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The FinCEN Files Leak Reveals Need for Banks to Conduct More Enhanced Due Diligence

by Fizza Naqvi, JD

The FinCEN Files investigation, published by BuzzFeed News and the International Consortium of Investigative Journalists (the ICIJ), highlights trillions of dollars in suspicious financial activity carried out via global banks, including the most well-known and well-regarded financial institutions – JPMorgan Chase, HSBC, Barclays and Deutsche Bank.

The suspicious activity, identified in a leak of 2,100 suspicious activity reports (or SARs) filed with the Financial Crimes Enforcement Network (FinCEN), shows how global banks moved more than $2 trillion in suspicious payments over 18 years. This includes laundered money used by terrorist organizations, drug traffickers, rogue regimes and Russian oligarchs looking to evade sanctions.

Both BuzzFeed and the ICIJ have criticized the financial institutions for continuing to clear the transactions despite recognizing them as suspicious. Underlying this critique is a crisis of the U.S.’ anti-money laundering regime, which provides an ‘out’ for the financial institutions but leaves law enforcement without the means to pursue the bad actors.

There are a number of steps that banks can take to crack down on illicit money flows and avoid reputational risk, including conducting more enhanced due diligence on higher risk relationships.

Risk mitigation by financial institutions

In addition to filing SARs, financial institutions are coming under increased pressure to beef-up their internal anti-money laundering and risk mitigation procedures to weed out risky relationships. Banks’ Know Your Customer (“KYC”) policies are designed to identify risky accountholders, through increasingly complex risk identification models looking at a symphony of factors such as the operational activities and jurisdiction, source of wealth, political exposure, and reputation.

However, the KYC process is often frustrated by a lack of transparency around the beneficial ownership of corporate entities in certain jurisdictions. This is compounded by shadowy corporate entities’ and blacklisted individuals’ continued use of shell companies and proxy parties to obscure beneficial ownership. This opacity facilitates money laundering, fraud and sanctions evasion and allows dirty money to wash around the global financial system.

Enhanced due diligence

Gryphon supports banks’ efforts to identify compliance concerns relating to their potential and existing clients by carrying out due diligence investigations into their media profiles, litigation history, regulatory records, governmental filings, possible and/or known associate(s), and highlighting any risks associated with their operational jurisdiction.

However, more enhanced due diligence investigations become necessary and are increasingly a requirement, when counterparties have significant footprints in jurisdictions where public records are not readily available or reliable, the press is suppressed, and/or there is increased regulatory risk in the form of international sanctions.

In these instances, public records research does not go far enough and should be supplemented by discreet inquiries with trusted human sources well-placed to provide informed and reliable intelligence on the counterparties. This allows financial institutions to develop a line of sight into true beneficial ownership, source of wealth and political exposure of potential clients, to help them prevent illicit transactions, mitigate the risk of reputational damage by association and exposure to civil or criminal penalties.

A Need for Increased Transparency

The U.S. Senate Banking Committee, in a hearing on May 21, 2019, acknowledged that the U.S. is woefully behind the E.U. and U.K. on beneficial ownership and money laundering rules, and has introduced legislation that would force limited liability companies to reveal, annually, their true beneficial ownership.

Simultaneously, increased scrutiny from the press, public and regulators is placing a firm onus on international financial institutions to go further with their due diligence and step-up their contribution to the crackdown on global, illegal money flows through enhanced KYC.

For more information on Gryphon’s due diligence practice, please contact Matt Hays [email protected]


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