FinCEN Should Use Special Authority to Enable Better Compliance

The Treasury Department’s anti-money laundering watchdog, the Financial Crimes Enforcement Network, can serve as a “supervisor-of last-resort” and use its special measures authority as a remedial tool.

In doing so, it can raise global AML standards, prevent criminals from seeking safe havens, and better ensure that foreign financial institutions seeking access to the US financial system have effective AML compliance programs.

FinCEN is able to designate foreign jurisdictions, financial institutions, classes of transactions, or types of accounts as being of “primary money laundering concern” and can impose “special measures,” which include prohibiting a foreign financial institution from maintaining a US correspondent bank account and a complete ban on transmitting funds to or from the US.

FinCEN’s recent uses of these authorities have been indistinguishable from sanctions administered by Treasury’s Office of Foreign Assets Control. OFAC sanctions are often punitive, intended to deter bad behavior, constrain access to resources, or deny the US market to bad actors.

For example, three Mexican financial institutions designated under the FEND Off Fentanyl Act for processing transactions for customers allegedly involved in the purchase of fentanyl precursors have faced significant operational challenges, including revocation of their banking licenses. The designations under Section 311 of the Patriot Act of transactions of 10 Mexican gambling establishments connected to drug cartels and a Cambodian financial institution for its connections to cryptocurrency investment scams have accompanied related OFAC sanctions. In these cases, FinCEN’s designation has had existential impact.

Few financial institutions have survived these designations, sometimes with profound collateral consequences for unwitting customers and markets. But designation under FinCEN’s special measures authority doesn’t have to be a death sentence.

First, FinCEN could establish transparent standards for rescinding special measures it has imposed, including by communicating clear expectations for financial institutions and their supervisors. It could provide a pathway to rehabilitate the designated institution through supervisory controls, compliance enhancements, or a monitorship. This could be done in partnership with the foreign supervisor.

Second, FinCEN could defer use of its special measures authority with remediation as the goal by, for example, entering into an agreement with a foreign financial institution that includes compliance and oversight requirements.

Third, FinCEN could establish a voluntary engagement program for foreign financial institutions that want to avoid the imposition of special measures through proactive engagement.

These steps could help FinCEN have a broader impact on global anti-money laundering compliance and ensure that foreign financial institutions that use the US financial system but aren’t subject to US AML laws and supervision have effective compliance programs.

Establishing Clear Standards

FinCEN also could provide a financial institution with a pathway to rescinding its designation under special measures authority by articulating clear expectations and standards with measures to:

• Enhance its AML compliance program, particularly on customer due diligence and transaction monitoring controls
• Conduct a transaction lookback or customer risk review and terminate problematic customer relationships
• Share information proactively with law enforcement and other financial institutions

It could condition the rescission of special measures on the successful completion of a monitorship—similar to settlement agreements negotiated with the Office of the Comptroller of the Currency or Federal Reserve Board. These standards would give the financial services sector and supervisors measurable and predictable benchmarks.

FinCEN could share—potentially along with a home-state regulator—threat information specific to the jurisdiction to help bolster foreign institutions’ compliance programs, including advisories with typologies and red flags. While US regulators historically have been shy to infringe on sovereignty or replace national priorities, cross-border institutions look to both US and home-state regulators for guidance.

For designated institutions seeking to sell or wind down operations, clear supervisory expectations would provide a baseline for prospective purchasers to conduct risk-based due diligence on acquired customers and design compliance programs tailored to risks associated with new customers or business lines.

In either case, FinCEN would need a proactive strategy to prevent a “race to the exits” and signal to the financial sector that the designated institution or its successor can become viable market participants.

Deferring Special Measures

FinCEN could further use deferral agreements—much like deferred prosecution agreements used by the Department of Justice—to defer imposing special measures. In exercising its discretion to defer imposition of special measures, FinCEN could consider the factors federal banking regulators consider in determining whether a federally chartered bank convicted of a money laundering offense should have its license revoked.

These factors include whether board members or senior executives knew of or were involved in misconduct and whether misconduct occurred notwithstanding the AML policies’ existence, as well as the extent to which the institution has implemented controls to prevent recurring misconduct and to cooperate with law enforcement.

As with deferred prosecution agreements, FinCEN could defer imposing special measures for a period of years. It could be contingent on the financial institution agreeing to cooperate with FinCEN and US law enforcement, to remediate its anti-money laundering compliance program, and (where appropriate) to retain an independent compliance monitor.

The penalty for violating the deferral agreement would be the immediate imposition of special measures. Entering into such an agreement could have the same negative consequences for an institution as an actual designation, but this approach at least would establish a clear pathway for an institution to resolve AML compliance issues identified by FinCEN, signal the institution’s commitment to remediation with oversight, and ultimately to avoid the actual imposition of special measures.

Encouraging Voluntary Engagement

Finally, FinCEN could encourage foreign financial institutions to come forward voluntarily to implement enhanced anti-money laundering and sanctions controls or participate in law enforcement cooperation in exchange for certain procedural protections, akin to the DOJ’s voluntary self-disclosure programs and its Tax Division’s Swiss Bank Program.

FinCEN could agree that if the institution subjected its AML compliance program to review, implemented enhanced compliance measures, and agreed to cooperate in US investigations, it wouldn’t designate the institution as a primary money laundering concern and impose special measures.

It likely won’t have sufficient resources to administer a voluntary engagement program that would require it to conduct an examination of foreign financial institutions’ AML programs. However, it could work with the institution’s home-state supervisor or allow an examination by a third-party expert selected by FinCEN but paid by the financial institution, similar to the model used for independent compliance monitors.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Brent Wible is a partner in White & Case’s global white collar practice group who previously was the DOJ’s principal deputy assistant attorney general and head of the Criminal Division.

Himamauli Das is senior managing director and counsel at K2 Integrity who previously served as FinCEN director and in senior positions at the White House and Treasury and State departments.

Write for Us: Author Guidelines