Chinese Money Brokers – The First US Case Involving An Identified Threat to the US Financial System?

February 6, 2020 – US Warns of Chinese Money Brokers Integrating Illicit Cash Proceeds through Trade Based Money Laundering, or TBML

On February 6, 2020, the Treasury Department released its 2020 National Strategy for Combating Terrorist and Other Illicit Financing. 2020 National Strategy. Among other threats to the US financial system were Chinese money laundering networks, or money brokers, described at pages 24 and 25 of the Strategy …

U.S. law enforcement has seen an increase in complex schemes to launder proceeds from the sale of illegal narcotics in the United States by facilitating the exchange of cash proceeds from Mexican drug trafficking organizations to Chinese citizens residing in the United States. These money laundering schemes, run by Professional Money Laundering Networks, or PMLNs, are designed to sidestep two separate obstacles: Drug Trafficking Organizations’ (DTOs’) inability to repatriate drug proceeds into the Mexican banking system due to dollar deposit restrictions imposed by Mexico in 2010 [of $4,000 a month per individual and $1,500 a month for U.S. currency exchanges by non-accountholders] and Chinese capital flight law restrictions on Chinese citizens located in the United States that prevent them from transferring the equivalent of US$50,000 held in Chinese bank accounts for use abroad. Chinese money laundering networks facilitate the transfer of cash between these two groups.

As described in the graphic from the Strategy [below], a variety of Chinese money brokers, processors and money couriers facilitate these PMLNs. Brokers in Mexico coordinate with DTOs in order for the DTOs to receive pesos in exchange for drug profits earned in the United States. The DTO instructs a courier in the United States to provide U.S. currency to the broker’s U.S. processor. The processor then launders the cash and identifies U.S.-based buyers. In exchange for U.S. currency, the buyer will transfer renminbi (RMB) through their Chinese bank account to a Chinese account controlled by the money broker. The broker then uses the RMB to buy commodities from a Chinese manufacturer for export to Mexico. Once the goods arrive in Mexico, the broker or the DTO completes the cycle by selling the goods locally for pesos.”


February 3, 2020 – Owners of Underground, International Financial Institutions Plead Guilty to Operating Unlicensed Money Transmitting Business

The First Chinese Money Broker Prosecution? On February 3, 2020 – three days before the 2020 National Strategy was released, the US Attorney for the Southern District of California issued a press release that announced that Bing Han and Lei Zhang pleaded guilty in federal court for operating unlicensed money transmitting businesses. The US Attorney noted that the guilty pleas “are believed to be the first in the United States for a developing form of unlawful underground financial institution that transfers money between the United States and China, thereby circumventing domestic and foreign laws regarding monetary transfers and reporting, including United States anti-money laundering scrutiny and Chinese capital flight controls.”

The press release described the scheme as admitted in the plea agreements (which are not available online) as follows:

“Han and Zhang would collect U.S. dollars (in cash) from various third-parties in the United States and deliver that cash to a customer, typically a gambler from China who could not readily access cash in the United States due to capital controls that limit the amount of Chinese yuan an individual can convert to foreign currency at $50,000 per year. Upon receipt of the U.S. dollars, the customer (i.e., the gambler) would transfer the equivalent value of yuan (using banking apps on their cell phones in the United States) from the customer’s Chinese bank account to a Chinese bank account designated by defendant Han or Zhang. For facilitating these transactions, Zhang and Han were paid a commission based on the monetary value illegally transferred … Han and Zhang further admitted that they were regularly introduced to customers by casino hosts, who sought to increase the gambling play of the casino’s customers. By connecting cash-starved gamblers in the United States with illicit money transmitting businesses, like those operated by Han and Zhang, the casinos increased the domestic cash play of their China-based customers. All a gambler needed was a mobile device that had remote access a China-based bank account. As a result, Han and Zhang managed to transmit and convert electronic funds in China into hard currency in the United States; all while circumventing the obstacles imposed both by China’s capital controls, and the anti-money laundering scrutiny imposed on all United States financial institutions. For their efforts, the casino hosts often received a cut of Han’s or Zhang’s commission.”

This sounds very similar to what was described in the 2020 National Strategy document. AML professionals should put a reminder in their calendars for the sentencing hearings of Han and Zhang in order to learn more about these “Chinese Money Broker” crimes that pose a threat to the US financial system.

US v. Bing Han, SD CA Case 20CR00369 is scheduled for sentencing on May 1, 2020.

US v. Lei Zhang, SD CA Case 20CR00370 is scheduled for sentencing on May 4, 2020.

A Bank’s Bid for Innovative AML Solutions: Innovation Remains A Perilous Endeavor

One Bank Asked the OCC to Have an “Agile Approach to Supervisory Oversight”

On September 27, 2019 the OCC published an Interpretive Letter answering an unknown bank’s request to make some innovative changes to how it files cash structuring SARs. Tacked onto its three technical questions was a request by the bank to do this innovation along with the OCC itself through something the bank called an “agile approach to supervisory oversight.” After qualified “yes” answers to the three technical questions, the OCC’s Senior Deputy Comptroller and Chief Counsel indicated that the OCC was open to “an agile and transparent supervisory approach while the Bank is building this automated solution” but he didn’t actually write that the OCC would, in fact, adopt an agile approach. This decision provides some insight, and perhaps the first public test, of (i) the regulators’ December 2018 statement on using innovative efforts to fight money laundering, and (ii) the OCC’s April 2019 proposal around innovation pilot programs. Whether the OCC passed the test is open to discussion: what appears settled, though, is that AML innovation in the regulated financial sector remains a perilous endeavor.

Regulators’ December 2018 Joint Statement on Innovative AML Efforts

On December 3, 2018 the five main US Bank Secrecy Act (BSA) regulators issued a joint statement titled “Innovative Efforts to Combat Money Laundering and Terrorist Financing”.[1] The intent of the statement was to encourage banks to use modern-era technologies to bolster their BSA/AML compliance programs. The agencies asked banks “to consider, evaluate, and, where appropriate, responsibly implement innovative approaches to meet their Bank Secrecy Act/anti-money laundering (BSA/AML) compliance obligations, in order to further strengthen the financial system against illicit financial activity” and “[t]he Agencies recognize[d] that private sector innovation, including new ways of using existing tools or adopting new technologies, can help banks” to do so.

The statement was a very positive step to encourage private sector innovation in fighting financial crime by testing new ways of using existing tools as well as adopting new technologies.

But it wasn’t the “green light to innovate” that some people have said it is. There was some language in the statement that made it, at best, a cautionary yellow light. And the September 27th OCC letter seems to clarify that banks can innovate, but the usual regulatory oversight and potential sanctions still apply.

The Agencies’ December 2018 statement included five things that bear repeating:

  1. “The Agencies recognize that private sector innovation, including new ways of using existing tools or adopting new technologies, can help banks identify and report money laundering, terrorist financing, and other illicit financial activity by enhancing the effectiveness and efficiency of banks’ BSA/AML compliance programs. To assist banks in this effort, the Agencies are committed to continued engagement with the private sector and other interested parties.”
  2. “The Agencies will not penalize or criticize banks that maintain effective BSA/AML compliance programs commensurate with their risk profiles but choose not to pursue innovative approaches.”
  3. “While banks are expected to maintain effective BSA/AML compliance programs, the Agencies will not advocate a particular method or technology for banks to comply with BSA/AML requirements.”
  4. Where test or implemented “artificial intelligence-based transaction monitoring systems … identify suspicious activity that would not otherwise have been identified under existing processes, the Agencies will assess the adequacy of banks’ existing suspicious activity monitoring processes independent of the results of the pilot program”
  5. “… the implementation of innovative approaches in banks’ BSA/AML compliance programs will not result in additional regulatory expectations.”

Note the strong, unqualified language: “the Agencies are committed to continued engagement”, “the Agencies will not penalize or criticize”, “the Agencies will not advocate …”, “the Agencies will assess”, and “the implementation of innovative approaches will not result in additional regulatory expectations”.

The qualified “assurances” come in the paragraph about pilot programs (with emphasis added):

“Pilot programs undertaken by banks, in conjunction with existing BSA/AML processes, are an important means of testing and validating the effectiveness of innovative approaches.  While the Agencies may provide feedback, pilot programs in and of themselves should not subject banks to supervisory criticism even if the pilot programs ultimately prove unsuccessful.  Likewise, pilot programs that expose gaps in a BSA/AML compliance program will not necessarily result in supervisory action with respect to that program.  For example, when banks test or implement artificial intelligence-based transaction monitoring systems and identify suspicious activity that would not otherwise have been identified under existing processes, the Agencies will not automatically assume that the banks’ existing processes are deficient.  In these instances, the Agencies will assess the adequacy of banks’ existing suspicious activity monitoring processes independent of the results of the pilot program.  Further, the implementation of innovative approaches in banks’ BSA/AML compliance programs will not result in additional regulatory expectations.”

Here there are the qualified assurances (a qualified assurance is not an assurance, by the way): “should not” is different than “will not”; “will not necessarily” is very different than “will not”; and “not automatically assume” isn’t the same as “not assume”.  These are important distinctions. The agencies could have written something very different:

“… pilot programs in and of themselves will not subject banks to supervisory criticism even if the pilot programs ultimately prove unsuccessful.  Likewise, pilot programs that expose gaps in a BSA/AML compliance program will not result in supervisory action with respect to that program.  For example, when banks test or implement artificial intelligence-based transaction monitoring systems and identify suspicious activity that would not otherwise have been identified under existing processes, the Agencies will not assume that the banks’ existing processes are deficient …”

The OCC’s April 2019 Innovation Pilot Program

On April 30, 2019 the OCC sought public comment on its proposed Innovation Pilot Program, a voluntary program designed to provide fintech providers and financial institutions “with regulatory input early in the testing of innovative activities that could present significant opportunities or benefits to consumers, businesses, financial institutions, and communities.” See OCC Innovation Pilot Program. As the OCC has written, the Innovation Pilot Program clearly notes that the agency would not provide “statutory or regulatory waivers and does not absolve entities participating in the program from complying with applicable laws and regulations.”

Twenty comments were posted to the OCC’s website. A number of them included comments that innovators needed some formalized regulatory forbearance in order to be able encourage them to innovate. The Bank Policy Institute’s letter (BPI Comment), submitted by Greg Baer (a long-standing and articulate proponent of reasonable and responsible regulation), provided that:

“… the OCC should clarify publicly that a bank is not required to seek the review and approval of its examination team prior to developing or implementing a new product, process, or service; that unsuccessful pilots will not warrant an MRA or other sanction unless they constitute and unsafe and unsound practice or a violation of law; and that innovations undertaken without seeking prior OCC approval will not be subject to stricter scrutiny or a ‘strict liability’ regime. We also recommend that the OCC revisit and clarify all existing guidance on innovation to reduce the current uncertainty regarding the development of products, processes and services; outdated or unnecessary supervisory expectations should be rescinded.”

The American Bankers Association comment ABA Comment also asks for similar guidance:

“For institutions to participate confidently in a pilot, there must be internal agreement that OCC supervision and enforcement will not pursue punitive actions. In other words, the program should produce decisions that have the full support of the OCC and bind the agency to those conclusions going forward … One way for the OCC to accomplish this is to clarify that a participating bank will not be assigned Matters Requiring Attention (MRAs) if it acts in good faith as part of a Pilot Program. The nature of technological innovation means that banks must try new things, experiment, and sometimes make mistakes. The Pilot Program has been designed as a short-term limited-scale test to ensure that any mistakes made are unlikely to have an impact on the safety and soundness of an institution. Clarifying that MRAs will not be issued for mistakes made in good faith may help give banks the certainty they need to participate in a Pilot Program.”

And the Securities Industry and Financial Markets Association (SIFMA) comment letter SIFMA Comment Letter included the following:

“Relief from strict regulatory compliance is a vital prerequisite to draw firms into the test environment, precisely so that those areas of noncompliance may be identified and remediated and avoid harm to the consumers. Without offering this regulatory relief, the regulatory uncertainty associated with participating in the Pilot Program could, by itself, deter banks from participating. Similarly, the lack of meaningful regulatory relief could limit the opportunity the program provides for firms to experiment and innovate.”

So where did that leave banks that were thinking of innovative approaches to AML?  For those that choose not to pursue innovative pilot programs, it is clear that they will not be penalized or criticized, but for those that try innovative pilot programs that ultimately expose gaps in their BSA/AML compliance program, the agencies will not automatically assume that the banks’ existing processes are deficient. In response to this choice – do not innovate and not be penalized, or innovate and risk being penalized – many banks have chosen the former. As a result, advocates for those banks – the BPI and ABA, for example – have asked the OCC to clarify that it will not pursue punitive actions against banks that unsuccessfully innovate.

How has the OCC replied? It hasn’t yet finalized its Innovation Program, but it has responded to a bank’s request for guidance on some innovative approaches to monitoring for, alerting on, and filing suspicious activity reports on activity and customers that are structuring cash transactions.

A Bank’s Request to Have the OCC Help It Innovate

The OCC published an Interpretive Letter on September 27, 2019 that sheds some light on how it looks at its commitments under the December 2018 innovation statement.[2]  According to the Interpretive Letter, on February 22, 2019 an OCC-regulated bank submitted a request to streamline SARs for potential structuring activity (the Bank also sought the same or a similar ruling from FinCEN: as of this writing, FinCEN has not published a ruling). The bank asked three questions (and the OCC responded):

  1. Whether the Bank could file a structuring SAR based solely on an alert, without performing a manual investigation, and if so, under what circumstances (yes, but with some significant limitations);
  2. Whether the proposed automated generation of SAR narratives for structuring SARs was consistent with the OCC’s SAR regulations (yes, but with some significant limitations);
  3. Whether the proposed automation of SAR filings was consistent with the OCC’s BSA program regulations (yes, but with some significant limitations).

The most interesting request by the Bank, though, was its request that the OCC take an “agile approach to supervisory oversight” for the bank’s “regulatory sandbox” initiative. Pages 6 and 7 of the OCC letter provide the particulars of this request. There, the OCC writes:

“Your letter also requested regulatory relief to conduct this initiative within a “regulatory sandbox.” Your regulatory sandbox request states ‘This relief would be in the form of an agile approach to supervisory oversight, which would include the OCC’s full access, evaluation, and participation in the initiative development, but would not include regulatory outcomes such as matters requiring attention, violations of law or financial penalties. [The Bank] welcomes the OCC to consider ways to participate in reviewing the initiative outcomes outside of its standard examination processes to ensure effectiveness and provide feedback about the initiative development.’”

NOTE: I had to read the key sentence a few times to settle on its intent and meaning. That sentence is “This relief would be in the form of an agile approach to supervisory oversight, which would include the OCC’s full access, evaluation, and participation in the initiative development, but would not include regulatory outcomes such as matters requiring attention, violations of law or financial penalties.”

Was the bank saying the relief sought was an agile approach to supervisory oversight that included the OCC’s full participation in the process and no adverse regulatory outcomes? Or was the bank saying the relief sought was an agile approach to supervisory oversight that included the OCC’s full participation in the process, but did not include anything to do with adverse regulatory outcomes?

I settled on the latter meaning: that the bank was seeking the OCC’s full participation, but did not expect any regulatory forbearance.

The OCC first reiterated its position from the December 2018 joint statement by writing that it “supports responsible innovation in the national banking system that enhances the safety and soundness of the federal banking system, including responsibly implemented innovative approaches to meeting the compliance obligations under the Bank Secrecy Act.” It then wrote that it “is also open to an agile and transparent supervisory approach while the Bank is building this automated solution for filing Structuring SARs and conducting user acceptance testing.” This language is a bit different than what the OCC wrote at the top of page 2 of the letter: “the OCC is open to engaging in regular discussions between the Bank and appropriate OCC personnel, including providing proactive and
timely feedback relating to this automation proposal.”

Notably, the OCC wrote that it is “open to an agile and transparent supervisory approach”, and “open to engaging in regular discussions between the Bank and appropriate OCC personnel”, but being open to something doesn’t mean you approve of it or agree to it. In fact, the OCC didn’t appear to grant the bank’s request. In the penultimate sentence the OCC wrote: “The OCC will monitor any such changes through its ordinary supervisory processes.”

How About Forbearance to Innovate Without Fear of Regulatory Sanctions?

As set out above, in June 2019 the BPI and ABA (and eighteen others) commented on the OCC’s proposal for an innovation pilot program. The BPI commented that “the OCC should clarify publicly that … unsuccessful pilots will not warrant an MRA or other sanction unless they constitute and unsafe and unsound practice or a violation of law”, and the ABA commented that the OCC should “clarify that a participating bank will not be assigned Matters Requiring Attention (MRAs) if it acts in good faith as part of a Pilot Program”.

The OCC seems to have obliquely responded to both of those comments. In its September 2019 Interpretative Letter, the OCC took the time to write that it “will not approve a regulatory sandbox that includes forbearance on regulatory issues for the Bank’s initiative for the automation of Structuring SAR filings.” Note that the OCC made this statement even though the bank appears to have specifically indicated that the requested relief did not include forbearance from “regulatory outcomes such as matters requiring attention, violations of law or financial penalties”. And the OCC letter includes a reference to both the Interagency statement on responsible innovation and the OCC’s April 2019 Innovation Pilot Program (see footnote 25 on page 7): “banks must continue to meet their BSA/AML compliance obligations, as well as ensure the ongoing safety and soundness of the bank, when developing pilot programs and other innovative approaches.”

So although the OCC hasn’t formally responded to the comments to its June 2019 innovation program to allow banks to innovate without fear of regulatory sanction if that innovation doesn’t go well, it has made it clearer that a bank still has the choice to not innovate and not be penalized, or to innovate and risk being penalized.

(In fairness, in its Spring 2019 Semiannual Risk Perspective Report, the OCC noted that a bank’s inability to innovate is “a source of significant strategic risk.” See OCC Semiannual Risk Perspective, 2019-49 (May 20, 2019)).

Timely Feedback – Is Seven Months Timely?

As set out above, the OCC wrote that it “is open to engaging in regular discussions between the Bank and appropriate OCC personnel, including providing proactive and timely feedback …”.  The bank’s request was submitted on February 22, 2019. The OCC’s feedback was sent on September 27, 2019. So it took the OCC seven months to respond to the bank’s request for an interpretive letter. In this age of high-speed fintech disruption, seven months should not be considered “timely.” What would be timely? I would aim for 90 days.


This unnamed OCC-regulated bank appears to have a flashing green or cautionary yellow light from the OCC to deploy some technology and process enhancements to streamline a small percentage if its SAR monitoring, alerting, and filing.  The OCC will remain vigilant, however, warning the bank that it “must ensure that it has developed and deployed appropriate risk governance to enable the bank to identify, measure, monitor, and control for the risks associated with the automated process. The bank also has a continuing obligation to employ appropriate oversight of the automated process.”

So the message to the 1,700 or so OCC banks appears to be this: there’s no peril in not innovating, but if you decide to innovate, do so at your peril.

[1] The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Financial Crimes Enforcement Network (FinCEN), the National Credit Union Administration, and the Office of the Comptroller of the Currency. The statement is available at https://www.occ.gov/news-issuances/news-releases/2018/nr-occ-2018-130a.pdf

[2] https://www.occ.gov/topics/charters-and-licensing/interpretations-and-actions/2019/int1166.pdf

The Current BSA/AML Regime is a Classic Fixer-Upper … and Here’s Seven Things to Fix

A 1970 Holden “Belmont” … built the same year as the first BSA-related Act was passed in the United States: the Currency and Foreign Transactions Reporting Act, PL 91-508

There is a lot of media attention around the need for a new way to tackle financial crimes risk management. Apparently the current regime is “broken” (I disagree) or in desperate need of repair (what government-run programs are not in some sort of state of disrepair?), or, at the very least, not particularly effective nor efficient. And there are a lot of suggestions from the private and public sectors on how to make the regime more effective and more efficient.  I’ll offer seven things to consider as we all work towards renovating our BSA/AML regime, to take it from its tired, dated (the last legislative change to the three statutes we call the Bank Secrecy Act was made in 2004) state to something that provides a more balanced, effective, and efficient regime.

I. Transaction Monitoring Systems

Apparently, current customer- and account-based transaction monitoring systems are highly inefficient, because for every 100 alerts they produce, five or fewer actually end up being reported to the government in a Suspicious Activity Report. The transaction monitoring software is often blamed (although bad data is the more likely culprit), and machine learning and artificial intelligence are often touted (by providers of machine learning and artificial intelligence) as the solutions. Consider the following when it comes to transaction monitoring and false positives:

  1. If a 95% false positive rate is bad … what is good? Human-generated referrals will result in SARs about 50% of the time: that might be a good standard.
  2. We have to stop tuning our transaction monitoring systems against SARs filed with law enforcement, and start tuning them against SARs used by law enforcement. I’ve written about this on many occasions, and have offered up something called the “TSV” SAR – a SAR that law enforcement indicates has Tactical or Strategic Value.
  3. High false positives rates may not be caused by bad data or poor technology at all, but by regulatory expectations – real or imagined – that financial institutions can’t afford the audit, regulatory, legal, and reputational costs of failing to identify (alert on) something unusual or anomalous that could eventually be found to have been suspicious.

(I’ve written about this on a few occasions: see, for example, RegTech Consulting Article).

It may be that transaction monitoring itself is the culprit (and not bad data, outmoded technology, or unreasonable regulatory expectations). My experience is that customer- and account-based transaction monitoring is not nearly as effective as relationship-based interaction surveillance. Let’s parse this out:

  • Customer versus relationship – focusing on a single customer is less efficient than looking at the entire relationship that customer is or could be part of. Bank’s marketing departments think in terms of households as the key relationship: credit department’s think in terms of parent and subsidiary entities and guarantors as the needed relationship in determining credit worthiness. Financial crimes departments need to also think in the same terms. It is simply more encompassing and more efficient.
  • Transaction versus interaction – customers may interact with a bank many times, through a phone call, an online session, a balance inquiry, or a mobile look-up, before they will perform an actual transaction or movement of value. Ignoring those interactions, and only focusing on transactions, doesn’t provide the full picture of that customer’s relationship with the bank.
  • Monitoring versus surveillance – monitoring is not contextual: it is simply looking at specific transaction types, in certain amounts or ranges, performed by certain customers or customer classes. Surveillance, on the other hand, is contextual: it looks at the context of certain activity compared against all activity of that customer over time, and/or of certain activity of that customer compared to other customers within its class (Whatever that class may be).

So the public sector needs to encourage the private sector to shift from a customer-based transaction monitoring regime to a relationship-based interaction surveillance regime.

II. Information Sharing

Crime and criminal organizations don’t operate in a single financial institution or even in a single jurisdiction. Yet our BSA/AML regime still encourages single entity SAR filers and doesn’t promote cross-jurisdictional information sharing.  The tools are available to better share information across a financial institution, and between financial institutions. Laws, regulations, and regulatory guidance all need to change to specifically and easily allow a single financial institution operating in multiple jurisdictions to (safely) share more information with itself, to allow multiple institutions in a single and multiple jurisdictions to (safely) share more information between them, and to allow those institutions to jointly investigate and report together. Greater encouragement and use of Section 314(b) associations and joint SAR filings are critical.

III. Classical Music, or Jazz?

Auditors, regulators, and even a lot of FinTech companies, would prefer that AML continue to be like classical music, where every note (risk assessments and policies) is carefully written, the music is perfectly orchestrated (transaction monitoring models are static and documented), and the resulting music (SAR filings) sounds the same time and time again regardless of who plays it. This allows the auditors and regulators to have perfectly-written test scripts to audit and examine the programs, and allows the FinTech companies to produce a “solution” to a defined problem. This approach may work for fraud, where an objective event (a theft or compromise) produces a defined result (a monetary loss). But from a financial institution’s perspective, AML is neither an objective event nor a defined result, but is a subjective feeling that it is more likely than not that something anomalous or different has occurred and needs to be reported. So AML is less like classical music and more like jazz: defining, designing, tuning, and running effective anti-money laundering interaction monitoring and customer surveillance systems is like writing jazz music … the composer/arranger (FinTech) provides the artist (analyst) a foundation to freely improvise (investigate) within established and consistent frameworks, and no two investigations are ever the same, and similar facts can be interpreted a different way by different people … and a SAR may or may not be filed. AML drives auditors and examiners mad, and vexes all but a few FinTechs. So be it. Let’s acknowledge it, and encourage it.

IV. Before Creating New Tools, Let’s Use the Ones We Have

The federal government has lots of AML tools in its arsenal: it simply needs to use them in more courageous and imaginative ways. Tools such as section 311 Special Measures and 314 Information Sharing are grossly under-utilized. Information sharing is discussed above: section 311 Special Measures are reserved for the most egregious bad actors in the system, and are rarely invoked. But the reality is that financial institutions will kick out a customer or not (knowingly) provide services to entire classes of customers or in certain jurisdictions for fear of not being able to economically manage the perceived risk/reward equation of that customer or class of customer or jurisdiction. But that customer or class or jurisdiction simply goes to another financial institution in the regulated sector, or to an institution in an un- or under-regulated sector (the notion of “de-risking”). The entire financial system would be better off if, instead of de-risking a suspected bad customer or class of customer or jurisdiction, financial institutions were not encouraged to exit at all, but encouraged to keep that customer or class, and monitor for and report any suspicious activity. Then, if the government determined that the customer or class of customers was too systemically risky to be banked at all, it could use section 314 to effectively blacklist that customer or class of customers. Imposing “special measures” shouldn’t be a responsibility of private sector financial institutions guessing at whether a customer or class of customers is a bad actor: it is and should be the responsibility of the federal government using the tool it currently has available to it: Section 311.

V. … and Let’s Restore The Tool We Started With

The reporting of large cash transactions was the first AML tool the US government came up with (in 1970 as part of the Currency & Foreign Transactions Reporting Act).  Those reports, called Currency Transaction Reports, or CTRs, started out as single cash transactions on behalf of an accountholder, for more than $10,000.  They have since morphed to one or more cash transactions aggregating to more than $10,000 in a 24-hour period, by or on behalf of one or more beneficiaries.  There will be more than 18 million CTRs filed this year, and apparently law enforcement finds them an effective tool. But there is nothing more inefficient: simply put, CTRs are now the biggest resource drain in BSA/AML. Because of regulatory drift, CTRs are de facto SAR-lites … we need to get back to basic CTRs and redeploy the resources used to wrestle with the ever-expanding aggregation and “by or on behalf of” requirements, and deploy them against potential suspicious activity. And forget about increasing the threshold amount from the current “more than $10,000” standard: $10,000 is almost 5,000 times the amount of the average cash transaction in the United States today (which is $22, according to multiple reports from the Federal Reserve), and no one can argue that having a requirement to report a transaction or transactions that are 5,000 times the average is unreasonable. And it isn’t the amount that causes inefficiencies, it is the requirements to (i) aggregate multiple transactions totaling more than $10,000 in a 24-hour period, (ii) to identify and aggregate transactions “by or on behalf of” multiple parties and accountholders, and (iii) exempt, on a bank-by-bank basis, certain entities that can be exempted (but rarely are) from the CTR filing regime. If anything, we could save and redploy resources if the CTR threshold was the same as the SAR threshold – $5,000.

VI. The Clash of the Titles

And remember the “Clash of the Titles” … the protect-the-financial-system (filing great SARs) requirements of Title 31 (Money & Finance … the BSA) are trumped by the safety and soundness (program hygiene) requirements of Title 12 (Banks & Banking), and financial institutions act defensively because of the punitive measures in Title 18 (Crimes & Criminal Procedure) and Title 50 (War … OFAC’s statutes and regulations). There is a need to harmonize the Four Titles – or at least Titles 12 and 31 – and how financial institutions are examined against them. BSA/AML people are judged on whether they avoid bad TARP results (from being Tested, Audited, Regulated, and Prosecuted) rather than  on whether they provide actionable, timely intelligence to law enforcement. Today, most BSA Officers live in fear of not being able to balance all their commitments under the four titles: the great Hugh MacLeod was probably thinking of BSA Officers when he wrote: “I do the work for free. I get paid to be afraid …”

VII. A Central Registry for Beneficial Ownership Information

At the root of almost all large money laundering cases are legal entities with opaque ownership, or shell companies, where kleptocrats, fraudsters, tax evaders, and other miscreants can hide, move, and use their assets with near impunity.  Greater corporate transparency has long been seen as one of the keys to fighting financial crime (the FATF’s Recommendation 24 on corporate transparency was first published in 1993), and accessible central registries of beneficial ownership information have been proven to be the key to that greater transparency. Yet the United States is one of the few major financial centers that does not have a centralized registry of beneficial ownership information. I’ve written that without such a centralized registry, the current beneficial ownership requirements are ineffective.  See Beneficial Ownership Registry Article. Two bills currently before Congress – the Senate’s ILLICIT Cash Act (S2563) and the House’s Corporate Transparency Act (HR2513) both contemplate a centralized registry of beneficial ownership maintained by FinCEN. But both of those bills – and FATF recommendations and guidance on the same issue – fall short in that they only allow law enforcement (or “competent authorities” using the FATF term) to freely access that database. The bills before Congress allow financial institutions to access the database but only with the consent of the customer they’re asking about and only for the purposes of performing due diligence on that customer. I have proposed that those bills be changed to also allow financial institutions to query the database without the consent of the entity they’re asking about for the purposes of satisfying their suspicious activity reporting requirements.

Conclusion – Seven Fixer-Upper Projects for the BSA/AML Regime

  1. Shift from customer-centric transaction monitoring systems to relationship-based interaction surveillance systems
  2. Encourage cross-institutional and cross-jurisdictional information sharing
  3. Encourage the private sector to be more creative and innovative in its approach to AML – AML is like jazz music, not classical music
  4. Address de-risking through aggressive use of Section 311 Special Measures
  5. Simplify the CTR regime. Please. And forget about increasing the $10,000 threshold – in fact, reduce it to $5,000
  6. As long as financial institutions are judged on US Code Titles 12, 18, 31, and 50, expect them to be both ineffective and inefficient. Can Titles 12 and 31 try to get along?
  7. A central registry of beneficial ownership information that is freely accessible to financial institutions is a must have

FinCEN’s FY2020 Report to Congress Reveals its Priorities and Performance

FinCEN Needs More Resources – and a TSV SAR Feedback Loop – To Really Make a Difference in the Fight Against Crime & Corruption

Every year each US federal government department and agency submits its Congressional budget justification and annual performance report and plan: essentially a document that says to Congress “here’s our mission, here’s how we did last year, here’s what we need for next year.” FinCEN’s fiscal year 2020 (October 1, 2019 through September 30, 2020) Congressional Budget Justification and Annual Performance Report and Plan is available at


My notes on the 14-page document summarize some of the key aspects of the report.

First is a summary of what FinCEN does: its areas of responsibility. Of note is the seventh area – “bringing together the disparate interests of law enforcement, [158 foreign] FIUs, regulatory partners, and industry”. This is also an admission that the interests of the various public and private sector participants are, in fact, disparate. Which begs the questions “should there be disparate interests?” and “what can we do to bring all these participants together and forge a single, unified interest of safeguarding the financial system from illicit use, combating money laundering, and promoting national security through the strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence?” (quoting FinCEN’s mission statement).  When it comes to fighting human trafficking, drug trafficking, etc., different perspectives are healthy and expected … competing or disparate interests are counterproductive.

Second, many people will be surprised at just how small FinCEN is – from the number of people to its overall budget – given the importance of its mission. The FY2019 budget called for 332 people and a budget of $115 million. The FY2020 budget proposes an increase to 359 people and a budget of $124.7 million, with the increase in people split between two priority programs: 13 for cybercrime, and 14 for “special measures”, which includes the actual special measures section (section 311) of the Patriot Act, requests to financial institutions for data on foreign financial institution wire transfers, and Geographic Targeting Orders.  As a “participant” for 20+ years, I would like to see what FinCEN could do if it had 659 people and a budget of $224.7 million: perhaps the $100 million to fund FinCEN’s efforts to combat human trafficking, narcotics trafficking, and foreign corruption could come from a 2.8% reduction in the “new drone procurement” budget request of the Department of Defense …

Third, the data on SARs filed, total BSA reports filed, and BSA Database Users is interesting. From FY2014 through FY2018 (actuals) and through FY2020 (estimates), the number of SARs filed has gone from 1.9 million to 2.7 million, an increase of 41.5%. But in the same period, the total number of BSA reports filed – including SARs – has gone from 19.2 million to 20.9 million, an increase of only 9.2%. That tells us two things: SARs are estimated to make up about 1 out of every 8 BSA reports filed in FY2020 compared to 1 out of every 10 BSA reports filed in FY2014 (a positive trend); and the total number of non-SAR BSA filings has essentially been the same for the last 7 years. In other words, the number of CTRs, CMIRs, and FBARs is not going up.

Fourth, there is the axiomatic, reflexive gripe that the SAR database is a black-hole: that financial institutions file SARs then never hear anything back from FinCEN or law enforcement as to whether those SARs are meaningful, effective, useful.  But look at the following from page 12:

FinCEN monitors the percentage of domestic law enforcement and regulators who assert queried BSA data led to detection and deterrence of illicit activity. This performance measure looks at the value of BSA data, such as whether the data provided unknown information, supplemented or expanded known information, verified information, helped identify new leads, opened a new investigation or examination, supported an existing investigation or examination, or provided information for an investigative or examination report. In FY 2018, FinCEN narrowly missed its target of 86 percent with 85 percent of users finding value from the data. FinCEN will work toward increasing its FinCEN Portal/FinCEN Query training efforts to provide more users with the knowledge needed in order to better utilize both FinCEN Portal and FinCEN Query. In FY 2019, the target is set at 86 percent and 87 percent in FY 2020.

Looking at this in a positive light, there appears to be a feedback loop between the users of BSA data – law enforcement and the regulators – and FinCEN, where law enforcement and regulators can assert – therefore they can determine – whether BSA data (mostly SARs and CTRs) led to detection and deterrence of illicit activity: whether the data provided unknown information, supplemented or expanded known information, verified information, helped identify new leads, opened a new investigation or examination, supported an existing investigation or examination, or provided information for an investigative or examination report.

The feedback loop between the users of BSA data (law enforcement, regulators, and FinCEN) must be expanded to include the producers (financial institutions) of BSA data

I have written previously about the need to provide financial institutions with more feedback on the 20 million+ BSA reports they produce every year. See, for example: https://regtechconsulting.net/uncategorized/rules-based-monitoring-alert-to-sar-ratios-and-false-positive-rates-are-we-having-the-right-conversations/

In that article, I introduced something I call the “TSV” SAR, or “Tactical or Strategic Value” SAR. I wrote:

How do you determine whether a SAR provides value to Law Enforcement? One way would be to ask Law Enforcement, and hope you get an answer. That could prove to be difficult.  Can you somehow measure Law Enforcement interest in a SAR?  Many banks do that by tracking grand jury subpoenas received to prior SAR suspects, Law Enforcement requests for supporting documentation, and other formal and informal requests for SARs and SAR-related information. As I write above, an Alert-to-SAR rate may not be a good measure of whether an alert is, in fact, “positive”. What may be relevant is an Alert-to-TSV SAR rate.  What is a “TSV SAR”? A SAR that has Tactical or Strategic Value to Law Enforcement, where the value is determined by Law Enforcement providing a response or feedback to the filing financial institution within five years of the filing of the SAR that the SAR provided tactical (it led to or supported a particular case) or strategic (it contributed to or confirmed a typology) value. If the filing financial institution does not receive a TSV SAR response or feedback from law enforcement or FinCEN within five years of filing a SAR, it can conclude that the SAR had no tactical or strategic value to law enforcement or FinCEN, and may factor that into decisions whether to change or maintain the underlying alerting methodology. Over time, the financial institution could eliminate those alerts that were not providing timely, actionable intelligence to law enforcement, and when that information is shared across the industry, others could also reduce their false positive rates.

Tactical or Strategic Value (TSV) SAR Feedback Loop

It appears that there are already mechanisms in place for law enforcement and the regulators to determine whether the 20 million CTRs and SARs that are being filed every year provide unknown information, supplement or expand known information, verify information, help identify new leads, open a new investigation or examination, support an existing investigation or examination, or provide information for an investigative or examination report. There is a way – there is always a way if there is the will – to provide that information to the private sector filers of the CTRs and SARs. Perhaps there is a member of Congress out there that could tweak FinCEN’s Fiscal Year 2020 budget request a little bit to give it the people power and monetary resources to begin developing a TSV SAR Feedback loop. We’d all benefit.

“Get off the Pot on Pot!” – A Panel of (Two of) Three Judges of the 2nd Circuit Court of Appeals Suggests the Administration Needs to Act on Marijuana Rescheduling

Patients, Veterans, and African‐American businessman Challenge the DOJ and DEA on Marijuana Scheduling

“This is the latest in a series of cases that stretch back decades and which have long sought to strike down the federal government’s classification of
marijuana as a Schedule I drug under the Controlled Substances Act (CSA) … The current case is, however, unusual in one significant respect: among the Plaintiffs are individuals who plausibly allege that the current scheduling of marijuana poses a serious, life‐or‐death threat to exhaust their administrative remedies before seeking relief from us, but we are troubled by the Drug Enforcement Administration (DEA)’s history of dilatory proceedings. Accordingly, while we concur with the District Court’s ruling, we do not dismiss the case, but rather hold it in abeyance and retain jurisdiction in this panel to take whatever action might become appropriate if the DEA does not act with adequate dispatch.”

The case is available at http://www.ca2.uscourts.gov/:

Court of Appeals Docket #: 18-859 Docketed: 03/29/2018
Nature of Suit: 2440 CIVIL RIGHTS-Other
Washington v. Barr
Fee Status: Paid
Case Type Information:
     1) Civil
     2) United States
     3) –
Originating Court Information:
     District: 0208-1 : 17-cv-5625
     Trial Judge: Alvin Hellerstein, U.S. District Judge

As the Court indicates, the plaintiffs all have compelling reasons to have the Government act. The plaintiffs are:

  1. An African‐American businessman working in the medical marijuana space. He would like to expand his business into whole‐plant cannabis products and take advantage of the federal Minority Business Enterprise Program, but, he alleges, he is impeded from so doing by the drug’s scheduling.
  2. The Cannabis Cultural Association, Inc. (CCA) is a not‐for‐profit organization dedicated to assisting people of color develop a presence in the cannabis industry. CCA is particularly focused on the way past convictions for possession, cultivation, distribution, and use of marijuana have disproportionately affected people of color and prevented minorities from participating in the new state‐legal marijuana industry.
  3. Two children with dreadful medical problems. [One] suffers from chronic and intractable seizures; [the other] from Leigh’s disease. They allege that they exhausted traditional treatment options before finding success medicating with cannabis. They claim that marijuana has saved their lives. Because of its Schedule I classification, however, they cannot bring their life‐saving medicine with them when they travel onto federal lands or into states where marijuana is illegal. For [one], these travel limitations also mean that she cannot take full advantage of the veteran’s benefits to which she is entitled through her father. In addition, both live in constant fear that their parents might be subject to arrest and prosecution for their involvement in their children’s medical treatment.
  4. One is a veteran of the war in Iraq and suffers from post‐traumatic stress disorder. After his honorable discharge, he became suicidal and was adjudged 70% disabled. He alleges that he pursued conventional therapies unsuccessfully. In despair, he turned to medical marijuana. This, he claims, has allowed him to manage his symptoms. He further asserts, like [another plaintiff], that marijuana’s Schedule I classification restricts his ability to travel and to take full advantage of his veteran’s benefits.
  5. Defendants are the United States, the Attorney General, the Department of Justice, the Acting Administrator of the DEA, and the DEA itself. They are
    responsible for implementing the CSA and, more particularly, for updating the classification of controlled substances.
The CSA Scheduling Process

The Court describes the process used to schedule, reschedule, or deschedule drugs in footnote 3 on page 8 of its May 30th order:

The CSA places in the Attorney General the power to schedule, reschedule, or deschedule drugs. See 21 U.S.C. § 811(a). The Attorney General has promulgated rules delegating this power to the head of the DEA. See 28 C.F.R. § 0.100(b). The CSA further requires that, before scheduling, rescheduling, or descheduling a drug, the Attorney General “shall . . . request from the Secretary [of Health and Human Services] a scientific and medical evaluation[ of the drug], and [the Secretary’s] recommendations, as to whether such drug or other substance should be so controlled or removed,” which “shall be binding on the Attorney General as to such scientific and medical matters.” 21 U.S.C. § 811(b). The process for reviewing a drug’s scheduling can be initiated by the Attorney General, the Secretary of Health and Human Services, or “on the petition of any interested party.” Id. § 811(a).

And then at page 13:

When Congress enacted the CSA, it put, by legislative fiat, certain drugs directly into schedules. See Controlled Substances Act, Pub. L. No. 91‐513, § 202, 84 Stat. 1236, 1247‐52 (1970) (codified at 21 U.S.C. § 812); see also Gonzales v. Raich, 545 U.S. 1, 14 (2005). But the statute contemplated that these initial lists would be regularly revised and updated by the Attorney General, in consultation with the Secretary of Health and Human Services, and that this would be done according to a specific procedure and set of standards.

It is Health & Human Services, not the DOJ or the DEA, that will decide whether to reschedule marijuana

The Court considered the plaintiffs’ arguments that the former Attorney General and Administrator of the DEA were biased against marijuana, and thus would not act appropriately. But the Court concludes that any bias by the AG or DEA is not relevant, because “on the medical and scientific claims central to Plaintiffs’ argument, it is the opinion of the Secretary of Health and Human Services that matters, not the judgment of the Attorney General or the head of the DEA.”

How long does it take to decide petitions to reschedule drugs? Nine years.

“Plaintiffs argue that the administrative process will prolong their ordeal intolerably. And their argument is not without force. Plaintiffs document that the average delay in deciding petitions to reclassify drugs under the CSA is approximately nine years.”

Rescheduling marijuana requires action by the Administration

At page 16:

A sensible response to our evolving understanding about the effects of marijuana might require creating new policies just as much as changing old ones. This kind of constructive governmental work, mixing adjudication and program‐design, creating policy through the balancing of competing legitimate interests, is not generally best accomplished by federal courts on their own; it is, however, the stock‐in‐trade of administration. See, e.g., James M. Landis, The Administrative Process (1938). Assuming, of course, that one can get the administrative agency to act.

It is this last sentence – assuming, of course, that one can get the administrative agency to act – that is the key aspect of this decision, and how the Court left it.

Conclusion: The Court warns the Administration to get off the pot on pot, or it will step in

At pages 25-26:

Unless the Plaintiffs seek agency review and so inform us within six months, we will affirm the District Court’s judgment dismissing this case. (And if only some Plaintiffs seek agency review, we will dismiss the complaint as to those who do not.) But if Plaintiffs do seek agency review, and the agency fails to act with alacrity, Plaintiffs may return directly to us, under our retained jurisdiction. To be clear, we repeat that this case remains in our purview only to the extent that the agency does not respond to Plaintiffs with adequate, if deliberate, speed. In other words, we retain jurisdiction exclusively for the purpose of inducing the agency to act promptly.

Artificial Intelligence – Who Is On The Hook When Things Go Wrong With Your AI System? You Are!

“Organisations and individuals developing, deploying or operating AI systems should be held accountable for their proper functioning”

For all the upstart fintechs out there that are trumpeting their innovative Artificial Intelligence-based solutions that can solve a financial institution’s financial crimes problems! … note that you may be held accountable when that AI system doesn’t quite turn out like your marketing materials suggested. Legal responsibility for something you design, build, and deploy is not a new concept, but how that “something” – in this case, the AI system you developed and installed at a client bank – actually works, and reacts, and adapts, over time could very be new ground that hasn’t been explored before. But many smart people are thinking about AI developers’ accountability, and other AI-related issues, and many of those have produced some principles to guide us as we develop and implement AI-based systems.

On May 22, 2019 the OECD published a Council Recommendation on Artificial Intelligence. At its core, the recommendation is for the adoption of five complimentary “value-based principles for responsible stewardship of trustworthy artificial intelligence. The link is Artificial intelligence and the actual recommendation is https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0449#_ga=2.200835047.853048335.1559167756-681244095.1559167756

What’s the big deal about artificial intelligence?

The OECD recognized a number of things about AI that are worth including:

  • AI has pervasive, far-reaching and global implications that are transforming societies, economic sectors and the world of work, and are likely to increasingly do so in the future;
  • AI has the potential to improve the welfare and well-being of people, to contribute to positive sustainable global economic activity, to increase innovation and productivity, and to help respond to key global challenges;
  • At the same time, these transformations may have disparate effects within, and between societies and economies, notably regarding economic shifts, competition, transitions in the labour market, inequalities, and implications for democracy and human rights, privacy and data protection, and digital security;
  • Trust is a key enabler of digital transformation; that, although the nature of future AI applications and their implications may be hard to foresee, the trustworthiness of AI systems is a key factor for the diffusion and adoption of AI; and that a well-informed whole-of-society public debate is necessary for capturing the beneficial potential of the technology, while limiting the risks associated with it;
  • Given the rapid development and implementation of AI, there is a need for a stable policy environment that promotes a human-centric approach to trustworthy AI, that fosters research, preserves economic incentives to innovate, and that applies to all stakeholders according to their role and the context;
  • certain existing national and international legal, regulatory and policy frameworks already have relevance to AI, including those related to human rights, consumer and personal data protection, intellectual property rights, responsible business conduct, and competition, while noting that the appropriateness of some frameworks may need to be assessed and new approaches developed; and
  • Embracing the opportunities offered, and addressing the challenges raised, by AI applications, and empowering stakeholders to engage is essential to fostering adoption of trustworthy AI in society, and to turning AI trustworthiness into a competitive parameter in the global marketplace.

What is “Artificial Intelligence”?

The recommendation includes some helpful definitions of the major terms:

Artificial Intelligence System: a machine-based system that can, for a given set of human-defined objectives, make predictions, recommendations, or decisions influencing real or virtual environments. AI systems are designed to operate with varying levels of autonomy.

Artificial Intelligence System Lifecycle: four phases which can be sequential but may be iterative:

(i) design, data and models – a context-dependent sequence encompassing planning and design, data collection and processing, as well as model building;

(ii) verification and validation;

(iii) deployment; and

(iv) operation and monitoring

Artificial Intelligence Actors: AI actors are those who play an active role in the AI system lifecycle, including organisations and individuals that deploy or operate AI.

Is an OECD Recommendation binding on a country that has adopted it?

OECD Recommendations are not legally binding but they are highly influential and have many times formed the basis of international standards and helped governments design national legislation. For example, the OECD Privacy Guidelines adopted in 1980 and stating that there should be limits to the collection of personal data underlie many privacy laws and frameworks in the United States, Europe and Asia.

So the AI Principles are not binding, but the OECD provided five recommendations to governments:

  1. Facilitate public and private investment in research & development to spur innovation in trustworthy AI.
  2. Foster accessible AI ecosystems with digital infrastructure and technologies and mechanisms to share data and knowledge.
  3. Ensure a policy environment that will open the way to deployment of trustworthy AI systems.
  4. Empower people with the skills for AI and support workers for a fair transition.
  5. Co-operate across borders and sectors to progress on responsible stewardship of trustworthy AI.

Who developed the OECD AI Principles?

The OECD set up a 70+ member expert group on AI to scope a set of principles. The group consisted of representatives of 20 governments as well as leaders from the business (Google, Facebook, Microsoft, Apple, but not any financial institutions), labor, civil society, academic and science communities. The experts’ proposals were taken on by the OECD and developed into the OECD AI Principles.

What is the Purpose of the OECD Principles on AI?

The OECD Principles on Artificial Intelligence promote artificial intelligence (AI) that is innovative and trustworthy and that respects human rights and democratic values. The OECD AI Principles set standards for AI that are practical and flexible enough to stand the test of time in a rapidly evolving field. They complement existing OECD standards in areas such as privacy, digital security risk management and responsible business conduct.

What are the OECD AI Principles?

The Recommendation identifies five complementary values-based principles for the responsible stewardship of trustworthy AI:

1. Inclusive growth, sustainable development and well-beingAI systems should be designed in a way that respects the rule of law, human rights, democratic values and diversity, and they should include appropriate safeguards – for example, enabling human intervention where necessary – to ensure a fair and just society. And AI should benefit people and the planet by driving inclusive growth, sustainable development and well-being.

The actual text reads: “Stakeholders should proactively engage in responsible stewardship of trustworthy AI in pursuit of beneficial outcomes for people and the planet, such as augmenting human capabilities and enhancing creativity, advancing inclusion of underrepresented populations, reducing economic, social, gender and other inequalities, and protecting natural environments, thus invigorating inclusive growth, sustainable development and well-being.

2. Human-centred values and fairness AI actors should respect the rule of law, human rights and democratic values, throughout the AI system lifecycle. These include freedom, dignity and autonomy, privacy and data protection, non-discrimination and equality, diversity, fairness, social justice, and internationally recognized labor rights. To this end, AI actors should implement mechanisms and safeguards, such as capacity for human determination, that are appropriate to the context and consistent with the state of art.

3. Transparency and explainabilityAI Actors should commit to transparency and responsible disclosure regarding AI systems. To this end, they should provide meaningful information, appropriate to the context, and consistent with the state of art to foster a general understanding of AI systems, to make stakeholders aware of their interactions with AI systems, including in the workplace, to enable those affected by an AI system to understand the outcome, and, to enable those adversely affected by an AI system to challenge its outcome based on plain and easy-to-understand information on the factors, and the logic that served as the basis for the prediction, recommendation or decision.

4. Robustness, security and safetyAI systems should be robust, secure and safe throughout their entire lifecycle so that, in conditions of normal use, foreseeable use or misuse, or other adverse conditions, they function appropriately and do not pose unreasonable safety risk. To this end, AI actors should ensure traceability, including in relation to datasets, processes and decisions made during the AI system lifecycle, to enable analysis of the AI system’s outcomes and responses to inquiry, appropriate to the context and consistent with the state of art. And AI actors should, based on their roles, the context, and their ability to act, apply a systematic risk management approach to each phase of the AI system lifecycle on a continuous basis to address risks related to AI systems, including privacy, digital security, safety and bias.

5. AccountabilityAI actors should be accountable for the proper functioning of AI systems and for the respect of the above principles, based on their roles, the context, and consistent with the state of art. Organisations and individuals developing, deploying or operating AI systems should be held accountable for their proper functioning in line with the above principles.

What countries belong to the OECD?

Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States

Colorado: The Epicenter of Black Market Marijuana in the United States?

Forty-two Individuals Arrested In One Of The Largest Black Market Marijuana Takedowns In Colorado History

A two year investigation by dozens of federal, state, county, and local law enforcement agencies in the Greater Denver area culminated in the exercise of 255 search warrants on 247 homes and 8 businesses. The result was that law enforcement found 240 residential grows, arrested 42 individuals, seized 80,000 plants and 2.5 tons of finished marijuana. In 7 federal criminal cases and 6 federal civil forfeiture cases, the government is seeking forfeiture of 41 homes, $2.2 million in cash, and 25 vehicles – the 41 homes all had grow operations with at least 100 plants, many with more than 1,000 plants. Colorado law allows no more than 12 plants in home grows

Some of the statements of the lead agencies’ heads are telling:

  • US Attorney for Colorado: “Colorado has become the epicenter of black market marijuana in the United States … this investigation may be just the tip of the iceberg.”
  • DEA Special Agent in Charge (Denver): “this marijuana issue is out of control in Colorado.”
  • 18th Judicial District (Denver) District Attorney: Colorado is becoming “the wild west of weed.”

Looking at the names of the 15 defendants in the 7 federal criminal cases, my guess is that these cases will have similar fact patterns to the US v Li case from March 2019 filed in the Central District of California. See the story from March 14, 2019 https://regtechconsulting.net/uncategorized/illegal-cannabis-grows-shell-companies-straw-buyers-border-searches-beneficial-owners-and-gtos/.

The US Attorney’s press release is at https://www.justice.gov/usao-co/pr/forty-two-individuals-arrested-one-largest-black-market-marijuana-takedowns-colorado

314(a) Information Requests – Can A Bank Research a Name in 4 Minutes or Less?

A call to action for all US financial institutions!

On May 7, 2019, FinCEN published a “Notice and Request for Comments” in the Federal Register that sought comments from the public on its renewal, without change, of the 314(a) Program … the program created by section 314(a) of the USA PATRIOT Act of 2001, and established by regulations published on September 26, 2002, where law enforcement, through FinCEN, can ask covered financial institutions to search their customer and transactional records for names of persons and entities believed to be involved in terrorist financing or money laundering.

The notice is at https://www.regulations.gov/document?D=FINCEN-2018-0017-0001 but I couldn’t find any reference on FinCEN’s website to indicate that it published the Notice and Request for Comments.

The original 2002 regulation gave federal law enforcement agencies the ability to use 314(a). The regulation was revised in 2010 to give certain non-federal law enforcement entities access to 314(a). This Notice and Request for Comments only applies to the non-federal law enforcement entities: footnote 4 on page 20000 of the Federal Register notice provides ” this renewal applies only to the use of the 314(a) Program with respect to queries initiated by non-Federal law enforcement entities.”

Under the Paperwork Reduction Act, each such notice requires a statement of how many entities are affected by the notice or proposed rule, and how much time each of those entities will take to comply.

Here’s where it gets interesting …

14,463 financial institutions receive 314(a) requests that come from non-federal law enforcement agencies

FinCEN writes that “On an annual basis, there are approximately 14,643 covered financial institutions, consisting of certain commercial banks, savings associations, and credit unions, securities broker-dealers, future commission merchants, certain trust companies, life insurance companies, mutual funds and money services businesses.” (footnote 5)

And how many 314(a) requests does FinCEN send to these 14,463 financial institutions that do not originate with federal law enforcement agencies?

FinCEN sends ninety (90) requests a year under section 314(a) that do not originate with federal law enforcement agencies

Footnote 6 provides the details: “Estimated cases/subjects per annum subject to the [Paperwork Reduction Act] include, 10 from FinCEN, 50 from state/
local law enforcement, and 30 from European Union countries approved by treaty, for a total of 90 requests per annum, with each request containing an average of 7 subjects (including aliases).”

How much time is spent responding to each request?

According to FinCEN, it takes a bank 4 minutes on average to determine if a 314(a) name is a match on its customer and transactional systems

Footnote 6 continues with this: “Each subject requires 4 minutes to research, resulting in (90 × 7 × 4 ÷ 60) = 42 hours per year.”

Does it really take only 4 minutes to scour bank records to determine if there is a match?

What does the 314(a) regulation require of financial institutions? 31 CFR s.1010.520(b)(3) sets out the two “obligations of a financial institution receiving an information request” – searching records and, if there is a name match, to report to FinCEN:

(i) Record search. Upon receiving an information request from FinCEN under this section, a financial institution shall expeditiously search its records to determine whether it maintains or has maintained any account for, or has engaged in any transaction with, each individual, entity, or organization named in FinCEN’s request. A financial institution may contact the law enforcement agency, FinCEN or requesting Treasury component representative, or U.S. law enforcement attaché in the case of a request by a foreign law enforcement agency, which has been named in the information request provided to the institution by FinCEN with any questions relating to the scope or terms of the request. Except as otherwise provided in the information request, a financial institution shall only be required to search its records for:

(A) Any current account maintained for a named suspect;

(B) Any account maintained for a named suspect during the preceding twelve months; and

(C) Any transaction, as defined by §1010.505(d), conducted by or on behalf of a named suspect, or any transmittal of funds conducted in which a named suspect was either the transmittor or the recipient, during the preceding six months that is required under law or regulation to be recorded by the financial institution or is recorded and maintained electronically by the institution.

(ii) Report to FinCEN. If a financial institution identifies an account or transaction identified with any individual, entity, or organization named in a request from FinCEN, it shall report to FinCEN, in the manner and in the time frame specified in FinCEN’s request, the following information:

(A) The name of such individual, entity, or organization;

(B) The number of each such account, or in the case of a transaction, the date and type of each such transaction; and

(C) Any Social Security number, taxpayer identification number, passport number, date of birth, address, or other similar identifying information provided by the individual, entity, or organization when each such account was opened or each such transaction was conducted.

So … given a name, the financial institution needs to search all of its customer systems going back twelve months, and all of its transaction systems going back six months, to look for name matches and, if there is a match, to report back to FinCEN.  This process takes much longer than four minutes.

The most important part of the entire Notice came at the end of footnote 6, where FinCEN wrote: “For the 2016 renewal of this information collection, FinCEN did not receive any public comments regarding the estimate of 4 minutes.”

Action Required – Financial Institutions, Let FinCEN Know How Long It Takes to Comply With 314(a) Requests!

I strongly urge financial institutions to submit comments to FinCEN by the deadline date of July 8, 2019, to let it know how long it actually takes to comply with 314(a) requests.

44% of UK Solicitors Tested Are Not Meeting ML/TF Regulatory Requirements – but Unlike Their American Counterparts, At Least They Have Regulatory Requirements

A review by the UK’s Solicitors Regulation Authority (SRA) results in 44% of solicitor firms tested will be subject to disciplinary process. That’s bad, but what is worse is that US lawyers performing the same type of work are not subject to equivalent regulations

There are 7,000 regulated law firms in England and Wales that are subject to the anti-money laundering program and reporting regulations promulgated as a result of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Act 2017. Among other things, those firms are required to have a risk-based ML/TF compliance program, including customer due diligence and suspicious activity reporting requirements.

Note 1: not all “lawyers” are subject to these regulations. In the UK (and Canada) lawyers are either barristers – representing clients in criminal and civil proceedings in court – or solicitors – acting for clients in all other legal matters. The ML/TF regulations apply, generally, to solicitors, or “independent legal professionals and trust of company service providers” that provide “legal or notorial services to other persons, when participating in financial or real property transactions concerning” the buying or selling of real property and businesses, managing client money or asserts, opening and management of bank, savings, or securities accounts, and creating companies, trusts, and foundations. Put simply, financial, company, or property transactional work outside the court systems is covered by the ML/TF program and reporting requirements.

Note 2: the money laundering and terrorist financing compliance program requirements address at least (or only) three (3) of the enumerated thirty-eight (38) risks identified by the SRA in its Regulatory Risks Index. Ten (10) of the risks relate to the market and are not given a “severity” score: twenty-eight (28) of the risks relate to individual firms and are given a severity risk. Those risks range from a low of 4% for geographical or jurisdictional conflicts to a high of 96% for misuse of money or assets. The mean (average) risk is 43%, and the median (middle) risk is 38%. The second highest severity score was for criminal association (77%), the third highest was for money laundering (73%), and the fourth highest was for bribery and corruption (67%). Other than stealing clients’ money, the Solicitors Regulation Authority considers financial crimes – associating with criminals, money laundering, and bribery and corruption – to be the risks with the greatest severity. So with such severe risk, one would assume that firms would be serious about their compliance requirements: the results of the SRA’s review suggest otherwise.

In 2018 the SRA reviewed the programs of 59 law firms. On May 7, 2019 the SRA published the results. The actual report is at Go to the review. The press release is at https://www.sra.org.uk/sra/news/press/aml-tcsp-review-2019.page.

The SRA’s press release provided as follows:

A review has shown that a significant minority of law firms are not doing enough to prevent money laundering, with some falling seriously short.

The review did not find evidence of actual money laundering or that firms had any intention of becoming involved in criminal activities. However, it did find a range of breaches of the 2017 Money Laundering Regulations, as well as poor training and processes.

One of the biggest areas of concern was firms’ risk assessments. A firm risk assessment is required in legislation and should be the backbone of a firm’s anti-money laundering approach. We found that more than a third (24) of firms reviewed fell short in this area, including four that had no risk assessment at all.

There were also issues around appropriate customer due diligence. This included inadequate processes in almost a quarter (14) of firms to manage risks around Politically Exposed Persons, known as PEPs. However, in some instances effective customer due diligence did result in firms turning down work. Fifteen firms had done this, with one of the main reasons being evasive clients.

As a result of the review we have put 26 firms [out of 59] into our disciplinary processes. We have also published a warning notice reminding the profession of their obligations, particularly in relation to firm risk assessments. And we have begun a further review of 400 other law firms to check compliance with the Governments 2017 Money Laundering Regulations. This review will be led by a new dedicated anti-money laundering unit, being set up to bolster resources to prevent and detect money laundering.

But as important as what the press release did include is what it did not include. According to the actual report:

“Firms had raised low numbers of internal suspicious activity reports (ISARs).” The actual data, represented by the graphic below, suggests an even bleaker picture: only three (3) of fifty-nine (59) firms  – or one out of twenty – averaged more than one internal report on potential suspicious activity per year.  And the report noted that “only 10 firms had submitted SARs in the last 24 months”, but like the ISAR data, the actual SAR data was even more bleak, with only two (2) of the fifty-nine (59) firms filing more than one SAR a year over the last two years. 

Other results are worth highlighting:

  • two firms failed to consider the countries that they operate in and failed to have a PEP process in place
  • two firms failed to consider the geographical location of their clients or the nature of their firm’s work
  • five firms failed to consider the types of transactions that they undertake. They also failed to provide information and procedures in their AML policy about scrutinising complex and/or unusual transaction or transactions that have no apparent economic or legal purpose
  • one firm failed to address how they deliver legal services and also acknowledged that they do not see 5% of their clients
  • five firms that did not have a file [client] risk assessment process in place. This is concerning and suggests that some firms are not systematically addressing money laundering issues. This undermines the ability of fee earners to detect issues, report concerns and mitigate risks.
  • nine firms that had a [client risk assessment] process in place, but the fee earner was unable to provide an adequate risk assessment for each file. These failures suggest some firms struggle to monitor the compliance levels of fee earners and/or fail to implement the process/policy
  • We made eight referrals into our disciplinary processes about inadequate AML policies. This included one referral for a complete lack of written policies
  • of the 59 firms we visited, the fee earner we spoke to at 10 of the firms (17%) was unable to provide the relevant CDD for each of their files
  • eight files did not contain adequate information and/or recorded evidence about beneficial owners of the relevant trust or company
  • eight firms had no PEP process. These firms were referred into our disciplinary process

These same firms are advising financial institutions on how to comply with UK AML laws and regulations. It is inconceivable that these firms would ignore their own advice – assuming it is good advice – by having programs that have inadequate risk assessments, missing or inadequate customer due diligence files, no or inadequate internal processes for escalating unusual or potentially suspicious activity, and missing SARs. In fairness, though, where five firms have no programs, fifty-four have programs; where eight firms have no PEP process, fifty-one have a PEP process. And, as the headline indicates, at least the UK solicitors are equal partners with their financial institution clients in the global fight against money laundering and terrorist financing … unlike their American counterparts.

Regulators Testify on BSA/AML

Sed quis custodiet ipsos Custodes

But who will guard the guards themselves? – Roman poet and satirist Juvenal, c. 100 AD

On May 15, 2019 the Senate Banking Committee held a hearing on “Oversight of Financial Regulators”. The link to the hearing is:


The heads of the OCC, FDIC, and NCUA, and the head of regulatory supervision of the Board of Governors of the Federal Reserve, submitted written statements and testified. Anti-money laundering (AML) and its regulatory regime under the Bank Secrecy Act (BSA) were touched on by three of the four witnesses in their written statements.

The OCC’s Comptroller, Joseph Otting, had the following:

“Compliance risk remains elevated as banks seek to manage money-laundering risks in a complex, dynamic operating and regulatory environment.”

“My priorities also include improving the efficiency and effectiveness of Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations, supervision, and examination, while continuing to support law enforcement, protect the financial system from those who seek to exploit it for illicit and illegal purposes, and reduce the burden of BSA/AML compliance.”

And under the heading “Bank Secrecy Act and Anti-Money Laundering”, the Comptroller wrote:

The BSA and AML laws and regulations exist to protect our financial system from criminals who would exploit that system for their own illegal purposes or use that system to finance terrorism. While regulators and the industry share a commitment to fighting money laundering and other illegal activities, the process for complying with current BSA/AML laws and regulations has become inefficient and costly. It is critical that the BSA/AML regime be updated and enhanced to address today’s threats and better use the capabilities of modern technology to protect the financial system from illicit activity.

The OCC has taken a leadership role in coordinating discussions with the FDIC, Board of Governors of the Federal Reserve System, National Credit Union Administration, Treasury’s Office of Financial Intelligence, and FinCEN to identify and implement ways to improve the efficiency and effectiveness of BSA/AML regulations, supervision, and examinations, while continuing to meet the requirements of the statute and regulations, support law enforcement, and reduce BSA/AML compliance burden. In October 2018, these agencies released a joint statement clarifying ways in which community banks with a lower BSA risk profile may be able to increase efficiency and reduce burden in their BSA/AML compliance programs by sharing BSA resources. The statement describes how these banks can effectively use collaborative arrangements to share human, technology, or other resources related to BSA compliance to reduce costs, increase operational efficiency, and leverage specialized expertise.

More recently, in December 2018, these agencies issued a joint statement encouraging banks to take innovative approaches to meet their BSA/AML compliance obligations. The statement recognizes significant potential for technological innovation to transform BSA/AML compliance. In addition to assisting banks’ efforts to control their costs, innovation is increasingly necessary to counter constantly changing threats, as illicit financing methods evolve to exploit vulnerabilities in existing systems. The statement makes clear the agencies are committed to continued engagement with the private sector to modernize and innovate in their BSA/AML compliance programs. The OCC is actively engaged in discussions with banks and other stakeholders regarding ways to explore enhanced technology usage while maintaining the current strong protections for the financial system.

The OCC also has identified areas in which legislative changes could increase the impact and efficiency of BSA/AML regulation and compliance programs. The OCC generally supports legislative changes that would reduce unnecessary industry burden and compliance costs and allow for more effective information sharing related to illicit finance. These include requiring a regular review of BSA/AML regulations to identify those that could be strengthened, refined or to reduce unnecessary burden, and providing safe harbors to promote sharing of information.

The written statements of Jelena Williams, Chair of the FDIC, and Randal K. Quarles, Vice Chair for Supervision for the Federal Reserve, did not include anything on BSA/AML.

The written statement of Rodney E. Hood, Chairman of the National Credit Union Administration (NCUA), included the following on BSA/AML (footnotes omitted):

Ensuring Compliance with the Bank Secrecy Act The NCUA takes seriously its obligations to supervise federal credit unions for compliance with the various BSA and AML laws and regulations. As technology has become embedded in financial systems, even small financial institutions like credit unions can be vulnerable to illicit finance activity. The NCUA examines federal credit union compliance with BSA during every examination that we conduct. Additionally, the NCUA assists state regulators by conducting BSA examinations in federally insured, state-chartered credit unions where state resources are limited. In 2018, the NCUA conducted 3,308 BSA examinations in federal credit unions.

The NCUA’s BSA reviews are risk-focused and include a set of core procedures that cover an institution’s compliance with the pillars of the BSA. These core procedures are based on the FFIEC examination procedures we issue jointly with the other federal financial regulatory agencies. In addition to the core procedures, examiners are trained and directed to tailor examinations based on the unique risk characteristics of each federal credit union. Federal credit unions that have diverse platforms with higher risk activities will receive an expanded review tailored to the unique risk characteristics they present. Conversely, examinations of smaller, low-risk credit unions are appropriately scaled to minimal necessary procedures consistent with their risk characteristics and our obligations under the FCU Act.

The NCUA coordinates regularly with our counterparts as the other federal financial regulatory agencies, as well as the Financial Crimes Enforcement Network (FinCEN). The NCUA actively participates in the Bank Secrecy Act Advisory Group (BSAAG) and the FFIEC BSA Working Group. Additionally, the NCUA is part of a recently established interagency working group to improve effectiveness and streamline, where possible, our regulations and supervisory processes. The working group recently issued a Joint Statement on Innovative Efforts to Combat Money Laundering and Terrorist Financing, as well as an Interagency Statement on Shared BSA Resources. Both joint statements provide appropriate information for institutions to leverage resources and new technologies to improve and streamline their BSA compliance obligations. The NCUA intends to continue to foster collaborative working relationships with our regulatory counterparts, including FinCEN. I believe that this is especially important in addressing substantial concerns related to the proliferation of cash-based businesses, which further necessitates reforming and modernizing the BSA regime.

Finally, the NCUA also communicates with the credit union industry through numerous channels, including: BSAAG participation and outreach; assistance and participation in national events applicable to the BSA attended by credit union industry professionals and leaders; and through periodic and ongoing training via webinars. The NCUA continues to maintain transparency in its policy positions. To that end, the agency publishes our examination and policy manuals, as well as nearly all guidance and directives provided to examiners related to the supervisory process or examinations.

I’ve highlighted three excerpts from Comptroller’s Otting’s statement:

It is critical that the BSA/AML regime be updated and enhanced to address today’s threats and better use the capabilities of modern technology to protect the financial system from illicit activity.

The agencies issued a joint statement encouraging banks to take innovative approaches to meet their BSA/AML compliance obligations. The statement recognizes significant potential for technological innovation to transform BSA/AML compliance.

The OCC generally supports legislative changes that would reduce unnecessary industry burden and compliance costs and allow for more effective information sharing related to illicit finance. These include requiring a regular review of BSA/AML regulations to identify those that could be strengthened, refined or to reduce unnecessary burden, and providing safe harbors to promote sharing of information.

Comptroller Otting’s testimony – and indeed the actions of the OCC and the other regulators – around the encouragement of innovative uses of technology is a very positive for all financial institutions struggling to balance the competing and sometimes conflicting interests and perspectives of their regulators, their customers, and law enforcement. The promotion of sharing information is also very positive: financial institutions working individually will never fulfill their regulatory obligations effectively or efficiently, and can only do so by sharing information with other institutions. Big data intelligence and collaborative investigations are the future of BSA/AML.