"Pretzel Logic"* from officials

I had an interesting opportunity last week to attend an FBI bank outreach program on combating terrorist financing. The New York Federal Reserve hosted the event.

Sessions covered the gamut from cyber threats to virtual currencies and counterintelligence trends. Clearly, to me, law enforcement “gets it.”

What I mean is that they value their partnership with the private sector.

The authorities represented used the day to update AML/financial crime professionals on new initiatives, trend analysis, and tips on SAR filing improvements. Every presenter thanked the audience for their work and commitment to the mission of detecting, preventing, and reporting financial crime. The acknowledgement was sincere and it is apparent that the audience appreciated being recognized.

Whether it was explaining virtual currency red flags, advising when IP addresses are essential in SAR filings, or explaining new Islamic State banking initiatives, the participants left with more information than when they arrived.

Reconciling aid with official mixed messages

What strikes me is this: How can AML professionals manage this new “data” with the continued mixed messages being sent about onboarding and exiting accounts throughout the world?

For example, the international standard setting organization FATF has posted a summary of its meeting with the private sector in March. It said, in part:

“The FATF reiterated its position on de-risking and the need for financial institutions and other designated businesses and professions to undertake proper implementation of the risk-based approach. Views on the drivers and scale of this issue vary considerably and the problem is not well understood. The FATF invited the Forum participants to share any statistics that they may have which would help to shed further light on the scale of this complex issue.”

Share “statistics?” How will financial institutions do that? The issue is exiting relationships after attempting to manage risk. If you share my view that there is no wholesale exiting of categories of accounts, asking for statistics begs the question.

The real point in the FATF statement is that “the problem is not well understood.”

UK’s regulator opines on de-risking

The United Kingdom’s Financial Conduct Authority (FCA) surprised the financial sector with a not-too-veiled threat to issue formal penalties for exiting accounts. If you doubt that, take a look at the following, an excerpt from FCA’s “Derisking: Banks’ Management Of Money-Laundering Risk—FCA expectations":

“Where a bank does not believe that it can manage the money-laundering risk associated with a business relationship effectively, it should not enter into, or maintain, that business relationship. But the risk-based approach does not require banks to deal generically with whole categories of customers or potential customers: instead, we expect banks to recognize that the risk associated with different individual business relationships within a single broad category varies, and to manage that risk appropriately.

“While the decision to accept or maintain a business relationship is ultimately a commercial one for the bank, we think that there should be relatively few cases where it is necessary to decline business relationships solely because of anti-money laundering requirements. As a result, we now consider during our AML work whether firms’ derisking strategies give rise to consumer protection and/or competition issues.”

The fallacy in the statement above is stating that there are few instances where banks decline or exit business solely because of inability to manage risk and survive regulatory second-guessing.

Banks report that they are not free to utilize the risk-based approach in many cases and that gives rise to those difficult business decisions.

Zarate gives Congress the picture

ACAMS award winner and dedicated AML/CTF veteran Juan Zarate recently testified before a congressional committee. He pointed out:

“An inherent and dynamic tension has emerged between the isolation of suspect behavior from the formal financial system and the incorporation of more of the world into the formal financial system. Going forward, the core principle of isolating and exiling actors from the legitimate financial system for policymakers needs to be balanced with the need to ensure that rogue actors can be captured and affected by the legitimate financial system. Financial inclusion needs to be a strategic consideration and complement to our financial exclusion campaigns.”

This came from testimony Zarate gave in his capacities as senior advisor, Center for Strategic and International Studies (CSIS), and chairman and senior counselor,

Center on Sanctions and Illicit Finance at the Foundation for Defense of Democracies. [Download a copy of “A Survey Of Global Terrorism And Terrorist Financing.”]

Zarate identifies a conflict that shows no immediate signs of abating—financial institutions using intelligence garnered from law enforcement or other open sources and making decisions on retention of that risk. If the decision is to exit, the collateral damage is the inability for law enforcement to have a pipeline to successfully monitor suspicious activity.

Zarate calls for “financial inclusion” but we know that in the current environment, there is much to do.

Law enforcement recognizes how to include the financial sector in its efforts—now we need others to do the same.

Rich Riese: Best wishes to a true professional

This week, my former colleague Rich Riese is retiring from the American Bankers Association. Rich was a tremendous asset and advocate for the compliance community and was always thoughtful and sincere in his approach with the regulators. The ultimate compliment for anyone’s career work is that they were a true professional. Rich was that and then some. Congratulations! LINK:

* “Pretzel Logic” was a critically acclaimed 1974 Steely Dan album. Thought the phrase was apropos here to the “debate” we are having with AML in 2015…