Regulators Laud Bank Improvements in AML (Seriously)

WASHINGTON — The Treasury Department gave financial institutions a rare pat on the back in a recent analysis of anti-money-laundering safeguards, saying the system has significantly improved.

The two-part assessment, which totaled nearly 200 pages, was the first such undertaking in a decade, examining criminal and terrorist activities as well as vulnerabilities and risks. Though the Treasury saw room for enhancement, the National Money Laundering Risk Assessment sounded upbeat in its conclusion.

"Our anti-money-laundering and countering the financing of terrorism framework is sophisticated and well designed to address these threats, while maintaining an attractive business environment," Adam Szubin, acting undersecretary for terrorism and financial intelligence, writes in the beginning of the June 12 report.

The report said that the U.S. "has developed a robust regulatory framework, complemented by law enforcement and supervision efforts, which make it more difficult and costly for criminals and terrorists to access and use the U.S. financial system."

That was a marked contrast to the 2005 assessment, which declared "the overall picture is both sobering and promising."

David Schwartz, executive director at the Florida International Bankers Association, noticed the change.

"There was this recognition of citing cases of how complex and how difficult it is," he said.

The review's conclusions are far from academic, and may influence a pending evaluation by the Financial Action Task Force, an international intergovernmental anti-money-laundering organization that makes policy recommendations to member countries.

The risk assessment "will be a key document that Treasury provides the FATF mutual evaluators during the evaluation that is coming up in early 2016," said John Wagner, a managing director in the anti-money-laundering and sanctions consulting practice at Deloitte.

Industry representatives also praised the Treasury's report because it is rich with examples and cases of money laundering, as well as explanations of criminal and terrorist organizations.

"As you go through it, I think it is pretty valuable to learn about the cases … there is a lot of good grist for the training mill," said John Byrne, executive vice president at the Association of Certified Anti-Money Laundering Specialists. "It is always productive when the private sector gets a pretty detailed view, in this case of vulnerabilities and risks and cases."

The report found that the U.S. "has effectively kept pace with innovation," forcing criminals to design and implement costly schemes to avoid detection and enforcement. Those are primarily using cash, other monetary instruments, shell companies and "conducting transactions below customer identification thresholds," the report found.

By and large, the report found the same vulnerabilities as it did a decade ago, including customers who use "nominees" to disguise the identity of who controls an account, the creation of legal entities without accurate information about the identity of the beneficial owner, and misuse of products and services that succeed due to deficient compliance with anti-money-laundering obligations.

Fraud was found to be the most prevalent crime that contributed to money laundering, and while the report found that most banks were in compliance, it said one of the most vulnerable areas of the financial system is if a financial institution willfully assists bad actors or individuals inside the institution.

"It highlights what the U.S. government believes to be the most significant money laundering risks that exist today," said H. David Kotz, a managing director at Berkeley Research Group.

He added that while there were the "usual concerns," such as fraud and drug trafficking, the report "also cites cash transactions as the most vulnerable area, which is noteworthy."

Edward Wilson, a partner at Venable, also noticed the focus on cash transactions. Regulators, he said, are "looking at banks to be better about cash deposits and particularly at oversight of correspondent banking relations."

But he agreed that the largest threat comes from fraud, which "dwarfs other illicit proceeds-generating crimes," according to the report. Health care fraud alone accounted $80 billion in losses to the federal government annually.

"Getting that money out of the system requires a higher level of sophistication in knowing a bank's customers, what their normal banking practices look like, spotting red flags quickly and stopping illicit transfers," Wilson said.

Lee Kurman, managing director at Exiger, a risk and compliance consultancy, said he was struck by the report's "heightened focus on trade-based money laundering — and that is relatively recent."

"There is a turn to that as opposed to other types of money laundering that have been subject to increasing controls or other regulatory focus over the past five or 10 years," he said.

Some also noted a difference in the assessments for anti-money-laundering versus terrorist financing, which were broken out separately in the Treasury's report.

"The terrorist finance risk assessment document paints a dark picture about money laundering and points to issues both in the banking system and in the charitable organization system that need to be studied and improved upon to protect legitimate charities and financial institutions," Wilson said.

Deloitte's Wagner said financial institutions could take some comfort in the relatively good assessment in the report. But he noted that regulators warn that if just one institution lacks the right safeguards it could do serious damage to the system.

"They note there are very few instances of noncompliance," he said. "But there are concerns that even one institution or a few institutions that have noncompliance could result in substantial criminal activity flowing through the financial sector."