Thanks to my friend and financial crimes colleague Gina (Scialabba) Jurva of the Thomson Reuters Legal Executive Institute for the article. We did the interview and article back in November 2018 and it was recently published on LEI’s website. It’a available at:
http://www.legalexecutiveinstitute.com/public-private-partnerships-jim-richards/
The text of the article is reproduced below:
With an average of 55,000 new financial institution filings each day — known as Currency Transaction Reports (CTRs) and Suspicious Activity Reports (SARs) — the Financial Crimes Enforcement Network, (FinCEN) is busy. FinCEN, a bureau within the U.S. Department of the Treasury’s Office of Terrorism and Financial Intelligence (TFI), is the arm of our government charged with safeguarding the financial system from illicit use, combating money laundering, and promoting national security.
Those CTRs and SARs are filed by individual institutions acting alone and, for the most part, are the result of each institution monitoring its own customers’ cash and other transactions and reporting large cash transactions and suspicious transactions. But since the passage of the USA PATRIOT Act, a law enacted in response to the 9/11 terrorist attacks, there have been provisions to allow for the sharing of information between the government and financial institutions, and amongst financial institutions. These provisions – contained in section 314(a) and 314(b) of Patriot Act, authorize FinCEN to share law enforcement and regulatory information with financial institutions (FIs) on individuals, entities, and organizations reasonably suspected of engaging in terrorist financing or money laundering activities, and vice versa.
“The notion of information sharing was there before the PATRIOT Act, but no one had an appetite for it without any statutory protections,” said Jim Richards, Founder of RegTech Consulting, and former Bank Secrecy Act (BSA) Officer and Global Head of Financial Crimes at Well Fargo & Co.
Richards says this is an incredibly powerful tool that has been on the books for more than 15 years; and, when used properly, has provided valuable data to disrupt money laundering and terrorist financing. But, as with anything, Richards believes there are some improvements to be made. “There are ways we can utilize these tools to be more efficient and more effective for banks and law enforcement,” he said, adding that this includes combining parts of the law together in a smarter way.
Section 314 (a) and 314 (b): What’s the Difference?
But first, a crash course on sections 314(a) and 314(b).
- Section 314(a): Mandatory Information Sharing between Law Enforcement and Financial Institutions — This subsection deals specifically with information sharing between law enforcement via FinCEN and FIs. Law enforcement agencies investigating a crime related to terrorism or money laundering, via a FinCEN request, can ask FIs to search their records to determine whether they maintain or had maintained accounts for, or engaged in transactions with, any “individuals, entities, and organizations reasonably suspected of engaging in terrorist acts or money laundering activities.” Essentially, FinCEN is the gatekeeper for all information requests.
- Section 314(b): Voluntary Information Sharing Between FIs — Here, two or more FIs and any association of financial institutions (emphasis added, don’t worry, we will get back to that), may share information with one another “regarding individuals, entities, organizations, and countries suspected of possible terrorist or money laundering activities.” Simply put, this is an information-sharing mechanism to help disrupt financial fraud crimes by and among those FIs that elect to participate.
Keep in mind, Section 314(b) is a voluntary information-sharing tool; FIs are not required to register with FinCEN, nor share information.
Section 314(a) activities, however, are mandatory, and FIs must comply with FinCEN information requests. These information requests are limited in scope to terrorism activities (see 18 U.S.C. 2331) and money-laundering activity (see 18 U.S.C. 1956).
Powerful stuff, right? “Before the PATRIOT Act, we couldn’t do that,” Richards notes. Powerful, but not without its share of controversy.
Breaking Down a Section 314(b) Request
Let’s say Bank A and Bank B are registered with FinCEN under Section 314(b). Bank A is investigating an account owned by Jim for the purposes of filing a SAR. If Bank A sees that Jim has been sending money to Gina at Bank B, Bank A can request that Bank B provide transaction information.
Then Bank B can respond with “we aren’t telling you anything” or can say, “Gina has banked with us for 20 years, she owned a flower shop. We saw these transactions and have no concerns.”
The problem, Richards notes, is that because Section 314(b) information-sharing is not mandatory, it also creates more roadblocks. “If you have a certain time in which to file a SAR, and Bank B isn’t getting back to you, what do you do?” he said. “It creates a level of complexity that not many FIs want to deal with. Also, regulators are reluctant to criticize an FI for not participating in a voluntary program but can criticize a participating FI for any failures in doing so, so many FIs simply decide to save themselves from regulatory issues by not participating in an otherwise valuable program.”
Combining Sections 314(a) and 314(b): A New Approach to the PATRIOT Act
In Congressional testimony earlier this year, a witness testified that “of the roughly one million SARs filed annually by depository institutions (banks and credit unions), approximately half are filed by only four banks.” What if FinCEN and these four largest financial institutions worked together to share information? And what if they did that with tools already in the anti-money laundering (AML) toolbox?
Here’s how. Remember the language we emphasized above in Section 314(b)? Financial institutions and any association of financial institutions? An “association” can be a tremendously powerful tool when coupled with Section 314(a). Richards describes a scenario where these largest FIs get together to form an information sharing association under 314(b), which not only allows them to share certain information but provides legal protections when doing so, and then the association can work proactively with FinCEN and law enforcement to receive and send names of known targets under 314(a).
“I see this as the wave of the future,” Richards explained. “Otherwise, each individual FI is limited in what it can see and more importantly, what it can understand.” More importantly, he said, it allows FinCEN and FIs to take existing tools and use them “in a more efficient way to solve big problems like human trafficking, contraband smuggling, the opioid crisis, the fentanyl crisis, and other societal problems.”
“Information sharing associations shouldn’t be limited to the biggest FIs, although Greg Baer’s testimony about the largest four FIs, out of about 12,000 in the US, filing 60% of SARs illustrates how powerful such an association could be,” Richards noted. “This association approach, even with smaller institutions, allows law enforcement to target the worst offenders and allow those FIs to better identify those targets and share information between themselves and with the government. “I think it is really positive,” he added, “but it will only work if the regulatory agencies are fully on board and encourage FIs to participate. If there is no regulatory upside for financial institutions, even the best-intentioned of them will think twice before participating in what is otherwise the right thing to do for our communities and country.”