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The Need for Anti-Money Laundering Regulatory Reform

It is rare these days for Republicans and Democrats to agree on political priorities – another profound grasp of the obvious.  Recently, on Capitol Hill there appears to be some common ground on the issue of reforming AML laws and regulations.

The motivation is to make financial AML regulations “smarter” and increase focus on beneficial ownership, terrorist financing and proactive detection of money laundering.  Some of the AML requirements and reporting rules have lost focus on these important priorities.

Two significant issues have been identified: (1) reporting requirements for transactions over $10,000 and (2) the filing of Suspicious Activity Reports.  Banks and law enforcement agree that many of the filings above the $10,000 threshold and in SARs are not helpful to law enforcement.  In response to money laundering and terrorist financing threats, the number of filings required by banks has steadily increased with no firm finding that such filings have directly resulted in increased enforcement.  In fact, banks have suggested that the system is so complex and poorly coordinated that law enforcement’s ability to identify and target investigations has been hindered.

For example, the $10,000 threshold for reporting cash transactions was adopted in the 1970s.  There is a need to increase that figure, and some have suggested setting a new threshold at $30,000.

Also, with respect to filing of SARs, most banks, out of concern that they may fail to file a required SAR, file SARs in situations when the filing is not required.  The banks know that regulators will review their SARs filings and often second-guess these determinations.

In the case of the new beneficial ownership regulations that are effective in May 2018, some have floated the idea of having FinCEN create a national database of beneficial ownership information, mandating that company’s register themselves with federal regulators and not just state incorporation authorities.  While banks are complaining about the burden of beneficial ownership regulations, I do not expect Congress to modify this requirement.  Rather, the politicians floating this idea appear to be giving banks another shot to argue against the beneficial ownership regulations.  The United States is far behind other countries on requiring beneficial ownership disclosures, and consequently the amount of money laundering through hidden accounts in the US is much higher than it should be.

Banks have also sought additional guidance from law enforcement and regulators on AML compliance requirements.  The specific breakdown in communication and information sharing has been between law enforcement and regulators.  In many cases, banks have explained that the regulatory framework and specific requirements does not match law enforcement’s priorities and need for information, resulting in AML regulatory requirements that do not advance law enforcement’s ability to focus on the more serious financial crimes or terrorist financing schemes.

Law enforcement is sure to oppose any major revisions to the AML system and its voice is an important factor to consider in any regulatory modification.  However, there is nothing wrong with banks, regulators and law enforcement working to come up with practical improvements to the regulatory and reporting system.

Community banks have raised complaints about regulatory burdens and the amount of time and expense devoted to AML compliance.  Again, the community banks have suggested that they are not able to design a truly risk-based AML compliance program because of the fear that regulators will second guess such determinations when conducting supervisory reviews of their operations.

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1 Response

  1. Dennis Myhre says:

    Mr. Volkov,

    Another great article… since banks are typically purveyors of money laundering schemes, at least as unwilling participants in some cases, they will have no respect for SAR’s…. kinda like singing to the choir. As far as community banks, in their day they were easy targets due to their ready access to foreign financial markets and easy mom and pop bribery schemes, but today the money is too great… billions rather than millions, and the DOJ needs to hand off those investigations to the states.

    I research money laundering of commercial real estate, mostly involving 401(k) retirement funds. They are easy targets for insurance companies, since billions of dollars are involved and the state regulations heavily favor the insurance industry. Typically, an insurance company real estate separate account can involve the transfer of billions in cash every year. Under state regulations, the insurance company must own the plan assets, so they are wrapped in a variable annunity. the insurance company “owns” the plan assets, under common law.

    401(k) contributions first stop is the unallocated fund account found in the insurance company general account, right next to the retained earnings account, which is also owned by the insurance company. The IRC requires the unallocated fund be returned to a zero value at the end of the year, believing the account holds only forfeitures to be paid back to the plan. But they would be wrong.

    During the year, unallocated funds are used to acquire commercial properties, or make loans to developers to build new commercial buildings. Using a tri-party agreement with a bank, the insurance company is the lender, while the developer is the borrower. The funds move into the banking system via a repurchase agreement, and the money is washed!

    Of course, the straw “borrower” never pays on the loan, the real estate separate account later “buys” the loan back from the “bank,” under a loan purchase agreement, and the land and/or building goes into a shell company formed in Delaware under the law of “successors and assigns.”

    The real estate separate account has paid off the “fake loan” under a “forward commitment” disclosure found in the Annual Report, and five years later, when the property is resold to another developer, the sales price becomes retained earnings, and those billions in funds never quite make it into the 401(k) account. Repeat this hundreds of times, and you now have trillions of investors dollars being laundered by the insurance industry.

    Thanks for your transparent reporting,

    Dennis Myhre, AIC