Recent statements from the federal government’s top anti-money laundering (AML) official make clear that the government views AML and anti-fraud as necessarily intertwined. Banks and other financial institutions ignore this fact at their own peril. John Byrne and Chris Swecker hit the nail on the head when they wrote earlier this year that banks should waste no time in integrating their AML and anti-fraud capabilities.
Money laundering is, generally speaking, conduct that involves transporting, concealing, or avoiding reporting requirements in connection with the proceeds of a Specified Unlawful Activity (SUA) or property used to facilitate an SUA. By definition, then, money laundering requires the existence of an underlying SUA, such as fraud. So where there is fraud, there may be money laundering. Financial institutions risk the non-detection of money laundering whenever they withhold information about potential fraud from AML analysts. Failing to detect money laundering exposes them to further financial losses and regulatory scrutiny.
Even where there is no known or suspected connection between a fraudulent transaction and money laundering, banks and other financial institutions still have a legal obligation to file a Suspicious Activity Report (SAR) relating to the fraud, assuming the transaction meets a minimal threshold. The legal obligation (as well as the voluntary option) to file a SAR must be addressed in the written AML program and is subject to regulatory oversight by AML examiners. Thus, it seems clear that financial institutions should integrate their AML and anti-fraud capabilities.
Since September 2008, when he spoke to the Florida Bankers Association, James H. Freis, Jr., Director of the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), has been extolling the virtues of understanding the intersection of AML and anti-fraud efforts and urging financial institutions to take a landscape approach toward compliance. Director Freis has repeatedly made the point that, especially in this economic downturn where resources are scarce, corporate compliance departments can and should combine their AML and anti-fraud resources.
Recently, in a talk to the Institute of International Bankers, Director Freis stated that a robust AML program can pay for itself through the prevention and detection of fraud. He explained that a recent study indicated that, in 2008, banks suffered $788 million in card fraud-related losses, $1 billion in check fraud-related losses, and another $100 million in ACH fraud-related losses. Rather than accept this nearly $2 billion in annual losses as a cost of doing business, Director Freis suggested that banks would increase their detection and prevention of fraud, and therefore significantly cut their losses due to fraud, by more closely aligning their AML and anti-fraud functions.
AML and anti-fraud efforts should also be combined for purposes of taking full advantage of FinCEN’s voluntary information sharing program, which is authorized by section 314(b) of the USA PATRIOT Act of 2001. Section 314(b) is a program in which financial institutions (and associations of financial institutions) are protected from liability when they share information with other financial institutions that may involve possible money laundering and terrorist financing. Because money laundering requires an SUA as a predicate, FinCEN issued guidance reminding financial institutions that information may be shared under section 314(b) if financial institutions suspect that a questionable transaction may involve the proceeds of an SUA. By sharing information under section 314(b), financial institutions can combat money laundering and terrorist financing while saving money on fraud prevention.
Financial institutions should not wait for a significant law enforcement or regulatory action to be taken before they integrate their AML and anti-fraud efforts. Integration is a win-win proposition and now is the time to do it.