CATF Reports Jan. 12, 2016, 11:28am


The post-Watergate period of the 1970s witnessed a revolution in how federal agencies attacked fraud and corruption in America’s most trust institutions, and banks quickly found themselves in the crosshairs. Specially targeted were illegal campaign contributions — many of them tied to Watergate — run through hallowed banks and foreign commercial bribery where again banks played a pivotal facilitation role.

The latter revelations led to passage in 1977 of a major piece of remedial legislation, the Foreign Corrupt Practices Act. At the same time, South American cocaine traffickers began to exploit weak U.S. bank compliance with currency reporting requirements under the Bank Secrecy Act, leading some financial institutions to become de facto drug laundering centers. Eventually, widespread noncompliance fueled a heated competition among some banks, especially in south Florida, to seek and sustain a laundering clientele. The result was stepped up Treasury pressure to report large currency transactions under the Bank Secrecy Act (BSA), passed in 1970 to combat the flow of drug money into banks. 

To address the growing problem of uneven detection of fraud, money laundering, and crimes stemming from insider manipulation, Congress created the Federal Financial Institutions Examination Council (FFIEC) in 1979. It was designed as an interagency body to coordinate federal regulation of lending institutions and standardize audit as well as examination to detect fraud and money laundering scheme. Among other manifestations of uniformity, FFIEC issued common reporting forms to ensure that a federally chartered bank and a state chartered savings and loan would both follow common financial risk evaluations and provide for reporting of large or otherwise suspicious currency deposits.

For the past thirty-five years, FFIEC has been a quiet (but never silent) behind-the-scenes player focused on preserving — and when necessary restoring — the fiscal health of depository institutions. Occasional oversight reports have underscored the professionalism and integrity with which it engaged and supported its regulatory clientele. A 2005 Congressional Research Service Report found no problems calling for its customary list of reforms — a rarity in the Washington policy arena. An exception is a 2007 Treasury Inspector General’s report citing lackluster enforcement cooperation in the Office of Financial Assets Control — the key unit enforcing asset freezing sanctions in narcotics, terrorist, and weapons proliferation cases.

Arguably FFIEC’s most valued contribution is its model Bank Secrecy Act Anti-Money Laundering Examination Manual, first published in 2005. A special appendix section addressed the challenge of terrorist finance, which had been growing steadily as an unmet national security challenge since 9/11. Overall, the examination manual provides guidance on suspicious aspects of deposit and withdrawal transactions which bank security personnel were forewarned to ask customers about, potentially leading to Suspicious Transaction Reports that provide key law enforcement leads. The following examples associated with possible terrorist financing are lifted directly from the manual, which in turn borrowed points from Financial Action Task Force terrorist financing indicators:

- A large number of incoming or outgoing funds transfers take place through a business account, and there appears to be no logical business or other economic purpose for the transfers, particularly when this activity involves higher-risk locations.

- Funds transfers are ordered in small amounts in an apparent effort to avoid triggering identification or reporting requirements.

- Funds transfers do not include information on the originator, or the person on whose behalf the transaction is conducted, when the inclusion of such information would be expected.

- Multiple personal and business accounts or the accounts of nonprofit organizations or charities are used to collect and funnel funds to a small number of foreign beneficiaries.

- Foreign exchange transactions are performed on behalf of a customer by a third party, followed by funds transfers to locations having no apparent business connection with the customer or to higher-risk countries.

Moving forward, the major benefits of FFIEC leadership in the fight against terror finance should definitely be praised but objectively qualified, for two reasons. First, even 100% financial institution compliance and cooperation confronts the reality that significant enclaves of terrorist fundraising exist in off-the-books, small denomination amounts — whether from extortionate “taxes” in Syrian no-man’s-lands or from bizarre value exchanges like Hawalas or Bitcoin. Second — and again even with full compliance — powerful capabilities like OFAC can only freeze current assets, encouraging terrorists to park their new money beyond U.S. jurisdiction. But the bottom line is that by promoting and ensuring the counterterrorism integrity of the U.S. financial system, FFIEC continues to execute its mission to a degree unparalleled by higher profile government initiatives.

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