U.S. federal law enforcement found Congress willing to give broad support in increasing investigative powers, removing stumbling blocks in complex money laundering cases and raising penalties for individuals lying to banks or hiding behind anonymous ownership structures.
Those are just some of the outcomes at a Congressional hearing this week analyzing a bill that would strengthen the country’s defenses against all financial crimes. Also discussed was potentially using the suspicious activity information gathered by U.S. anti-money laundering (AML) programs as a bargaining chip to get more data from foreign banks and jurisdictions.
The hearing before the U.S. Senate Judiciary Committee took place to query top federal law enforcement agencies, including the U.S. Treasury, U.S. Department of Justice and Homeland Security, about a proposed bill, S.1241. The line of questioning focused on whether the proposed legislation goes far enough in addressing many of the country’s largest vulnerabilities allowing criminals, corrupt power brokers and terrorists to use the financial system to launder money.
The bill, dubbed the “Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017,” would modernize U.S. money laundering laws, bolster corporate transparency by criminalizing concealment of beneficial owners and allow money laundering charges to be tacked on to tax crimes. It is generally seen as a U.S. law enforcement “wish list.”
It would also make it easier and faster for U.S. investigators to get foreign bank records from law enforcement partners, and potentially punish jurisdictions that blow off U.S. inquiries on illicit individuals and companies. This would represent a vital update to “antiquated” mutual legal assistance treaty (MLAT) procedures that can take six months to a year to complete for one request – if it is fulfilled at all.
The discussions at the hearing swung from dire and dour - when focusing on the depressing reality that less than one percent of dirty money is actually recovered and forfeited by U.S. and international investigators - to hopeful and supportive as legislators all stated they wanted to give more resources to federal agencies, regardless of if the bill becomes law.
Questions included things like, “is this bill enough,” “what other tools do you need,” “Do you have enough resources and how can we get you more” and lastly, “what new legislation do you need” to give more teeth to current laws or penalties for flouting them – something that could directly impact financial crime compliance teams, which speakers called the “first line of defense.”
The questions from legislators covered many of the current nigh impassable impediments to U.S. law enforcement investigations, including the inability to identify hawalas, foreign and domestic oversight of correspondent banking relationships and the enduring frustration of anonymous ownership structures defeating efforts to access beneficial ownership information.
But the bill is still remiss in addressing some of the biggest holes in U.S. financial crime defenses, including trade-based money laundering (TBML), and AML requirements for attorneys, accountants, certain real estate professionals, and hedge and private equity funds.
To read prior ACFCS coverage of the bill, please click here. To read the full text of the bill, click here. To peruse a general summary of the bill, click here. To review a more detailed summary of each section of the proposed bill, click here.
By the numbers: Global Money Laundering
Globally: The U.N. Office on Drugs and Crime estimates that annual illicit proceeds total more than $2 trillion globally.
The United States: $300 billion, or about two percent of GDP.
Biggest generator: $64 billion annually from drug trafficking.
Enforcement: Federal prosecutors have secured, on average, more than 1,200 federal money laundering convictions each year, including global and high-value money laundering cases.
Percentage forfeited: Less than one percent, in some cases .0025.
Corruption: U.S. has seized or restrained $3.5 billion worth of corruption proceeds in recent years as part of the Kleptocracy Asset Recovery Initiative, including last year seeking to recover more than $1.7 billion tied to 1MDB.
After 9/11 flurry, AML stagnation
At issue, according to Congress: The United States hasn’t made substantial changes to the country’s anti-money laundering (AML) laws since the introduction of the Patriot Act in the aftermath of the 9/11 attacks, said Senate Judiciary Committee Chairman and Iowa Republican Chuck Grassley, one of the co-sponsors of the bill.
“It has been almost 15 years since Congress took significant action to update our anti-money laundering laws,” he said, adding that U.S. AML laws must better keep pace with new technologies that allow criminals to “move millions of dollars in illegal funds with the click of a button.”
All entities under the broad ambit of financial institutions and law enforcement must prepare for the new reality of financial crime, he said.
“We now have new technologies and methods that allow criminals and terrorists to move money and operate in the dark, outside the traditional financial system and the watchful eyes of law enforcement,” Grassley said, with the sobering conclusion being that, “unfortunately, our AML structure is now outdated.”
The structure, created in the 1980s to prosecute “cocaine cowboys” and narco trafficking groups, must now morph into becoming more agile, data driven and determined, cooperating more quickly and fully domestically and with international partners as criminal schemes become more global in scope, he said.
Such strategies are vital, Grassley said, to counter ISIS-inspired terrorists, Russian billionaire kleptocrats and Mexican drug cartel kingpins, while these groups also weave old-style money laundering with virtual currencies and companies hidden behind anonymous, impenetrable ownership structures in offshore secrecy havens, a tall order indeed.
Overall, criminals and corrupt politicos launder $300 billion in illicit funds through the U.S. each year, he said, adding that 99.9 percent of illicit funds getting laundered never gets caught or forfeited.
All of the combined efforts of banks, law enforcement and regulators only account for a fraction of a decimal point in actual confiscated criminal assets, he said.
“The bill would close a number of legal loopholes that have stifled law enforcement by clarifying for prosecutors and judges precisely the type of evidence that is required to prove money laundering offenses,” Grassley said.
It would also enable prosecutors to “more effectively charge cases when dirty money is comingled with clean money” and “increase the penalties for bulk cash smuggling, which remains the most common method for drug traffickers to move money into and out of the U.S,” he said.
As well, the bill provides for two new criminal laws that will make it a crime for someone to lie to a bank about the true beneficial ownership of a bank account or whether such an account is associated with a foreign political official, which is the type of information that would trigger enhanced due diligence by banks, Grassley said.
Beyond extensive bipartisan support – the bill is spearheaded by three influential Democrats and Three Republicans – it has also, not surprisingly, garnered deep law enforcement backing, commanding formal endorsements from the Federal Law Enforcement Officers Association, the National Association of Police Organizations, National Association of Assistant United States Attorneys, the National District Attorneys Association, the Fraternal Order of Police and the FACT Coalition.
Challenges abound in cross-border cases
Some of the current significant focal points of U.S. law enforcement include, at the top of the list, lack of beneficial ownership data, said Kenneth Blanco, deputy assistant attorney general of the U.S. Department of Justice’s Criminal Division and the incoming head of the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).
“For example, investigators may need grand jury subpoenas, witness interviews, or foreign legal assistance to unveil the true ownership structure of shell or front companies associated with serious criminal conduct,” he said, which can take too long to get responses or never come into being because even the most basic information is hidden behind layers of opaque LLCs.
“Moreover, the failure to collect beneficial ownership information also undermines financial institutions’ ability to determine which of their clients pose compliance risks, which in turn harms banks’ ability to comply with their legal obligation to guard against money laundering,” he said, adding that other major areas of attention are foreign correspondent relationships, the misuse of money remitters and prepaid cards, virtual currencies and grand corruption.
And if foreign banks don’t respond to law enforcement requests for information, there is no mechanism to force their hand – or punish them for their recalcitrance, or even prevent that bank from tipping off the subject of their request, Blanco said.
“There is no procedure to seek to compel compliance with subpoenas to foreign banks, nor any explicit authority to impose sanctions for contempt,” he said, adding that law enforcement can’t even “close the correspondent account or a foreign bank when the foreign bank has brought proceedings to challenge enforcement of the subpoena,” Blanco said.
Moreover, transnational criminal organizations “are able to convert cash drug proceeds to virtual currencies through both licensed and unlicensed exchangers, and then transfer the virtual currencies to China to purchase Chinese goods,” he said.
On the graft side of the illicit equation, recent investigations and prosecutions have “revealed that corrupt foreign officials have purchased various U.S. assets to launder the proceeds of their corruption, from luxury real estate and hotels to private jets, artwork, and motion picture companies,” according to Blanco.
In era of virtual worlds, all crimes becoming ‘cyber-enabled’
But one of the most disturbing trends now is organized criminal groups taking their tactics into virtual worlds, said Matthew Allen, Assistant Director of Investigative Programs for Homeland Security Investigations (HSI), part of Immigration and Customs Enforcement (ICE).
“Many of the traditional transnational crimes that HSI investigates have begun to migrate to become ‘cyber-enabled,’ with significant parts of the crime committed over the internet, including both the ‘indexed’ internet and the ‘unindexed’ dark web,” he said.
Transnational crimes that HSI investigates, including child exploitation, drug smuggling, intellectual property rights violations, illegal export of firearms, and money laundering “now all have cyber-enabled elements to them,” Allen said, adding that can bring new obstacles when criminals use anonymity-enhancing crypto currencies.
To better improve investigations and AML compliance at banks, investigators and regulators are now exploring new technologies, including machine learning, said Jennifer Fowler, Deputy Assistant Secretary at the Office of Terrorist Financing and Financial Crimes, part of the U.S. Treasury.
“It is incumbent upon us to explore new ways to use technology, including artificial intelligence, to maximize our ability to identify the highest threats,” she said, adding that the office is currently conducting outreach with financial institutions and businesses in the financial technology (FinTech) and regulatory technology (RegTech) sector to better understand and assess the potential of technological innovations coming to market.
“We are eager to identify the new technologies that may help us improve how we collect from and share information with the private sector,” she said, adding that is happening in concert with identifying metrics to improve the information in bank filings, while lowering the burden on the industry.
Banks can also look for FinCEN to more aggressively use Patriot Act Section 314(a) to share detailed information on proliferation finance, corruption, and fraud, Fowler said.
In fact, countries not following the U.S. lead in improving AML effectiveness is at the heart of the global financial crime problem.
“The most significant challenge we are facing internationally is from the countries that have put appropriate laws in place but are not implementing or enforcing them effectively,” Fowler said.
Bill, if enacted, addresses many outstanding gaps
Something that could change drastically domestically if the bill becomes law.
“The bill as proposed hits those problems,” of boosting beneficial ownership disclosures, foreign bank records and the like, Blanco said. “It covers the gaps we see in the legislation that currently exist. So I think this legislation goes a long way,” he said, adding that a common enabler of those gaps is lack of corporate transparency.
But while the bill can help, it has a lot of ground to cover to make a real dent in global money laundering networks, said John Cassara, a Board Member of the Center On Sanctions and Illicit Finance at the Foundation for Defense Of Democracies, and a former top U.S. Treasury official.
“AML legislation is the least effective of any anti-financial crime measure anywhere,” he said, adding that the crimes, whether theft, narco trafficking or corruption, “threaten our daily lives. Many of the ills we face all come back to the money. Money laundering is the essential component of transnational crime.”
And when tabulating the success or failure of AML efforts, there are “only two metrics that matter: The amount of dirty money seized and forfeited…and the number of convictions.”
The results: In one example, looking at the $18 billion to $39 billion smuggled across the country’s Southern Border, .0025 ever gets seized, with the comparative rate of prosecutions for money laundering also abysmal, he said.
“For a money launderer to be caught and prosecuted, that person has to be really stupid or really lucky,” Cassara said.