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Prepared Remarks of James H. Freis, Jr., Director Financial Crimes Enforcement Network Louisiana Bankers Association 112th Annual Convention April 26, 2012 New Orleans, LA
Good afternoon. I appreciate the opportunity to speak with you all today about the work we are doing at the Financial Crimes Enforcement Network - known as FinCEN.
Let me say at the outset that the work being done by the Louisiana Office of Financial Institutions underscores the strong partnership between our two agencies, particularly under John Ducrest's leadership as Commissioner of the Louisiana Office of Financial Institutions, as well as Chairman of the Conference of State Bank Supervisors. And his work to promote a strong banking system extends beyond Louisiana, as John was recently appointed to serve on the Financial Stability Oversight Council, which works to monitor the safety and stability of the nation's financial system.
I truly appreciate opportunities like this to meet with bankers, including a few times each year with members of State banking associations, to discuss why and how at FinCEN we do what we do, and why it matters to you as bankers, as well as your customers.
FinCEN was established almost exactly 22 years ago (our anniversary was just yesterday, April 25). And while our mission has adapted over the years to an ever-changing landscape, at its core, our purpose has always been to combat money laundering, track illicit finance, and serve as a nexus for information gathering and sharing among Federal, State, and local law enforcement agencies. Providing support to law enforcement is one of the main reasons FinCEN exists. Financial crime is rooted in profit, and it is our job to help law enforcement follow the money and piece the financial trail together.
And because FinCEN's mission must continue to evolve, our focus now includes new responsibilities to help combat terrorist financing, fraud, and other increasingly sophisticated financial crimes.
And in any regulatory framework, establishing rules, providing education, guidance and feedback, and enforcing compliance are all critical components and mutually reinforcing. In the anti-money laundering and counter-terrorism financing (AML/CFT) context, rules can be placed in three basic categories: (i) knowing your customer and being vigilant against criminal abuse; (ii) keeping records so that financial institutions and law enforcement can "follow the money" if needed as part of an investigation into suspicious or criminal activity; and (iii) reporting of information, most critically Suspicious Activity Reports (SARs).
FinCEN implements, administers, and enforces the Currency and Financial Transactions Reporting Act of 1970, the nation's first and most comprehensive AML/CFT statute. Many of you are familiar with this framework, as amended over the years, under the common description as the Bank Secrecy Act (BSA). In brief, the BSA authorizes the Secretary of the Treasury to issue regulations requiring banks and other financial institutions to take a number of precautions against financial crime, including the establishment of AML programs, and "to require certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations and proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism." The Secretary of the Treasury has delegated administration of the BSA to FinCEN.
The key to everything we do is sharing the extremely valuable information that financial institutions provide to us. As part of our responsibility, FinCEN oversees the maintenance of a database with approximately 180 million records of financial transactions and other reports filed by financial institutions like yours. This data represents the most broadly relied upon and largest source of financial intelligence available to law enforcement.
In addition to collecting, analyzing, securing, and disseminating the FinCEN data to our law enforcement and regulatory partners, FinCEN itself is also a financial institution regulator. We have the challenging but important task of writing and coordinating the enforcement of AML rules for over 200,000 banks, credit unions, non-bank mortgage lenders and originators, money services businesses (MSBs), insurance companies, securities brokers, casinos, mutual funds, precious metal dealers, and other financial institutions that face the risk of being used by criminals to support enterprises ranging from drug cartels, mortgage fraud rings, terrorist finance networks, immigrant smuggling, and much more. Why do we have such a broad remit? The reason is simple: any way you can move money, any way you can intermediate value, can be abused by criminals, who are motivated overwhelmingly by money and the need to launder and attempt to enjoy the proceeds of their crimes.
Given the scope of FinCEN's mission, people are often surprised to learn that our workforce is only comprised of slightly over 300 employees. Our dedicated team includes analysts that study and research the reported information to support law enforcement and regulatory partners - both domestically and internationally; regulatory experts developing guidance for the financial industry; and IT specialists building systems to ensure the FinCEN information your institutions report is readily accessible to our law enforcement and regulatory partners.
In this context, perhaps you can better understand why I emphasize how important it is for FinCEN to partner with others, both in the government and the private sector. My trip today and tomorrow to Louisiana is a perfect example of the close partnership we have with our State regulatory partners, in particular to ensure compliance with FinCEN's regulations by State-chartered or licensed financial institutions. John Ducrest and the OFI have been leaders in helping FinCEN with the State banking commissioners and supervisors of money services businesses, such as money transmitters and check cashers. Tomorrow, I will meet with Jim Donelon, the Commissioner of the Louisiana Department of Insurance and Vice-President of the National Association of Insurance Commissioners. I will also meet with Darin Domingue, President of the American Association of Residential Mortgage Regulators, to discuss new regulations for mortgage brokers. It makes sense for FinCEN to partner with prudential supervisors, not only because they know their institutions, but because we see again and again that compliance with FinCEN regulations is closely related to institutions' overall culture of compliance.
Feedback on the Use and Usefulness of the Data Reported to FinCEN
Let me turn now to answering for you some of the questions we hear most consistently from bankers such as yourselves. FinCEN is unique among the Federal financial regulators, as we do not directly examine for compliance and, therefore, do not have the same kind of day-to-day interaction as do other regulators with the financial institutions that fall under our purview. Therefore, in 2010, FinCEN undertook an outreach initiative to smaller depository institutions all over the country to hear about how these institutions implement their anti-money laundering programs, including unique challenges faced by institutions across this asset class and where additional guidance from FinCEN could be helpful. These meetings built upon FinCEN's previous outreach with large depository institutions in 2008, followed in 2009 by meetings with some of the nation's largest money services businesses.
In addition to on-site meetings with 18 depository institutions in 13 states, FinCEN staff also held town hall style meetings in both Chicago, Illinois and Eden Prairie, Minnesota, where we engaged with more than 40 different institutions.
FinCEN invited a number of institutions that expressed an interest in meeting at FinCEN's offices, to participate in two town hall meetings - one for banks and one for credit unions - that FinCEN held at its offices in suburban Washington, D.C. The one common theme that arose during these meetings was about the use and usefulness of the currency transaction report (CTR) and the suspicious activity report (SAR) information reported to FinCEN. With that in mind, I would like to spend a moment talking about how FinCEN - and others - are using and protecting this data your institutions provide to us.
Tip Off: Primarily with respect to a SAR, but also sometimes with a CTR, the FinCEN information provided can be the first tip that starts an investigation. A financial institution employee's good instincts can, and do, result in the contribution of critical information that serves to set investigatory wheels in motion to track down suspected criminal activity. Most people understand and expect this usage, yet fail to appreciate the following broader uses of FinCEN data.
Identifying Information: When an investigation is already underway, the information reported to FinCEN can add significant value by pointing to the identities of previously unknown subjects, exposing accounts and other hidden financial relationships, or unveiling items of identifying information like common addresses or phone numbers that connect seemingly unrelated individuals and, in some cases, even confirming locations of suspects at certain times.
Law enforcement, again and again, confirms the reliability and usefulness of the information you report to FinCEN, which is a direct reflection of the diligence and training within institutions such as yours.
Trends: Law enforcement investigators, as well as FinCEN analysts, can use technology to examine the entire information base more broadly. When expertly queried, trends and patterns emerge with tell-tale signs of criminal or terrorist activity revealing networks and emerging threats. Hidden in the wealth of information, but easily revealed by skilled analysts with the right tools, are very reliable and credible reports of mortgage fraud, check fraud, identity theft, bribery, counterfeiting, insider abuse, and other financial crimes.
This information can also be overlaid on a map to make apparent the geographic range of suspicious activity and allow law enforcement agencies to better allocate their limited resources for maximum effectiveness. We can only gain such insights with the aid of a large database in which we see vulnerabilities otherwise invisible in a single report or to individual institutions.
Deterrence: The very existence of FinCEN's regulations has a deterrent effect on those who would abuse the financial system. The certainty of a CTR filing and the mere possibility of a SAR filing force criminals to behave in risky ways that make them vulnerable to detection and capture.
Criminals fear detection if they use the U.S. financial system and are willing to take great risk to avoid its well-designed capability to detect illicit activity. The definitive currency reporting threshold forces criminals to structure their cash transaction(s) which, in turn, exposes them to a SAR filing. CTRs and SARs are complementary forms that together create an intimidating criminality trap. In addition to the increased likelihood of discovery, it's a success of its own that our collective efforts make it more difficult and time consuming for illicit actors to realize the proceeds of crime or raise and move funds for terrorist training and operations.
And one of the key findings from our outreach to financial institutions in 2010 was that while compliance officers were quite familiar with a range of FinCEN publications and information on the purposes behind the regulatory framework, in particular the uses of the FinCEN data, they struggled to effectively communicate this information within their institutions. Both compliance and line of business professionals noted that there is an ongoing need to educate management on the range of information available on the value of FinCEN data. As a result of this feedback, FinCEN published an article in the October 2010 SAR Activity Review to provide additional suggestions on how to discuss the value of FinCEN data with the board of directors.1
In summary, information reported to FinCEN can - and does - play an important role in different ways that contribute to the success of many law enforcement investigations. With that in mind, I'd like to take a minute to share with you more specifics about how FinCEN engages with its law enforcement and regulatory partners in Louisiana.
Who is Using the FinCEN Data?
FinCEN has Memoranda of Understanding in place with U.S. Attorney's Offices all around the country to enable them to access FinCEN data to investigate and prosecute criminal activity involving the U.S. financial system. There are currently more than 12,000 nationwide users of the information at all levels of the law enforcement and regulatory communities-many of whom can access the FinCEN data remotely.
Additionally, FinCEN also opens its doors to law enforcement agencies who wish to come to our office to access the FinCEN data. Our Platform Program provides on-site access to FinCEN systems for designated personnel in the Washington, D.C. area who are conducting research for their agency's investigations. Currently, 42 Federal law enforcement agencies participate in this program, including offices of the Inspector General, which work to uncover waste, fraud, and abuse in government programs.
FinCEN's systems also provide us with alerts when more than one agency is researching the same subject within the FinCEN data. Last year alone, FinCEN networked agencies together more than 1,000 times by contacting investigative personnel in the respective agencies and providing them contact information for other agency personnel performing similar data searches.
Networking can help law enforcement by facilitating information sharing, avoiding potential negative impacts on other cases, and maximizing resources. Our networking capabilities are also enhanced by the fact that FinCEN has representatives working on-site as liaisons from 12 different Federal law enforcement and regulatory agencies.
FinCEN also provides direct analytical support to law enforcement efforts across the state of Louisiana, and conducts strategic analysis based on studying the information reported to FinCEN. The focus of much of our work in this area has been on mortgage loan fraud, however, in the aftermath of Hurricane Katrina, FinCEN issued an Advisory warning financial institutions about the potential for fraudulent transactions involving hurricane relief financial assistance, including possible "red flags" for institutions to look for, as well as encouraging financial institutions to file SARs reporting the activity. FinCEN also proactively provided information on SAR filings to law enforcement officials in support of a multi-agency Katrina Fraud Task Force, as well as in response to requests for law enforcement support from within Louisiana. This is a good example of how FinCEN can combine its range of regulatory and law enforcement support authorities, to take what it learns from actual criminal cases, to help proactively mitigate the risks of further criminal abuse.
Just last week, FinCEN issued its full year 2011 update of mortgage loan fraud reported suspicious activity reports (MLF SARs). Financial institutions submitted 92,028 MLF SARs last year, a 31 percent increase over the 70,472 submitted in 2010. The increase can primarily be attributable to mortgage repurchase demands. In Louisiana, MLF SARs filings were up 6 percent between 2010 and 2011. Among parishes in Louisiana, East Baton Rouge had the most MLF SAR subjects, followed by St. Tammany and Orleans.
The reporting of mortgage fraud in Louisiana reflects that the residential housing situation is not nearly as distressed as certain areas of the country. As Bob Taylor, your Louisiana Bankers Association CEO, explained in his opening remarks this morning, Louisiana is unique among the States in the role that notaries play in real estate transactions. Vulnerabilities in the real estate industry have been a primary focus of FinCEN's work in recent years, both in terms of fraud and the risks of criminals investing the proceeds of crime in real estate.2 Just three days ago I was pleased to speak to the Mortgage Bankers Association about some of these efforts, including the most recent expansion of FinCEN's regulations to close a regulatory gap by extending the requirements to banks to also include non-bank mortgage lenders and originators.3 In the near future, we will be publishing a study of risks related to title and escrow companies, and welcome public input on other steps we can take to mitigate risks of criminal abuse in the real estate industries.
How the FinCEN data is used in Louisiana
Law enforcement and regulatory officials, including the Louisiana Office of Financial Institutions, the United States Attorney's Offices for the Eastern, Middle, and Western Districts of Louisiana, and the Louisiana State Police, are very active users of the information reported to FinCEN.
FinCEN data is made available to state and local law enforcement agencies. Each state has a coordinator, so law enforcement agencies without direct access to the FinCEN data are able to make requests through them to query the information. In Louisiana, there are currently 18 different state and local law enforcement agencies utilizing the information reported to FinCEN through the Louisiana State Police, your state's coordinator. FinCEN conducts audits of how the data is being used and also conducts on-site inspections to ensure appropriate protocols designed to protect this sensitive data are being followed.
There are also over 100 SAR Review Teams located throughout the country, typically coordinated through the U.S. Attorney's Office. SAR Review Teams are comprised of State, local, and Federal law enforcement and regulatory authorities in the area; meet on a regular basis to review SARs filed within their judicial district; and coordinate law enforcement investigative follow-up as appropriate.
Louisiana has three SAR Review Teams coordinated by the three U.S. Attorney's Offices, reviewing SARs filed within their jurisdiction. The teams include representatives from Federal, State, and local agencies throughout the state who participate in the regularly scheduled meetings.
There have been several success stories resulting from investigative efforts in Louisiana.
In one case, Federal and local law enforcement officers in Louisiana arrested more than 20 people in connection with a multi-state cocaine distribution network operating out of the New Orleans area. The arrests are significant because they represented some of the first major enforcement actions undertaken in the wake of Hurricane Katrina. Federal financial investigators noted that FinCEN records played a major role in the investigation.
During this multi-state investigation, Federal agents and analysts made significant use of FinCEN data:
A Federal financial investigator noted that: "FinCEN information on this significant investigation has proven extremely valuable. It is anticipated that FinCEN's research will provide a significant number of financial transactions as other individuals, businesses, and financial institutions are developed." In fact, the defendants in this case ultimately pleaded guilty and were sentenced to more than four years, plus forfeiture of property, vehicles, weapons, and cash.
In another case, several banks in Louisiana filed SARs on a an individual who was ultimately convicted by a federal jury on multiple counts of extortion, wire fraud, failure to file income tax returns, and structuring financial transactions to evade a federally mandated reporting requirement. The SARs filed by banks in Louisiana on the defendant detailed unusual transactions, included structured transactions intended to evade reporting requirements. The defendant was ultimately sentenced to over a decade in prison and ordered to pay over $250,000 in restitution and forfeitures.
Louisiana Filings: A Snapshot
Now that we've spent some time discussing the use of the data, I wanted to quickly touch on what FinCEN is seeing statistically when we look at the information reported to FinCEN by financial institutions in Louisiana.
SAR filings in Louisiana totaled 5,557 in 2011, up 19 percent from the previous year's total of 4,665 filings. This is comparative to trends in overall filing volume, as SAR filings went up 14 percent nationally between 2010 and 2011. Looking more closely at the Louisiana filings, increases were seen in filings reporting suspected structuring/money laundering, mortgage loan fraud, false statement, mysterious disappearance, and wire transfer fraud. Decreases were seen in filings reporting suspected check kiting, as well as counterfeit credit/debit cards or other counterfeit instruments.
Louisiana's SAR filings account for less than 1 percent of national SAR filings, and Louisiana ranks 29th in terms of number of SAR subjects per capita in calendar year 2011. Geographically - and understandably - the highest number of SARs filed in Louisiana came from the state's most populated areas, including New Orleans and Baton Rouge. However, the greatest percentage increase in SAR filings between 2010 and 2011 (over 35 percent increase) came from Alexandria and Monroe, Louisiana.
As for characterizations of suspicious activity, BSA/Structuring/Money Laundering was the most frequently cited, occurring in 64 percent of the SARs filed. The 2nd ranked characterization was check fraud. In taking a closer look, the narratives of SARs characterizing activity as "other," the 3rd most common characterization, showed the following type of transactions (in one form or another) as occurring with the most frequency: tax evasion/fraud; ACH fraud; unusual cash activity; elder financial exploitation; account takeover; and unregistered/unlicensed MSB.
One note regarding elder financial exploitation: In February 2011, FinCEN issued an advisory to help financial institutions spot and report on activities involving elder financial exploitation. We appreciate the efforts of Louisiana depository institutions for their efforts to identify and make us aware of this activity.
For those of you interested in learning more about SAR statistics either in your state or across the country, FinCEN publishes statistics once each year on our website where you can not only review various numerical breakdowns, but also see the information plotted using mapping techniques.
Another area I wanted to touch on, which also was discussed during our outreach meetings last year, is the use of the 314(a) and 314(b) programs.
As most of you are probably aware, FinCEN's regulations under Section 314(a) of the USA PATRIOT Act enable Federal, State, local, and foreign law enforcement agencies, through FinCEN, to reach out to more than 45,000 points of contact at more than 22,000 financial institutions to locate accounts and transactions of persons that may be involved in terrorism or significant money laundering. FinCEN receives requests from law enforcement agencies and upon review sends requests to designated contacts within financial institutions across the country generally once every two weeks via a secure Internet Web site. The requests contain subject and business names, addresses, and as much identifying data as possible to assist the financial institutions in searching their records.
The financial institutions must query their records for data matches, including accounts maintained by the named subject during the preceding 12 months and transactions conducted within the last six months, unless a different time period is specified in the request. Financial institutions typically have two weeks from the transmission date of the request to respond to 314(a) requests. If the search does not uncover any matching of accounts or transactions, the financial institution is instructed not to reply to the 314(a) request.
To date, financial institutions have responded with over 100,000 positive subject matches - and over 170 of these responses have come from 45 depository institutions in Louisiana. And based on the total feedback we have received, 74 percent of 314(a) requests have contributed to arrests or indictments, demonstrating the high value of information these institutions are providing to law enforcement.
FinCEN's review of our data also shows that in the past 5 years, more than 60 percent of positive 314(a) matches have come from institutions with assets under $5 billion. In addition, FinCEN estimates that over the past 5 years 92 percent of the institutions that have responded to 314(a) requests are institutions with assets under $5 billion.
The general proposition remains true that in absolute terms a very small depository institution is statistically less likely to be touched by organized criminal activity than depository institutions with millions of customers and tens or hundreds of billions in assets. But the 314(a) statistics alone have shown that in comparative terms a disproportionately high number of actual cases of terrorist financing and significant money laundering have involved accounts and transactions at smaller depository institutions. The 314(a) statistics underscore how important it is for all financial institutions, big and small, to assess risk and implement appropriate policies and procedures to mitigate risk.
Section 314(b) of the USA PATRIOT Act allows financial institutions to share information with each other for the purpose of identifying and, where appropriate, reporting possible money laundering or terrorist activity.
In speaking with many of the largest banks in 2008, FinCEN found use of the 314(b) process to be quite extensive, with several banks noting that they often use the 314(b) process throughout the course of a SAR investigation, before filing a SAR or making a decision to close an account. In our discussions with institutions with assets under $5 billion, however, FinCEN found rather limited use of the 314(b) program.
For an institution to share, they simply need to visit FinCEN's Web site and fill out a short form providing notice of their intent to share information, and designating a point of contact. The form is very simple to complete and FinCEN will provide you with a 314(b) certification for your records.
In FinCEN's town hall meetings in 2010, institutions shared their experiences with 314(b), including how simple the procedure is to register with FinCEN. One institution shared how difficult it was to discuss a case with a counterpart (for example, seeking more information about a potentially suspicious wire transfer from the institution originating the transfer) in the absence of the institution being registered under 314(b).
This is exactly the kind of situation where the institutions should be relying on the safe harbor available under 314(b). Absent the safe harbor provided by 314(b), an institution could find itself in violation of customer confidentiality obligations.
While participation in 314(b) is ultimately voluntary, FinCEN would like to emphasize the importance of information sharing in protecting the financial system from abuse.
FinCEN published guidance in June 2009 on the scope of the safe harbor provided by 314(b). The guidance clarified that a financial institution participating in the 314(b) program may share information relating to transactions that the institution suspects may involve the proceeds of one or more specified unlawful activities. The institution will still remain within the protection of the 314(b) safe harbor from liability. "Specified unlawful activities" under 18 U.S.C. 1956 and 1957 include a broad array of underlying fraudulent and criminal activity.
For those of you not among the 78 institutions in Louisiana currently signed up to share via the 314(b) program, I hope you will visit FinCEN's Web site at www.fincen.gov or contact the FinCEN 314 Program Office with any questions you may have. The number is (866) 326-8314.
One last area I would like to touch on, and in which we've had recent developments, is electronic filing (E-Filing). E-Filing is a free, Web-based electronic filing system that allows filers to submit through a secure network their reports required under FinCEN's regulations implementing the BSA.
Subject to certain exemptions and hardship extensions, all FinCEN reports must be E-Filed beginning July 1, 2012.4 FinCEN had formally solicited comment on its proposal to require E-Filing. The benefits of E-Filing, both to the government and to the filer, are obvious and compelling. As more and more financial institutions migrate to E-Filing, they will be impressed with the ease and convenience of using their basic Internet connections, while gaining immediate feedback to continually improve the quality and usefulness of the reported information in the effort to combat financial crimes.
With the July 1 date approaching, FinCEN has been working closely with our state and Federal counterparts to increase outreach to those financial institutions who have submitted paper reports in the last few months to ensure industry is prepared for mandatory E-Filing.
In the first two months of this year, approximately 91 percent of CTRs filed by financial institutions in Louisiana were E-Filed; while 92 percent of SARs were filed electronically. In March, the number of CTRs filed electronically went up to 99 percent; however, the percentage of SARs E-Filed remained about the same. So, for those institutions in Louisiana that are still filing on paper, we encourage you to contact FinCEN shortly to begin your transitioning to E-Filing.
E-Filing is a faster and more convenient, secure, and cost-effective method of submitting reports as well as for receiving confirmation of acceptance and notices of any errors. Support is available through FinCEN's Web site or through our helpline at 866-346-9478 to get you started or answer any questions you may have.5
One final point: greater use of E-Filing also assists FinCEN in providing important information relevant to money laundering and terrorist financing investigations to law enforcement in the quickest manner possible. Through E-Filing, reports are available to and searchable by law enforcement in two days, rather than two weeks, for example if filed on paper.
I just mentioned FinCEN's helpline for E-Filing, but also want to note FinCEN's regulatory helpline available to financial institutions that may have questions or need assistance from FinCEN.6 In the past year, FinCEN representatives fielded 103 inquiries from representatives of financial institutions in Louisiana, assisting them in a number of areas, including CTR filing and exemption-related inquiries; MSB registration and renewals; questions regarding characterizations of suspicious activity on the SAR form; and E-Filing. We hope that financial institutions in Louisiana will continue to use this helpful resource.
I hope my remarks today have given you a better understanding of the work FinCEN does - particularly in the area of how we use the information you report to us, and the usefulness to law enforcement of this information. Providing feedback in this area is something we take very seriously. However, we must also be diligent to find the appropriate balance between sharing information and maintaining appropriate confidentiality.
Particularly with respect to SARs, FinCEN and law enforcement take very seriously the obligation of public trust in which sensitive personal and financial information about customers is reported under an expectation and obligation of confidentiality. The obligation to protect the confidentiality of reported information prevents us from disclosing that a SAR was filed or from providing too many investigative details, even in the case of an ultimate criminal conviction.
And even in more general trend reports, sometimes we seek to avoid providing a level of detail that would serve as a roadmap for criminals to see how others have successfully laundered money or the investigative techniques that law enforcement has used to apprehend them.
In conclusion, we look forward to working with the financial industry, as well as regulator partners, to follow our shared goals of serving customers, not criminals. We want to encourage a strong banking system, and appreciate all constructive suggestions as to how to do this in an efficient and effective way, to let you focus on banking and getting our economy moving.