Financial crime dominated the news in 2020, and we expect 2021 to be no different. From the well-publicized U.S. FinCEN leaks scandal to the newly signed National Defense Authorization Act (NDAA) that codified stronger anti-money laundering (AML) rules, it seems not a week goes by that we don’t hear about something or someone involved in financial crime.
With all the of noise in the media, however, is there common thread among these challenges that is too often overlooked? Indeed, what do the NDAA, FinCEN leaks, and a term known in AML circles as “adverse media” all have in common? The answer is that all three seek to expose the very real problem of banking dirty money, such as the proceeds obtained from criminal activities like drug trafficking, illegal gambling, financial fraud, and much more.
Underpinning the fight against dirty money
To start, both the NDAA and the FinCEN leaks case help set the foundation for making adverse media research a more effective tool to fight banking dirty money. Let’s start with the NDAA. Within this new law is the Corporate Transparency Act (CTA), which targets something specific: anonymous shell companies that have allowed criminal networks, human rights abusers, and tax evaders around the world to conduct business while hiding their financial tracks. The new law requires the disclosure of the identities of the true, human owners (called beneficial owners) of companies formed in the U.S., effectively banning anonymous shell companies. The disclosure will be filed with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
The FinCEN leaks scandal also helped support the use of adverse media research and screening. The leaks detailed how financial institutions filed Suspicious Activity Reports (SARs), which are reports filed when a bank spots a client or a transaction that raises suspicion. Although there are no hard rules on what constitutes a suspicious transaction, approximately 2.2 million SARs are filed every single year. In the leaks scandal, approximately 2,100 SARs were leaked to the news media, revealing very real gaps in today’s financial systems as global banks were shown as key conduits for banking and moving illegally obtained money.
Indeed, the FinCEN leaks case raised the question as to whether reporting a SAR was enough today or can more be done to stop illegal monies from entering the banking system?
Follow the news, follow the money
The term adverse media refers to a financial institution’s Knowing Your Customer (KYC) requirements, a fundamental aspect of onboarding and servicing a customer and applies to both people and businesses. Adverse media screening essentially means researching whether a negative news story exists on a bank customer or party to a transaction in open-source or online press reports or public records research.
Uncovering adverse media plays into a bank’s KYC duties. FinCEN codified its customer due diligence (CDD) rule in 2018 and its beneficial ownership rule requires financial institutions to identify and verify the identity of beneficial owners in companies. (This applies to those owners with 25% or more equity ownership or significant management or control.)
This same rule also requires banks to have risk-based CDD procedures in order to do its KYC — such as knowing the nature and purpose of the account, developing a customer risk profile, and ongoing monitoring. For higher risk bank customers (such as those with a higher risk of money laundering tied to certain types of businesses or professions, or those tied to the types of banking products and services being used), financial institutions need to conduct enhanced due diligence (EDD) and ongoing monitoring.
Can adverse media screening uncover dirty money?
The FinCEN leaks case shows that adverse media screening could make a difference. For example, the FinCEN leaks case showed that one address in the United Kingdom was ranked as one of the highest-risk money laundering locations in the world. According to the BBC, some 100 companies mentioned in the FinCEN leaks were registered to one office suite on the second floor of building in Hertfordshire, just north of London. The leaks suggest that had the banks been monitoring against payer and payee names, instead of just transactions, then some of the connected money-laundering issues might have been identified earlier and banks would have been able to block transactions, reject the business, and close client relationships.
Adverse media also played into the New York State Department of Financial Services’ 2020 Consent Order with Deutsche Bank over its dealings with the late Jeffrey Epstein. According to U.S. regulators, the bank ignored the well-known criminal history of Epstein, allowing suspicious transactions worth millions of dollars to go through in the process.
Putting an end to banking dirty money
Could more widespread use of adverse media screening put an end to banking dirty money?
Certainly, the long-overdue CTA will assist financial institutions as they seek to verify who is behind the companies they bank, and FinCEN leaks case did spotlight some of the ways bad actors have avoided detection. Yet, it will be up to financial services institutions to continue to use adverse media screening as part of its KYC protocol, sharpening the ways that illicit actors can be uncovered through media and public records.
Coincidentally, FinCEN recently announced upcoming plans to issue new guidance to banks on improving their AML effectiveness, urging them to come up with ways to provide more useful intelligence to regulators and law enforcement. Let’s see if that common sense approach can put more of a dent in this long-standing problem.