How Effective is US Anti-Money Laundering Regulation?
Finance Monthly speaks with Alma Angotti – Managing Director and Co-head, of Navigant Consulting, Inc.’s Global Investigations & Compliance practice, based in the company’s Washington DC office. With her 35 years of public and private sector legal, regulatory, and consulting experience, Alma currently works with financial institutions to, among other things, help them develop, implement, […]
Finance Monthly speaks with Alma Angotti – Managing Director and Co-head, of Navigant Consulting, Inc.’s Global Investigations & Compliance practice, based in the company’s Washington DC office. With her 35 years of public and private sector legal, regulatory, and consulting experience, Alma currently works with financial institutions to, among other things, help them develop, implement, assess, and enhance anti-money laundering (AML) and counter-terrorist financing (CTF) compliance programs required under the Bank Secrecy Act (BSA). She provides BSA/AML/CTF and Sanctions training. She also assists financial institutions in designing their own BSA/AML/Sanctions training policies and programs, conducts investigations and transaction look backs and provides training on AML compliance, examinations, and investigations to regulators globally.
In your opinion how robust is current anti-money laundering (AML) regulation? Is there anything that could be improved?
Legislatively speaking, the current US AML laws are robust.
One important gap in the AML laws is that Investment Advisers are not currently required to comply with the BSA. Investment Advisers sometimes have implemented AML compliance programs as a matter of best practice, but they have no obligation to file Suspicious Activity Reports. Because there is no enforcement mechanism, it is unclear how effective their programs are at detecting money laundering, terrorist financing, and other financial crime. There is a rule proposal that has been pending for several years. I think this is a risk area for the US and global financial systems.
Another area for potential improvement includes a legislative mandate for all companies registering in the US to include beneficial ownership information as part of the registration process and better cooperation among secretaries of state to assist in the identification of potential shell companies and corporations. Requiring the identification and information on the ultimate beneficial owner of a company deters shell companies and corporations from misusing registration systems and entering the US financial market. Understanding the beneficial owner of a customer account, or the ultimate beneficial owner of a financial transaction, are key elements for financial institutions to understand their customers and assess customer risk appropriately. Additionally, if the customer engages in suspicious behaviour, or suspicious transactions, knowing the ultimate beneficial party is integral to any potential law enforcement investigation.
Another area needing enhancement is the ability to share information with law enforcement and between financial institutions more easily. There is currently a US House bill introduced on this subject, H.R. 5783, the Cooperate with Law Enforcement Agencies and Watch Act of 2018. This bill limits a financial institution’s liability for maintaining a customer account in compliance with a written request by a federal, state, tribal, or local law enforcement agency. Additionally, the federal or state agency may not take an adverse supervisory action against a financial institution with respect to maintaining an account consistent with this request.
Beyond legislation and regulatory rule-making, however, consistent and robust enforcement of existing laws, rules, and regulations is critical to ongoing compliance by financial institutions.
What are the current AML issues and solutions affecting businesses and individuals operating in the US?
Some emerging issues that will impact financial institutions are the wider use and holding of cryptocurrencies, virtual currency exchanges (VCEs) looking for banking services, and issuers of initial coin offerings (ICOs) looking for broker-dealer and clearing platforms. Many banks and broker-dealers are de-risking and not providing banking services to VCEs and other high-risk clients (e.g. companies in the medical marijuana industry and customers holding penny stock portfolios) to save on BSA/AML/Sanctions compliance costs. As US regulators of financial institutions rush to regulate these emerging trends, financial institutions are struggling with how to take on these risks without running afoul of ever-changing regulatory expectations.
BSA/AML/Sanctions compliance related to cryptocurrency transactions and performing appropriate due diligence to know your customer when onboarding a VCE is further complicated in the US by the lack of a consistent regulatory definition of cryptocurrency. While many countries view cryptocurrency as currency or legal tender, the US regulatory authorities and law enforcement currently do not agree on whether it is legal tender, a security, or something else. For example, in a 2013 Guidance, FinCEN defined virtual or cryptocurrency as a ‘medium of exchange’ that operates like a currency in some environments but does not have all the attributes of real currency or operate as legal tender in any US jurisdiction. Whereas in 2016, the SEC suggested that cryptocurrency is a security. The Commodity Futures Trading Commission currently believes that it is a commodity, while the IRS views Bitcoin and the like as property that should be taxed.
Regarding ICOs, issuers are coming to consultants like Navigant to help understand unclear regulatory requirements, and broker-dealers are seeking advice on how to underwrite these issuers or onboard ICO companies to their platforms while continuing to comply with BSA/AML/Sanctions compliance laws, rules, and regulations.
What are the AML challenges affecting businesses operating cross-border transactions?
Growth in the volume of cross-border transactions, and greater integration of the world’s economies, have increased the risks that banks and financial institutions face in processing these transactions. Most financial institutions, however, still face challenges that diminish the efficiency and effectiveness of their AML/CFT programs such as: poor data quality and fragmented data sources; outdated technology; poorly tuned transaction-monitoring systems, resulting in high rates of false positives; and the continuous launch of new and complex products and services.
Another major challenge to businesses operating cross-border transactions is the advent and use of mobile payment processing services, and the use of mobile phone payment services, to pay third parties. Millennials are leading this trend by texting cash to friends and third parties, using apps such as Venmo (owned by PayPal), Square Cash or Cash App (owned by Square), Apple Pay, Samsung Pay, and others linked to social media apps like Snapchat. These payment systems obscure whether the transaction is a cross-border transaction, as well as significantly complicating issues such as who the ultimate beneficiary of the transaction may be.
Why is it so important to take an active stance on AML? What are the penalties associated with AML in the US?
Terrorism and transnational organised crime take a terrible toll on societies. The horrific terrorist acts we have seen over the past 20 years cost money and were financed by someone. Our AML/CTF and Sanctions laws, rules, and regulations are in place to stop and deter terrorists from using our financial institutions to finance terrorism, and to stop criminals from laundering the proceeds of other abhorrent practices such as human, sex, or drug trafficking, financing weapons of mass destruction, and nuclear proliferation. Financial institutions play a critical role in protecting the US and global financial systems from these bad actors. We all must be vigilant in this fight.
The importance of financial institutions’ role in fighting terrorism and keeping proceeds of illicit practices out of our monetary system explains the steep penalties for violations of these rules. Individual penalties can range from $500,000 to $1 million (such as the case of Thomas Haider of MoneyGram International) and up to 20 years in prison. Fines for financial institutions vary by regulator and violation. According to Bloomberg, in the first quarter of 2018 alone, federal banking regulators and FinCEN concluded two major AML enforcement actions with almost $1 billion in forfeitures and penalties, the highest ever annual total for federal authorities.
Financial institutions are arguably the most at risk from fraud. What measures can they take to ensure fraudulent behaviour is minimised both internally and externally?
There are many steps financial institutions can take to minimise fraud risk, but at the core of these steps is training and the four-eye principle. Potential fraud — whether internal or external — is significantly reduced by proper training of all staff on the red flags of fraud. Risk is further reduced by ensuring that all processes include more than one set of eyes (i.e., two people — four eyes). Ideally, for transactions most at risk for potential fraud, financial institutions would have a supervisor or quality assurance/control person review the transaction in addition to the employee originating the transaction. A properly tuned transaction-monitoring alert system would then identify any anomalies or potentially suspicious activity post-transaction, further minimising risk.
What changes would you like to see implemented in AML legislation, both nationally and internationally?
As I stated above, I believe it is past time for US regulatory agencies such as the Department of Treasury and FinCEN to assert regulatory authority and oversight over Investment Advisors as financial institutions under the BSA and other AML laws, rules, and regulations. Internationally, it would be ideal to have a centralised repository of beneficial ownership information accessible to financial institutions and law enforcement. Efforts are beginning in some countries to centralise this information, but privacy laws and concerns about confidentiality are often a stumbling block to the sharing of this type of information.
Navigant is a specialised, global professional services firm with focus on industries and clients facing transformational change and significant regulatory or legal pressures. Navigant provides a range of advisory, consulting, outsourcing, and technology/analytics solutions, primarily serving clients in the financial services, healthcare, and energy sectors. Headquartered in Chicago, the company has approximately 5,900 employees across North America, Europe, the Middle East, and Asia-Pacific.
 Robert Kim, “Q1 Ends with Record $1B in Federal Anti-Money Laundering Penalties and Forfeitures,” Bloomberg Law, April 6, 2018.