Banks are Corrupt. But Blaming Them Is Pointless.
An unpopular opinion on the FinCEN Files.
Last weekend, Buzzfeed News and the International Consortium of Investigative Journalists (ICIJ) triumphantly lifted the curtain on big banking’s entanglement in the global money-laundering trade.
The FinCEN files tell a story of capitalism run amok. They reveal how 90 major financial institutions positioned themselves as the collective washing machine through which drug cartels, crime rings and kleptocrats laundered $2 trillion of suspected dirty money. And “profits from deadly drug wars, fortunes embezzled from developing countries and hard-earned savings stolen in a Ponzi scheme” have been spinning unchecked inside this financial washing drum for two decades.
The journals are based on data from thousands of suspicious activity reports (SARs) filed by banks with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) between 1999 and 2017.
If you’re coming to this article completely clueless, having been intimidated by the amount of FinCEN headlines, fear not. Here are the Cliffs Notes to bring you up to speed:
- HSBC allowed masterminds of an $80 million Ponzi scheme to shift money around the world.
- JPMorgan, Citibank and Bank of America processed millions for family members of a Kazakh politician wanted by Interpol.
- Deutsche Bank moved money for organised crime rings, terrorists and drug traffickers.
- The UK Conservative Party’s biggest female donor is married to a man who was given £6.1 million by a Kremlin-linked oligarch under U.S. sanctions.
Essentially, the files are a treasure trove of scandalous banking faux pas.
The fallout from the leak was explosive, with last week’s newspapers hammering down on the greed-induced myopia of the banking industry. All well and good. But the media’s lamentation of all-things-Wall Street has pushed important questions the sidelines.
If you‘ve seen Ozark, Good Girls, Breaking Bad or any of Netflix’s many crime shows, you’re well-versed on the world of money laundering: it’s murky, has no ethical boundaries, and is run by criminal kingpins who map out epically creative ways to legitimize dirty cash. It’s a rare example of reality being just as strange as fiction, if not more.
And in this game of cops and robbers, anti-money laundering (AML) officers are the spies. It’s their job to spot when illicit money has been funnelled into the financial system, using AML technology to zero in on clients who authorise strange transactions in high-risk jurisdictions. When an AML officer thinks they’ve got a Marty Byrde on their hands, they file a suspicious activity report with FinCEN.
The seedy world of money laundering, however, means filing a SAR could feasibly become a “death sentence” for the AML officer who snitched. Nathan Lynch, manager of Thomson Reuter’s Regulatory Intelligence team, shared some pretty grisly examples last week that illustrate this.
Lynch once met with a former special agent for the U.S. Drug Enforcement Administration who had to pull a dead body from the trunk of a car in Mexico City. The body belonged to a financier-cum-informant, who was providing crucial intel on an international drug cartel money laundering operation.
The man’s hands were “tethered behind his back with a necktie” and “his fingertips were burnt to black stumps,” says Lynch.
Lynch also met with an AML officer in Karachi, Pakistan last year. The officer works for one of the country’s major banks, and had recently reported an instance of suspected terrorist financing to Pakistan’s AML unit. His reward? Not national acclaim, but concern for his safety. He hired two armed guards to patrol his family home and is now constantly shadowed by a bank-employed armed escort. In a similar vein, a Jordanian AML officer shrugged off being tailgated after filing SARs for suspected terrorist financing as a routine occurrence.
Reporting financial crime is a dangerous job, and crossing the wrong person can have life-threatening consequences. Although Buzzfeed and the ICIJ have protected anonymity in the FinCEN files, the leak multiplies the personal risk of internal compliance officers ten-fold. I can’t imagine a motivated and sophisticated network of crime rings, drug cartels and kleptocrats would struggle to (i) root out which bank employee first alerted an AML officer of their transaction; and (ii) pinpoint who the bank’s AML officer is.
The Buzzfeed and ICIJ report also expressed sorrow that banks aren’t required to halt suspicious activity or “stop serving shadowy clients” once a SAR has been filed. This, however, is an integral component of the SAR framework.
Immediately suspending a transaction is the equivalent of phoning up a client and personally telling them they’re the subject of a money laundering investigation.
It tips the client off — a criminal offence in the U.K. and U.S. — and gives them the chance to take their money and run. Mass media outlets have been so busy calling for Wall Street accountability they haven’t stopped to think about how many live investigations the FinCEN leaks might have blown wide open.
The FinCEN files have also given rise to a misdirected blame game. Headlines in the aftermath of the leak monolithically pointed the finger at banks for not only failing to fight the war against dirty money, but prancing across enemy lines.
“Banks suspected illegal activity, but processed big transactions anyway,” printed the New York Times. “The FinCEN files show banks don’t actually care about stopping money laundering,” said another news outlet.
Whilst these headlines aren’t wrong, they don’t exactly paint the full picture. The banks implicated by Buzzfeed and the ICIJ were, believe it or not, complying with their (albeit hollow) obligations. To use my previous analogy, banks and financial institutions are merely spies: they engage in back-office espionage, tracking the flow of money to and from accounts. Whenever a transaction rouses their suspicions, all they have to do it file a SAR. They don’t shoulder the burden of proving guilt or prosecuting the bad guys. The cops in this game are the national Financial Intelligence Units (FIUs), who (should) use the leads they gather from SARs to haul the robbers away in handcuffs.
One small issue, though. The FinCEN files are made up of thousands of SARs. So why didn’t FIUs catch the trillions of dollars of dirty money flowing through the financial system?
For starters, the punishment for failing to file a SAR is a huge civil or criminal penalty. The punishment for filing a useless SAR is nonexistent. This carrot and stick approach has given rise to the phenomena of ‘defensive filing’.
Translation: I’m pretty sure this transaction is legitimate, but I’m going to report it just in case it’s not.
The result is a tsunami of SARs showing up at FinCEN’s door on a daily basis, with FinCEN receiving 4.97 million SARs from banks and financial institutions over the past five years. Intelligence unit heads have said up to 90% of these had no operational value to law enforcement agencies. The current outcry against the banking industry will only ironically encourage ALM officers to file more SARs to save face.
The problem is compounded by intelligence units being notoriously underfunded and understaffed. FinCEN employs only 300 people, who are tasked with flipping through millions of fruitless leads. The situation is worse in the U.K., with the National Crime Agency employing even less. For money-laundering expert, Graham Barrow, this paints a bleak picture:
“400+ journalists from around 100 countries spent a year sifting through a little over 2,000 SARs working out what the story was. Imagine what life is like then, for the 118 people at the NCA who received around 500,000 every year. Or in the U.S. where it’s considerably more.”
So is it a surprise to anyone that the majority of SARs are “never even read, much less utilised”?
The truth, unsensational as it may be, is the current AML framework is flimsy and makes it alarmingly easy for real instances of money laundering to go unnoticed.
Trying to find a few good leads in a sea of SARs is like digging for a needle in a haystack.
This doesn’t mean we can’t be angry at banks for cosying up to money-laundering mobsters. The financial industry as a whole is in dire need of a dose of morality. But wherever there’s a loophole there will always be someone brazen enough to jump through it, and stacking the blame on banks without demanding systemic reform will take us nowhere.
You only have to watch the HSBC episode (named ‘Cartel Bank’) of Netflix’s documentary, Dirty Money, to appreciate this. In 2012 the bank, whose clientele list includes El Chapo, knowingly laundered close to a billion dollars for drug cartels. Its punishment?
A pinky promise it wouldn’t do it again (now broken) and a $1.9 billion fine; anything worse would risk damaging the economy beyond repair. Cartel Bank concludes with a striking remark that some bankers are just “too big to jail.” So although share prices in banks have slipped this week, it’s unlikely their accountability will stretch further than a slap on the wrist.
The FinCEN files investigation is a truly impressive work of journalism. It brings much-needed publicity to the uncomfortable fact dirty money networks “have become vital arteries of the global economy,” and the decay has seeped into the institutions we’re traditionally wired to trust.
But headlines in the aftermath of the leak have focused far too much on bank bashing, and have served as a distraction to the real issues the leaks give rise to: is anything being done to protect vulnerable AML officers? Which investigations, if any, have been prejudiced? How can we meaningfully reform the SARs system and resource our intelligence agencies?
These questions aren’t salacious and probably won’t elicit hushed whispers in (virtual) boardrooms across the world. But they’re important in helping us move forward and galvanize change. Even more important than rooting for the destruction of Wall Street.
