The FinCEN leaks and the compliance function

The leak of sensitive information from the U.S. Government’s Financial Crimes Enforcement Network (FinCEN) has created an embarrassing situation for many bank executives, and especially compliance executives. FinCEN is the U.S. government’s most confidential financial intelligence database, and yet somehow over 2,100 of its highly sensitive reports, filed between 2000 and 2019, were exposed to external agents in October 2020.

The International Consortium of Investigative Journalists (ICIJ) confirmed that they were in possession of the reports, with some originating from the larger, better known, international banks, such as HSBC, JP Morgan and Deutsche Bank. The banks have been criticized for failing to prevent the circulation of illicit funds and may lead to further erosion in public trust in the banking system.

While this loss of trust may be understandable, there is an argument that the leak reveals careful risk management by the banks. Indeed, the FinCEN files reveal a level of care taken by the banks’ compliance function to meet their obligations and report any suspicious activity to the relevant authorities.

It is essential to highlight this point not just because it may be an unfair judgement of the compliance function, but more importantly due to the negative perceptions of banking activity that has persisted for so many years. Those negative perceptions have an impact on banks, especially banks in specific geographical locations. MENA and African-based banks, in particular, have especially suffered from negative preconceptions, with many of their governments perceived as weak when it comes to anti-money laundering rules and enforcement.

These negative perceptions can have unfortunate consequences. For many MENA and sub-Saharan Africa banks, it has resulted in the loss of correspondent banking relationships as global banks opt to de-risk rather than invest time and resources in managing risk. The withdrawal of correspondent banking facilities can bring a host of issues for the local community, some of which are particularly critical for countries that are characterized by high poverty levels. It can inhibit financial integration by raising the cost of finance for small and medium-sized enterprises; threaten cash flow for those jurisdictions dependant on non-profit organizations to help build their economy, and cost some firms access to credit from U.S. exporters.

Yet perceptions are not always representative of actual events. 

Indeed, the role of the Compliance Officer has changed considerably over the past two decades. For a long time, and certainly, in the early 2000s, the compliance role was a simple back office check. Often it would be completed by an employee borrowed from the accounts or legal departments who spent one or two days a week checking that certain tasks had been performed. This would only happen once a deal had been signed, or an account opened. 

The compliance executive now occupies a much more central role within the organization, and the function has been elevated considerably. Today, for a compliance program to be effective, compliance executives need to be proactive and to help set the compliance tone within organizational structure. It is a role that now demands high-level project management skills and the careful management of senior executives who may be too focused on organizational goals to understand the significance of compliance. For a compliance function to succeed in an organization, the incumbent compliance officer must have the gravitas and ability to lead senior management when the need arises, even when faced with fierce opposition.

While the need for this gravitas has been understood for several years in the top financial districts, regional banks have now grasped the importance of compliance professionalism. Based on information contained in the FinCEN files, African-based journalists were able to explore a number of leads across the continent that included presidents, oil, gold and airline companies, and many more. While banks have been blamed for not taking strong enough action, without those compliance reports these activities would have remained hidden.

A bank’s compliance officer is duty-bound to submit a suspicious activity report (SAR) whenever there is note of specific actions on a client’s account. It does not follow that a crime has been committed but is an indication that certain activity has occurred that falls within the definition of heightened risk. The compliance officer cannot close the account, nor do they have the capacity to investigate and decide on prosecutorial action. Their responsibility is to report the activity in accordance with regulation, and this, clearly, has been achieved.