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Wolfsberg Group to FinCEN - Define the AML demands to streamline the US fight against dirty money

According to a leading group of banks, a lack of definition in the United States' fight against "dirty money" is obscuring how lenders and law enforcement can combat money launderers.

The Wolfsberg Group of banks has written to financial regulator FinCEN, recommending how the US's fight against financial crime can be updated and clarified.

FinCEN must now define an effective AML program that aligns "SAR regulations with national priorities," according to a group of 13 international banks.

Only by defining the AML regime's purpose will the US regain control of the financial crime battle, modernize its AML regime, and "make the regime more effective and efficient."

In a letter to the US Treasury Department, Wolfsberg CEO Alan Ketley writes, "Modernizing AML/CFT regulations in this way will enable FIs (financial institutions) to be more effective in detecting and deterring criminal activity, thereby helping to make our communities safer."

The Anti-Money Laundering Act of 2020 (the AML Act) and its requirement that national AML priorities be established, according to the Group, was a major leap toward a strategic approach to money laundering.

The banks now say the US government must make two major regulatory changes; to establish a definition for an effective anti-money laundering program, and align SAR regulations with national anti-money laundering priorities.

Defining an Effective AML/CTF Program:

The ultimate goals of the AML regime must be defined in order for it to be more effective and efficient. While having an AML program is required, the Bank Secrecy Act (BSA) and its implementing regulations do not specify what those programs should accomplish.

Supervisors tend to examine FIs almost exclusively on the basis of technical compliance rather than focusing on the practical element of whether AML/CFT programs are effective, based on performance against defined goals, when there are no defined AML program goals.

FinCEN took a step toward a definition in September 2020 with its Advanced Notice of Proposed Rulemaking, which establishes parameters that:

· Identifies, assesses, and reasonably mitigates the risks resulting from illicit financial activity

· Assures and monitors compliance with the recordkeeping and reporting requirements of the BSA

· Provides information with a high degree of usefulness to government authorities consistent with both the institution’s risk assessment and the risks communicated by relevant government authorities as national AML priorities.

Now, according to Wolfsberg, it's time to take a further step forward by adopting an effective definition.

Supervisors also should encourage banks and lenders to identify practices that are not required by law or regulation, do not result in the production of highly useful information for relevant government agencies, and/or provide little value to the FI in terms of financial crime risk management.

"Then following an appropriate risk-based evaluation and under appropriate governance, these practices could be stopped/scaled back, and resources employed more effectively and efficiently on areas that have increased value from a financial risk management perspective," it suggests.

The US Congress amended the BSA as part of the AML Act, stating that AML/CFT programs should be "risk-based, including ensuring that more attention and resources of financial institutions should be directed toward higher-risk customers and activities, consistent with the risk profile of a financial institution, rather than toward lower-risk customers and activities."

FinCEN, according to the banks, must re-examine the SAR regulations in order to achieve this risk-based approach.

"The current SAR requirements in the U.S. are very broad, do not prioritise any type of suspicious activity over another and do not provide a framework for FIs to focus on AML/CFT priorities. To cover the broad array of potentially suspicious activity, FIs spread their time and resources thinly across a wide spectrum rather than focusing on specific priorities that are applicable to their institution, " the group claims.

"While attempting to provide broad ‘coverage,’ in practice it means that FIs spend the majority of their time and resources reporting on frequently occurring, but relatively lower-risk activity without any apparent connection to the AML/CFT priorities (such as low dollar fraud or cash structuring when there is no apparent indication the cash was generated from criminal activity)," Wolfsberg says.

They want FinCEN to update SAR regulations so that banks can focus their attention and resources on higher-risk activities that are aligned with national priorities and granular enough for FIs to act on.

"The risk-based approach is not a zero-tolerance concept. Where an FI has reasonably focused on higher risk areas in line with its assessment of the threats it faces, an undetected weakness in a lower risk area is not by default an indication of program failure, but rather a natural extension of the implementation of a risk-based approach," the banks say.

It could mean that lenders are filing fewer SARs, or that certain reporting is done through automated feeds, which could be delivered to government agencies more quickly than it is now, rather than time-consuming human investigation.

According to the group, modernizing the SAR regulations will result in better quality, more useful information being sent to the government in the areas that matter the most, allowing banks to better manage their financial crime risk.

Additional Recommendations for Modernizing the US Anti-Money Laundering Regime

· Re-evaluation of the SAR form: The SAR form includes a number of boxes to check for various types of suspicious activity, but it does not cover all of the priority areas. It is unclear whether all of the data requested on the form is extremely useful to government agencies. FinCEN should re-evaluate all required information and either confirm or remove the requirement.

· Continuing Activity Reports (CARs): In cases where a CAR would be useful to law enforcement outside of the priority areas, law enforcement could contact lenders, who would then review the activity and file the CAR if necessary. More streamlined reporting or automation could improve the effectiveness and efficiency of such CAR filings (eg through an API).

· ‘No-SAR’ Documentation: Lenders may spend as much as twice as much time documenting a "no-SAR" decision as they do when a SAR is filled. This is due to examiners' and auditors' "expectations." FinCEN should make it clear that for each "no-SAR," a detailed description of the investigation and decision-making process is not required, and that a short, concise statement documenting its justification is sufficient.

· CTR Reporting and Aggregation: To determine whether the $10,000 threshold for reporting has been met, banks must review and aggregate cash transactions by or on behalf of the same person across accounts and business lines as part of the Currency Transaction Reporting (CTR) requirements. This aggregation requires a significant amount of time and resources. FinCEN should revisit its CTR regulations, according to Wolfsberg, in order to:

o allow cash transaction data to be sent directly to FinCEN in an automated fashion, eliminating the need to file a CTR in the way it is done today;

o eliminate the aggregation requirement. Providing the informationin this way would allow FinCEN to aggregate cash deposits across FIs. This more holistic view of the depositor’s activity is likely to be of higher value to FinCEN since sophisticated criminal organisations will often spread their cash deposits across multiple FIs.

· Government Feedback to Reporting: The government's response to SAR filing is limited. Greater feedback, particularly specific feedback on specific SARs to the filing FI, will allow FIs to focus on areas where machine learning and artificial intelligence are most useful, and better train their systems. FinCEN should take whatever steps it can under its regulations, guidance, or other authorities to strengthen the feedback loop by increasing the amount of information provided to FIs.

· Intelligence Sharing in Priority Areas: While establishing national AML priorities was a significant step forward, the priority areas are extremely broad. For example, a FI could not address all aspects of drug trafficking, which has been identified as a national priority. The government should make better use of existing intelligence sharing mechanisms (such as the FinCEN Exchange) and develop new ones to share actionable information on the most pressing threats in each priority area. Unfortunately, public advisories frequently provide information that is either too broad or too vague to be truly useful.

· PATRIOT Act’s 314(b): S.314(b) of the PATRIOT Act is one of the most effective regulations in the anti-money laundering regime. Lenders have been able to provide more actionable information as a result of the ability to share information between FIs, resulting in arrests, convictions, sanctions, and asset seizures. Government should look for ways to further incentivize FIs to participate in this type of impactful information sharing and collaboration as part of its effort to modernize the AML/CFT regime.

· Changes to the CDD Rule: To maximize effectiveness, the Group believes that changes to the CDD Rule's account-based triggers, the requirement to collect expected activity at account opening, and reconciling the CDD Rule's beneficial ownership requirements with the Corporate Transparency Act's requirements are required.



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