FAQ: Inside the Firing of Fincen's Director — And How it Affects Banks

WASHINGTON — Nothing intrigues this town more than a mystery, especially one with a potential whiff of scandal.

As soon as it became public two weeks ago that Jim Freis, the director of the Financial Crimes Enforcement Network, had been abruptly dismissed from his position — yet allowed to stay on until a successor was appointed — observers began questioning what was behind the sudden move.

But the inside story of what really happened — based on extensive interviews with a range of knowledgeable sources, most of whom would not speak on the record — is not a scandalous one. Instead, it reflects a fundamental disagreement between Treasury and Freis over the role Fincen plays and just how independent it should be. As Treasury seeks out a replacement, the consequences of its actions are likely to have significant ramifications for the banking industry and beyond.

American Banker offers the following frequently asked questions to try and understand what occurred — and why it matters.

Does "abruptly dismissed" really mean fired?
Yes. Unlike fully independent agencies at Treasury like the Office of the Comptroller of the Currency, the director of Fincen is appointed by the Treasury secretary, not the President, and can be dismissed at will. On May 17, Freis, who has been Fincen's longest serving director, informed staff that he had been asked to leave and that Treasury was actively seeking a replacement.

Whoa. That's pretty unusual, right?
Yes. Normally, officials dismissed in such a fashion claim they want to "spend more time with their families" or some other Washington cliché. Interestingly, Freis, who has served as director for five years, declined Treasury's offer to characterize his departure that way, making it clear there was more to the story.

So what happened?
Immediately following the dismissal, there were media reports that there was bad blood between David Cohen, the undersecretary of terrorism and financial intelligence, and Freis. Some also suggested Fincen was moving too slowly for Cohen's taste. But those reports largely miss the mark.

The issue wasn't Fincen's speed or personality conflicts, but more about control. To put it simply, Treasury wants more oversight of Fincen's activities, including additional focus on international areas such as terrorist financing. "Fincen ought to be better integrated and tethered to the policy issues that relate to money laundering, terrorist financing and economic sanctions on behalf of the U.S. government. It's not as well integrated as it should be," said a senior administration official who spoke on condition of anonymity.

Freis saw Fincen's role as more independent, and was primarily concerned with the agency's role in supporting law enforcement agencies as well as tackling other financial crimes such as mortgage fraud.

But isn't Fincen an independent agency?
Not completely. Unlike the banking regulators and many other government agencies, Fincen wasn't created by an act of Congress, but instead was established in 1990 by an order from the Treasury secretary. It gained more responsibilities during the next decade, but it only gained a statutory role with the passage of the USA Patriot Act in 2001, which made it an official bureau of Treasury. Even before then, there was often tension between Treasury and Fincen, with the latter typically viewing itself as more autonomous from main Treasury.

At least part of the problem here is physical. While Treasury sits in downtown Washington D.C., Fincen is parked in the suburbs near Vienna, Va. (Fincen is actually housed in what local residents refer to as the "toilet bowl" building for its unfortunate resemblance to the bathroom fixture.) As a result, Fincen isn't as involved in Treasury's day-to-day activities and inter-agency meetings with other departments. The agency, in other words, is off doing its own thing — and not necessarily the kinds of activities Treasury wants it to be doing.

Do we want Fincen to be fully independent?
That is the $64,000 question. Supporters of Fincen argue the agency is at its best when it's insulated from Treasury's political appointees. Some suggest that Treasury is more interested in headlines about cracking down on suspected terrorists than it is on its less flashy but potentially more important role as a collector of Bank Secrecy Act data for the FBI and other law enforcement agencies.

Some in Congress are also wary of Fincen being subject to more political influence. Late last year, Cohen led an attempt to remove some policy-making functions, like rule-writing, from Fincen and put it at Treasury, but was quietly stopped by lawmakers on Capitol Hill. The firing of Freis, then, could be seen as an attempt to accomplish the same goal through different means. Instead of formally removing the policy functions of Fincen, Treasury will select a new director that may share Cohen's view of Fincen and its priorities.

It's also worth noting that the U.S. has actively promoted the idea to foreign countries that financial intelligence units, or FIUs, should be fully independent. Fincen is the U.S. FIU.

Still, Treasury supporters argue that the department has always treated anti-money laundering and terrorist financing activities in an apolitical fashion. Stuart Levey, the first undersecretary of terrorism and financial intelligence, originally served under President Bush but was renominated by President Obama in 2009. They argue the departure of Freis is not designed to change that, but instead ensure Fincen is moving in concert with other arms of the government in a coordinated strategy.

"Fincen was sub-optimized and dis-intermediated from what the Treasury Department was trying to do," the senior administration official said. "David [Cohen] has showed leadership. He has a view of what Fincen can do that will help the broader national security effort. He's trying to do what he can to make sure that it can be useful and as effective as possible."

So who's going to replace Freis?
The leading candidate is William Langford, currently a senior vice president at JPMorgan Chase and its director of global anti-money laundering. Langford has an impressive resume and appears uniquely well-suited for the Fincen post. He previously worked at the agency between 2003 and 2006 as the associate director of regulatory policy and programs. Prior to that, he was the senior advisor to the Treasury general counsel. The combination of industry, Fincen and Treasury experience, as well as his lead role in helping to write several of the anti-money laundering regulations required by the Patriot Act, make him an attractive candidate.

What's all this mean for banks?
Fincen is likely to take a higher profile when it receives new leadership. In the immediate aftermath of the Sept. 11 attacks, Fincen was very active in dealing with bank regulatory matters, including helping to shape policy on anti-money laundering requirements. But the financial crisis largely pushed Fincen to the side and the agency focused on many of its other responsibilities. Treasury appears to want Fincen to take a larger role in terrorist financing activities and possibly reassert itself in the bank regulatory sphere. In past few years, banks have not had to focus on what Fincen's agenda was. A more assertive Fincen changes the equation.

How easy is that going to be?
Extremely challenging. One of the biggest issues here is that Fincen has a lot of items on its plate — and a declining budget. It had a $131 million budget for 2011, but saw that fall to $113 million in fiscal 2012 and $105 million requested for fiscal 2013. With roughly 300 employees, there's a limited amount the agency can actually accomplish.

"It's a hard job to manage Fincen with a small budget and big mandate," said Ann Jaedicke, a managing director at Promontory Financial Group, and a former anti-laundering official with the OCC. "Fincen was faced with the challenge of taking those precious resources and focusing on the things that are most important. I think different people can disagree on what's the most important area to focus on."