Innovation, Communication Needed to Address Emerging Illicit Finance Threats, Say Regulators

Shifting regulatory obligations and new technologies that could aid in catching financial criminals were top of mind at an annual conference on financial crime

Top financial regulators are encouraging bankers to work closely with their agencies on ongoing efforts to modernize the nation’s financial crime safeguards, including by helping to implement a landmark anti-money-laundering reform bill.

Himamauli “Him” Das, acting director of the U.S. Treasury Department’s anti-money-laundering bureau, said on Thursday that the agency was exploring the idea of creating a series of regulatory “sandboxes,” within which financial institutions can experiment with new technologies without the risk of a regulatory violation.

In January of last year, U.S. lawmakers passed legislation that requires the U.S. Treasury Department’s Financial Crimes Enforcement Network—known as FinCEN—to create a corporate ownership registry that lawmakers hope will help prevent bad actors from using anonymous shell companies for nefarious purposes.

The law also contains a number of provisions encouraging regulators and the financial sector to find ways to foster innovation, including through the use of new technologies such as artificial intelligence that can help pick out suspect transactions from among the droves processed by banks each day.

“FinCEN’s view is that our regulatory framework needs to approach these innovations in a way that recognizes not only the risks that they pose, but the opportunities that they present,” Mr. Das said at a virtual conference on financial crime enforcement hosted by the American Bankers Association and the American Bar Association.

Mr. Das said FinCEN was exploring how to innovate around transaction monitoring, customer risk ratings, digital identity and automating processes for reviewing suspicious activity reports that banks are required to file.

In December, FinCEN proposed a set of rules spelling out which companies will have to submit information to the new beneficial ownership database, and about who qualifies as the owner of a covered company. Officials say the rules will be a useful tool in helping prevent and disrupt the use of shell companies for illicit activities.

Creation of the new database will shift some of the responsibility for collecting ownership information to FinCEN, and away from banks and other financial institutions, which are required to collect information on their customers under existing rules, a change that the banking sector has largely supported.

But financial institutions and other stakeholders in public comments on the proposed database have expressed diverging views on how the new collection process should work. One source of concern has been if, and how, ownership information will be verified, as well as who will have access to it.

James Martinelli, the director of FinCEN’s office of regulatory policy, on Thursday said the issue of verification remained “an open question.”

“We specifically highlight this very critical issue of verification,” he said, referring to the agency’s notice of proposed rule-making from December.

“There’s not much I can say at this stage,” Mr. Martinelli added. “To the extent that is an important issue for folks, I would just encourage you to comment on the proposal.”

Last year FinCEN also took other steps to implement parts of the anti-money-laundering reform law, including by releasing a set of national priorities that financial institutions can use to better focus their anti-money-laundering resources.

The broad list of priorities released by FinCEN left few areas of transnational crime unmentioned, and compliance officials have expressed concern they could add to their institution’s overall regulatory burden instead of enabling them to allocate resources to areas of higher risk.

Regulators on Thursday reassured the bankers that their respective agencies would offer further guidance on the priorities. FinCEN officials have said they expect to propose a framework in April laying out how banks should incorporate the priorities into their compliance programs.

“There’s lots of elements that need to be explained, including how we’re going to assess and examine for it,” said Suzanne Williams, a deputy associate director for the Federal Reserve Board of Governors.

“We want … a consistent approach [for] how we assess effectiveness and incorporation of the priorities, and that’s going to require not only rule change, but accompanying guidance,” Ms. Williams added.


By Dylan Tokar, January 13, 2022, published on Wall Street Journal

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