit unions are deeply committed to the fight against crime, but it is important to recognize we are not law enforcement agents and we have certain fundamental limitations.” This statement, made by the Senior Vice President and General Counsel of a major U.S. credit union in testimony before Congress in July 2017,[1] reflects the legal and regulatory requirements and expectations that banks, credit unions, money services businesses, and other financial intermediaries can, must, and should play a role in combatting the misuse of the financial system for illicit purposes.

While banks, credit unions, and other financial intermediaries are not formally or technically “law enforcement,” they are, effectively, deputized law enforcement…

Deputized Law Enforcement

While banks, credit unions, and other financial intermediaries are not formally or technically “law enforcement,” they are, effectively, deputized law enforcement with affirmative legal obligations to adopt, implement, audit, and update programs to detect, monitor, and report money laundering and its predicate illicit activities, such as sanctions and tax evasion, official corruption, terrorism financing, and drug trafficking.

Indeed, in the United States—home of the world’s indispensable currency and financial system, both of which facilitate the extraterritorial reach and global influence of U.S. sanctions and anti-financial crime laws and standards[2]—a key law imposing anti-money laundering (AML) and other financial crime-related compliance requirements was adopted for the “principal purpose” of furnishing “American law enforcement . . . with the tools necessary to cope with the problems created by so called [bank] secrecy  jurisdictions.”[3]

Time to Reassess Banks and Other Financial Intermediaries’ Law Enforcement Role?

The logic and law enforcement usefulness of imposing anti-crime obligations on banks and others are clear. Nevertheless, the nature, scope, effectiveness, and byproducts of financial intermediaries’ law enforcement role should be assessed and, as needed, recalibrated commensurate with appropriate legal and practical needs and limits.

Slippery Slope? United Kingdom Enlists Banks to Enforce Immigration Laws  

A number of developments and recent trends make clear the need to revisit the law enforcement role of banks. A striking example comes from the United Kingdom, where, according to reports, banks and building societies , starting in January 2018, “are to carry out immigration checks” on 70 million checking (current) accounts, pursuant to the Immigration Act 2016 and the government’s plan to “create a ‘hostile environment’ for illegal immigrants in Britain.”[4]

The immigration checks, which are to be conducted quarterly, are expected to “identify 6,000” immigration law offenders, whose accounts will be “closed down or frozen ‘to make it harder for them to establish or maintain a settled life in the UK.’”[5] In other words, the government’s expectations indicate that less than 1 percent of the 70 million (or 1 in every 11,666 current accounts to be reviewed) will be associated with persons believed to be in violation of immigration laws.

Not only does the expected outcome beg questions about the cost-benefit soundness of the plan,[6] it also raises questions—or should—about whether banks and other financial institutions should be involved in the fight against immigration violations that, unlike money laundering and other financial crimes, do not have inherent ties to money and financial transactions.[7] More broadly, the UK development raises the question of how far laws and regulations can and should go in deputizing banks and other financial intermediaries to carry out or facilitate law enforcement functions and objectives. Such issues have legal, practical, and governance and accountability dimensions, and they merit serious consideration.

Even in the AML/financial crimes space, questions should be raised and addressed, such as whether cost of prevailing financial crime detection and reporting regimes are yielding sufficient and desired law enforcement benefits without unnecessarily harming the legal and financial interests of banks, individuals, and business and nonprofit organizations, as well as stifling domestic and international commerce.

Banks and Anti-Financial Crime: Cost-Benefit in Light of Scale and the Harmful Effects of Derisking Foreign Banks, MSBs, Businesses and Nonprofits, and Individuals

Even in the AML/financial crimes space, questions should be raised and addressed, such as whether cost of prevailing financial crime detection and reporting regimes are yielding sufficient and desired law enforcement benefits without unnecessarily harming the legal and financial interests of banks, individuals, and business and nonprofit organizations, as well as stifling domestic and international commerce.

Scale of BSA/AML Detection and Reporting Activities, Cost-Benefit Issues

At an April 2017 House Subcommittee hearing on “Safeguarding the Financial System from Terrorist Financing,” it was reported the FinCEN, the U.S. Treasury Department bureau with AML, anti-financial crime, and national security mandates,[8] “maintains ‘over 200 million’ BSA filings in its electronic database . . . [and] receives ‘an average of roughly’ 55,000 new financial institution BSA filings each day from more than 80,000 financial institutions and 500,000 individual foreign bank account holders.’”[9]  “Over 10,000 law enforcement and government parties have access to FinCEN’s BSA database . . . [and] conduct approximately 30,000 daily searches.”[10]

As the above data snippets indicate, the scale of BSA filings and data usage substantial, but it is not clear—to the public, at least—whether the quantity of filings, filers, and users of the FinCEN database yield regularly or substantially commensurate law enforcement benefits.[11] In any case, the scope and scale of BSA/AML and other financial crime framework applicable to banks and others imposes a significant compliance obligation—and to be clear, this writing does not question whether banks and other financial institutions should be subject to anti-financial crime measures; rather it speaks to the nature, extent, and cost-to-benefit value of their roles as deputized law enforcement. Such matters are germane given that the current anti-financial crime framework—including the law enforcement role of financial intermediaries—has and continues to unnecessarily harm some banks, money services businesses, other businesses, individuals, and commerce more generally.

Derisking: Unnecessarily Harmful Effects on Customer Segments, Regions, and Cross-Border Trade and Payment Flows

For example, derisking has been well-documented in recent years. Believed to have been spurred by commercial considerations, compliance costs, and massive penalties for AML, sanctions, and other violations, U.S. and European banks (and major foreign banks that service other foreign banks through U.S./European financial institutions through their correspondent relationships/payable through or nested accounts) have withdrawn from foreign correspondent banking relationships.[12] A June 2016 IMF paper (one of several on correspondent banking derisking published by multilateral institutions and others) reported that, per data collected in 2015, 75 percent of “large global banks” indicated that they had withdrawn from foreign correspondent relationships.[13]

The adverse impacts of derisking have been substantial and particularly hard felt within and among certain regions and customer and transaction segments, particularly: in the Caribbean, Africa, the Middle East, and some small Pacific states; by nonprofit organizations; money services businesses (who service, among others, those excluded from the financial system, including as a result of bank derisking); small to large businesses engaged in cross-border trade; and, by individuals in need of cross-border financial services, from senders and recipients of remittances to businesspersons requiring relatively sophisticated financial services.

The current state of affairs and the slippery slope afforded by the expanding and expandable role of financial intermediaries in law enforcement requires a reassessment of their roles and limitations, taking into consideration law enforcement objectives, financial inclusion goals, and the legal and practical interests of all stakeholders.

No Immediate Solutions of Scale in Sight; Risk That Financial Exclusion Gives Oxygen to Illicit Financial Services Platforms 

While multilateral development banks and standard setters (such as the Bank for International Settlements and the Financial Action Task Force (FATF)), as well as U.S. government agencies, [14] have identified the risks and consequences of derisking and urged action, tangible solutions of scale do not appear to be forthcoming in the very near term.

In the meantime, foreign banks, MSBs, other businesses, nonprofits, and individuals continue to be cut off from the financial system or subject to higher cost access. Ironically, the climate of massive penalties and (at least in some part) the blanket and lesser scale derisking of foreign correspondent banking, MSB, business and nonprofit, and individual banking relationships will—and undoubtedly has—driven some parties to resort to informal or illicit financial services providers and platforms, to the detriment of the law enforcement interests served by financial transactions surveillance and reporting by banks and other regulated financial intermediaries.[15] The current state of affairs and the slippery slope afforded by the expanding and expandable role of financial intermediaries in law enforcement requires a reassessment of their roles and limitations, taking into consideration law enforcement objectives, financial inclusion goals, and the legal and practical interests of all stakeholders.


NOTES

[1] Examining the BSA/AML Regulatory Compliance Regime Before the Subcommittee on Financial Institutions and Consumer Credit July 28, 2017 (testimony of Faith Lleva Anderson, Senior Vice President & General Counsel, American Airlines Federal Credit Union at 3).

[2] See e.g., Hdeel Abdelhady, A Great BRIC Wall? Emerging Trade and Finance Channels Led by Non-Western Nations Could Curtail the Global Reach of U.S. Law, MassPoint PLLC (July 11, 2015) (“American economic and financial heft facilitates the extraterritorial reach of U.S. law. For example, global transactions that are denominated in U.S. dollars and processed through the U.S. financial system “touch” the United States, come within its jurisdiction and create a jurisdictional nexus to foreign parties, property and events associated with those transactions.”) ) [hereinafter “Abdelhady Non-Dollar Trade”].

[3] Hdeel Abdelhady, Proposed U.S. Rule Requires Banks to Collect Beneficial Ownership Information, Butterworths Journal of International Banking and Financial Law, 651 (Nov. 2014) (discussing the legislative history of The Currency and Foreign Transactions Reporting Act of 1970, the legislative framework of which is commonly known as the “Foreign Bank Secrecy Act” or “Bank Secrecy Act” (“BSA”) (Pub. L. No. 91–508, Title II, Oct. 26, 1970, 84 Stat. 1118, as re-codified and amended (see 31 U.S.C. §§ 321, 5311 to 5314, 5316 to 5322).

[4] Alan Travis, UK banks to check 70m bank accounts in search for illegal immigrants, The Guardian, September 21, 2017 (explaining that “new legislation requires the banks to check the identity of every current account holder against a Home Office supplied database held by the anti-fraud organization, Cifas. It includes details of those whom the Home Office regard as liable for removal or deportation because they are overstayers, failed asylum seekers or those who have absconded from immigration detention.”).

[5] Id. Notably, The Guardian was alerted to the January 2018 implementation date by a reader who notified the paper of an email from a UK bank to a customer detailing terms and conditions, including “changes to how we check your eligibility to bank with us based on your immigration status.”

[6] It seems a near certainty, given the sheer scale of the account checks, that the quarterly review process will entail more than data cross-checking, account freezing or closure, and reporting. For example, individuals will inevitably be misidentified as immigration law offenders and accounts associated with multiple persons, such as those having different immigration (or non-immigrant) status, will require more complex and account-specific processes to achieve compliance with the account review mandate while not violating laws pertaining to the rights of joint or other account holders.

[7] Applying the underlying logic of the UK account review measures—that access to bank accounts and other basic financial services are conducive to “establishing and maintaining a settled life”—banks and other financial services providers can in principle be enlisted for a vast array of legal purposes, from enforcement of child support laws to the payment of traffic fines (such as by making eligibility to bank contingent on proven compliance with related laws and obligations).

[8] The Financial Crimes Enforcement Network’s (FinCEN) “mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.” FinCEN, What We Do (last accessed September 26, 2017).

[9] Hdeel Abdelhady, Congressional Hearing on Terrorism Finance Probes Bank Secrecy Act Data Processing Effectiveness, Lack of Beneficial Ownership Transparency, and Potential BSA and Patriot Act Amendments, MassPoint PLLC Business Update, April 28, 2017 at 2 [hereinafter “MassPoint BSA Hearing Report”].

[10] Id.

[11] FinCEN, financial institutions, compliance professionals, and others have acknowledged that, for example, Suspicious Activity Report (SAR) quality has and can fall short. In 2005, FinCEN clearly stated concern and highlighted the adverse effects of poor quality or “defensive” SARs–i.e., those filed pro forma or reflexively to create a paper trail of compliance (and a potential defense in case of future enforcement), err on the side of caution in close cases, or in the hopes satisfying or appearing to satisfy internal and external expectations. Specifically, FinCEN stated that “[w]hile the volume of filings alone may not reveal a problem, it fuels our concern that financial institutions are becoming increasingly convinced that the key to avoiding regulatory and criminal scrutiny under the Bank Secrecy Act is to file more reports, regardless of whether the conduct or transaction identified is suspicious. These ‘defensive filings’ populate our database with reports that have little value, degrade the valuable reports in the database and implicate privacy concerns. Financial institutions from the smallest community banks and credit unions to the largest international banks are telling us that they would rather file than face potential criticism after the fact. If this trend continues, consumers of the data – law enforcement, regulatory agencies, and intelligence agencies – will suffer.” FinCEN, The SAR Activity Review Trends Tips & Issues, Issue 8, April 2005.

While stakeholders have expressed similar concerns more recently, the 2005 FinCEN language describes the issues directly and well. A more recent example of questions about SARs quality can be found in the MassPoint BSA Hearing Report at 3 (“Some Congress members probed the quality of BSA filings. For example, one Congress member questioned whether financial institutions and other BSA filers made “defensive” filings (interestingly, the Congress member analogized to cases of healthcare providers who order procedures of questionable necessity in order to avoid future liability.”)

[12] For example, “[i]n the five-year period from 2010 to 2015, the number of AML/CFT fines increased more than 65% while the amount of those fines went from $161 million to over $2.6 billion, with a jump to over $15 billion in 2014 alone.” Clay Lowery and Vijaya Ramachandran, Unintended Consequences of AML Policies, The Clearing House, Banking Perspectives Q3 – 2016. See also Abdelhady Non-Dollar Trade at 2 (discussing sanctions and AML enforcement actions and penalties against specific banks between 2009 and 2015).

[13] International Monetary Fund, The Withdrawal of Correspondent Banking Relationships: A Case for Policy Action (IMF Staff Discussion Note), June 2016, 11.

[14] For example, in August 2016, the U.S. Department of the Treasury and Federal Banking Agencies (FBAs) jointly issued a fact sheet on correspondent banking re-stating and clarifying, among other matters, that U.S. banks’ AML and related compliance programs related to correspondent banking should be “risk-based” and “reasonably designed to assess and manage the risks inherent with these relationships.” The fact sheet appeared to be, at least in part, a response to correspondent banking derisking and seemed designed to counter the chilling effect of the “certain major enforcement cases [that] involved large enforcement penalties related to BSA/AML and OFAC sanctions.” Reminding U.S. banks that the Treasury and FBAs take financial crime “very seriously,” the Treasury Department and FBAs stated that they do not “utlize a zero tolerance philosophy that mandates the strict imposition of formal enforcement action regardless of the facts and circumstances of the situation.” U.S. Dept. of the Treasury and FBAs, Joint Fact Sheet on Foreign Correspondent Banking: Approach to BSA/AML and OFAC Sanctions Supervision and Enforcement, August 30, 2016.

[15] It is difficult to imagine that most or many individuals without legal status in the United Kingdom or elsewhere will depart a country only for lack of a bank account. It seems more likely—if the need to remain in a foreign country outweighs the risks—that such individuals will find other (albeit likely more costly, risky, and exploitative) channels to engage in financial transactions.[/vc_column_text][/vc_column][/vc_row]