WASHINGTON - When James Freis takes the reins today as the third director of the Financial Crimes Enforcement Network in two years, he confronts a daunting set of obstacles.
The agency has 13 proposals pending, most dating back at least three years, a data collection system it admits is obsolete, and a plan - already being assailed by the banking industry - to require the reporting of international wire transfers.
And the agency has yet to come up with a way to stop banks from severing relationships with money-services businesses, or to convince skeptical financial institutions that their anti-laundering filings are useful.
"Jim faces challenges in restoring the morale of Fincen's work force after two short-term directors, pushing ahead its regulatory program, re-emphasizing its intelligence efforts, and restoring some of its credibility with other agencies," said Stephen Kroll, a former Fincen official and Democratic counsel for the Senate Banking Committee.
Previously Mr. Freis was the Treasury Department's deputy general counsel for enforcement and intelligence, providing legal support to the Office of Terrorism and Financial Intelligence, including supervising legal counsel at Fincen and the Office of Foreign Assets Control. Before joining Treasury, he was senior counsel at the Bank of International Settlements in Basel, Switzerland, and worked in the legal department at the Federal Reserve Bank of New York.
Observers said they are hopeful his experience will help Mr. Freis sort out his new employer's issues.
"What Fincen needs is someone who can walk the halls and identify the problems for himself and decide what needs to be done about them," Mr. Kroll said. "Jim's background gives every evidence to meet those challenges."
Mr. Freis is the sixth director in Fincen's 17-year history. He succeeds Robert Werner, who served briefly at Fincen (from March to December of last year), and William Fox, who served between December 2003 and February 2006.
The rapid turnover has left the agency with plenty of unfinished business. It has more than a dozen pending proposals, six of them implementing various requirements of the USA Patriot Act, which was passed in 2001. Among those are proposals to subject more industries to anti-money-laundering requirements, including real estate professionals and hedge funds.
Also on the docket is a proposal implementing Section 312 of the Patriot Act that would allow banks more flexibility to focus their anti-laundering scrutiny of correspondent bank accounts according to the amount of risk presented by a particular account.
On Jan. 4, 2006, Fincen released a final rule requiring heightened due diligence to certain foreign accounts in countries with lax anti-laundering rules, but it also released a proposal to allow more risk-based procedures for correspondent accounts with certain categories of foreign banks. The proposal has not yet been finalized. Stephen Hudak, a spokesman for Fincen, said he expected it to be completed soon.
Also left unresolved were efforts to stop banks from dropping money-services businesses as customers. Policymakers first warned of the matter in 2004, and regulators issued guidance a year later designed to stem the cutoff. But the guidance, which said banks must ensure MSBs are registered with Fincen and analyze their risk of money laundering, backfired, causing more institutions to drop such businesses.
Fincen released an advance notice of proposed rulemaking last year asking for help in solving the problem, but has since taken no action.
Bankers argue Fincen has taken far too long to act.
"We're looking for a shorter, simpler process that doesn't put banks in the position of regulating MSBs," said Richard Riese, director of the American Bankers Association's center for regulatory compliance.
Bankers are also frustrated by Fincen's plan to collect more data from financial institutions. In January, Fincen said it was moving forward with a plan to require certain institutions to report all international wire transfers to the government. The agency said it would need at least three years to implement the reporting process and any final action was conditional on the conclusions of additional research, including a cost-benefit analysis (The agency must also secure additional funding to implement the plan.)
Despite Fincen's decision to limit the reporting requirement to "gatekeeper" banks that directly transfer or receive money from abroad, industry representatives remain staunchly opposed.
"We have urged Treasury to not go forward," Mr. Riese said. "This is not the time to start something new. If they are putting more and more policy balls in the air, they will never make progress."
The ABA also argues Fincen lacks the capacity to store any new data. Indeed, the agency has acknowledged problems with its current systems. In July it announced it was pulling the plug on its BSA Direct program, which was designed to help analyze data from the millions of anti-laundering filings banks make each year, after spending more than $14 million on the project. The agency reverted to its previous system housed and operated by the Internal Revenue Service - a system that three years ago Fincen called inadequate.
Fincen officials say they are working on the problem. Since July it has hired a new chief information officer and established a project management office. "The new CIO has been digging deep to assess the technical capabilities," Mr. Hudak said.
Observers said building a new and better system is critical to Fincen's future.
"It has to have some program that can exploit the data," said Peter Djinis, a lawyer in Sarasota, Fla., and a former Fincen official. "Its ability to retrieve data has not kept up with today's technology."
A better system may also help persuade banks that the millions of suspicious activity reports and currency transaction reports filed each year are of value to law enforcement agencies. Fincen talked for years about establishing a feedback mechanism to let banks know how their data has been used, but aside from a twice-yearly report on SAR activity, little has been done.
"Financial institutions are sick and tired of providing … [data] to the government and not getting anything in return," said David Caruso, the chief executive officer and managing director of Dominion Advisory Group LLC, an anti-laundering consulting firm in Centreville, Va. "Fincen needs to provide a level of confidence that they can take the information they have and extract data and if can prove that, the industry will be more willing to provide more information later."
Greg Baldwin, partner at Holland & Knight LLP, said Mr. Freis should examine the agency's priorities and problems. "Someone needs to take a fresh look at what Treasury and Fincen have been doing," he said.
