An Interpretative View of Pertinent Legislation
1970 — Bank Secrecy Act. The US Government (USG) requires banks to report cash transactions over $10,000; identify conductors; and maintain records. The purpose of this was to aid the USG in identifying the source, volume, and movement of currency by potential targets or networks of interest (mainly those that may be tied to the War on Drugs).
1986 — Money Laundering Control Act. The USG criminalizes money laundering and introduces both civil and criminal consequences to violations of the Bank Secrecy Act. The purpose of this was to further formalize the obligation of banks to aid the USG.
1988 — Anti-Drug Abuse Act. The USG expands the onerous to car dealers and real estate closing personnel to report cash transactions. The purpose of this was directly tied to where money launderers were moving cash to conceal the illicit origin.
1992 — Annunzio-Wylie AML Act. The USG establishes the Bank Secrecy Act Advisory Group (BSAAG); replaces the Criminal Referral Form with the Suspicious Activity Report (SAR); and requires more records on wire transfers. The purpose of this was to expand the regime and with that came ambiguity — so let’s call this the precursor to the conflict model that will be discussed later in this article.
1994 — Money Laundering Suppression Act. The USG formalizes the requirements of regulatory supervision through examination(s). The expansion of the regime moves to Money Services Businesses (MSBs). Operating an unregistered MSB is federally criminalized and states are now urged to adopt uniform laws for MSBs. The purpose of this was to bring transparency around financial flows occurring outside the traditional US financial system. The supervision was the critical injection of a third party into a two-party objective (industry providing information to law enforcement).
1998 — Money Laundering and Financial Crimes Strategy Act. The USG aims at a more robust national level strategy to be developed by the Treasury; creates High Intensity Financial Crime Area (HIFCA) Task Forces for coordinated federal, state, and local law enforcement activities; and requires banking agencies to develop AML training for examiners. After 28 years of learning that finance is the lifeblood of most criminal organizations, the USG taps the Treasury to address the national security issue.
2001 — USA PATRIOT Act. The USG criminalizes the financing of terrorism and essentially lays out the most complex requirements for industry to aid the USG in the War on Terror. In response to the 9/11 attacks, the purpose here was to mobilize and compel an industry sitting on a treasure trove of intelligence to act more prudently in its corporate citizenry.
2004 — Intelligence Reform & Terrorism Prevention Act of 2004. The USG amends the Bank Secrecy Act to require banks to report cross-border electronic transmittals of funds. The purpose here was to look into the financial flows of terrorist funding and terrorist financing.
If you’ve read this far — you should’ve identified the key inflection points of the walk through pertinent legislative history. The following aspects of this article will string together why those inflection points have driven the U.S. AML Regime into a perfect conflict model.
What is a conflict model?
Conflict models are often the result of conflict perspective. When individuals or entities interact in an effort to cooperate fundamental alignments must be forged in order to produce desired outcomes. However, when alignments are off, friction or natural conflict ensues. We are familiar with this theory throughout many aspects of society and systems.
When we look at the U.S. AML Regime we see two primary players (the USG and industry). Within the public sector we see an array of interested entities (law enforcement, intelligence, law, rule, and policymakers, and regulators). Within the private sector we see predominately regulated financial firms and within those firms we must consider shareholders or the board that represents them, management, risk and compliance professionals, and customers as the interested entities. One additional layer to the private sector includes special interest groups and lobbyists.
Conflict #1 — Too many interested entities.
This origin of conflict is purely based on the amount of people that must come together to achieve a well organized and optimized regime aimed at combatting financial crime.
Conflict #2 — Finding a common view of the objective.
This should be easier to align amongst the various elements of the USG. However, while Treasury takes the lead on a national strategy and incorporates the national level policy view point it often seems disconnected with the operational components spread across the law enforcement, intelligence, and defense communities. Sprinkle in the regulators — who only have authorities as applied to supervision are naturally misaligned based on their inward focus alone.
The private sector is not much cleaner. Shareholders do not hold interest in banks to fight a war on drugs or terror (that’s a government’s job). Shareholders focus is rightfully on profits. The focus of boards and management must be aligned with shareholder expectations. However, corporate citizenry and responsibility can take shape within the margins in a very meaningful way. Alignment here is most often made difficult by the injection of a third party (the regulators).
Common views are often blurred by narratives that promulgate at conferences and through other mediums. This effect is known as the basis of existence — a theory in which many of the entities feel that conflict is the only means of survival. Needless to say a view point that is so far disconnected from a cooperative aimed at a singular outcome.
Conflict #3 — The rise of the regulator.
Most people in this space would say that everything that is being done is being done for one reason — appeasement of the regulators. This brings us back to those very critical inflection points in the legislative history. What began as a very objective information flow between two parties (if X happens, do Y) has evolved into a very subjective multi-pronged mechanism that grows further away from that flow. In the case of the regulator and their rise — you have to consider how bad policies have driven overly complicated rule requirements; bizarre examination procedures; and a carrot/stick (minus the carrot) relationship between a third party and the burdened industry elements.
Enforcement actions taken by regulators (the aforementioned stick) are most often too late to make any significant disruption to the actual criminal conduct (if there even was such conduct within the institution). The actions further result in solidifying the underlying belief throughout industry that what they’re doing (to the tune of 10s, if not 100s of millions of dollars in cost) is appeasing their regulator. Much more could be addressed here, but the general point should resonate on this conflict.
Conflict #4 — Information sharing falls short to make a difference.
Information holds value. In many instances lack of trust or red tape can block or significantly lag information sharing. Speculation and uncertainty can result in distrust and often results in poor outcomes. The regulators also play a role in disrupting good information sharing. The perception of regulatory risk often prevents management from being fully transparent with law enforcement partners without their regulator’s blessing.
Information sharing is a trending topic and much more can be said about this conflict perspective.
Conflict #5 — Domain isolation misses the big picture completely.
90% of the people that operate within specific “domains” of this regime only comprehend or care to understand the procedural aspects of their domain. It is a monumental challenge to get policymakers to view the landscape as operators do; for regulators to view the landscape as industry does; and so on. Domain isolation may be the top risk to the further disjoining of the U.S. AML Regime. Pressure (mainly from regulators on industry) is the predominate cause of domain isolation persistence.
stay tuned for Part Two…