Fulcrum’s 60 Second Brief on the Latest Financial Crime Scandal to be Broken by the ICIJ
What are the FinCEN files?
The FinCEN files comprise more than 2,500 documents, representing some of the international banking system’s most closely guarded secrets. Most of the documents are files sent to the U.S. authorities between 2013 and 2017, leaked to Buzzfeed News who shared them with the International Consortium of Investigative Journalists (“ICIJ”) and a 108 other media partners. The ICIJ has reported that there are 2,657 documents, including 2,121 Suspicious Activity Reports (“SARs”). SARs represent the means by which banks, and other businesses, report suspicions about transactions – and seek consent to proceed with them – without breaching confidentiality obligations to their clients. The name given to the leaked files originates from the US Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) to which the SARs were submitted.
While Buzzfeed News has not revealed their source, in January 2020, a former U.S. Treasury Department official, Natalie Mayflower Sours Edwards, pleaded guilty to unlawfully disclosing confidential Treasury documents. She reportedly leaked information to a reporter about suspicious financial transactions.
Who has been named and shamed by the FinCEN files?
The banks named in the FinCEN files included Citibank, HSBC, Barclays, Deutsche Bank, JPMorgan Chase, and Standard Chartered among others.
What distinguished the FinCEN leaks from the 2016 Panama Papers or the 2017 Paradise Papers is that they come from numerous of the world’s biggest banks. This raises important questions about the internal due diligence and anti-money laundering processes within the financial industry as a whole. Additionally, the revelations raise significant questions as to why the banks continue to do business with the relevant clients, and not place their relationships under more scrutiny, once they discovered suspected criminality, irrespective of whether they received consent (or deemed consent) from the authorities.
Albeit a separate leak, the FinCEN files have connections to the Luanda Leaks and the Panama Papers. For instance, JPMorgan Chase filed a SAR on transactions related to Sindika Dokolo who is the husband of Angolan billionaire Isabel dos Santos, profiled in the Luanda Leaks. An ICIJ analysis has also suggested that banks in the FinCEN files processed transactions for companies registered in ‘secrecy’ jurisdictions without knowing the ultimate owner of the account.
The ICIJ suggest that the FinCEN files show that the UK is oftentimes the weak link in the financial system. They suggest, for example, that London is flooded with tainted Russian cash.
The leaked files indicate that HSBC continued to move dirty money and even facilitated a Ponzi scheme only months after agreeing with regulators to improve their procedures, following a US criminal prosecution related to money laundering by Mexican drug lords, as a result of which HSBC was fined US$1.9bn for their involvement.
A confidential banking document has also implicated Standard Chartered Bank as a cog in the supply chain that delivers valuable, often illegally acquired, antiques to auction houses and major Western museums. Standard Chartered maintained three accounts in its Hong Kong branch for a company called Pantheon Worldwide Limited that exchanged millions of dollars in cash and antiques with traffickers, even though they did not know the company’s purpose or where it was registered.
The FinCEN files have also exposed that banks in Europe and the U.S. facilitated the flow of money from Venezuelan public funds to offshore companies and bank accounts belonging to family members of at least seven Venezuelan tycoons, despite blatant red flags. Between 2009 and 2017, banks reported more than US$4.8bn in suspicious transactions, of which almost 70% involved public money and had a Venezuelan government entity as a party.
What did the stock market and regulators have to say about it?
Since the revelations of the FinCEN files were made public on 20 September, HSBC’s share price been badly affected. In Hong Kong, which holds the bank’s biggest market, its share fell 5.3% to their lowest level since the mid-1990s. The news from the FinCEN files resulted in a mass sell-off of shares in the banking sector. Barclays’ share went down more than 5%, as did Nat West Group’s. Santander’s share price also dropped by 4.8%.
One of the interesting aspects of the story is the fact that Government investigators are faced with millions of SARs filed every year which makes it impossible for them to go through all of them diligently. Richard Elias, a former federal prosecutor for the Eastern District of California, said “I don’t think that we have enough resources in the government to meaningfully go through them all”. Even though the number of SARs filed grows exponentially every year, FinCEN’s staff has shrunk by more than 10% over the last ten years, according to Treasure reports. FinCEN has not yet made a comment about the files. It did, however, release a statement condemning the leak, and saying that “…the unauthorized disclosure of SARs is a crime”.
The FinCEN files have shone a new spotlight on the need for more stringent measures to detect and combat the act and facilitation of money laundering, and highlighted the practical limitations upon the SAR system, which would require substantial more investment by Governments to be a really effective preventative tool against money laundering.
The ICIJ’s reporting has shown that banks lacked information about entities behind suspicious transactions in more than half of the concerned SARs, but proceeded anyway, seemingly hiding behind the under-resourced SAR system to de-risk transactions that ought to have been examined with far more rigour internally before they moved forward.
It seems likely that the current reporting and the underlying evidence is unlikely to result in new punishments by governments or regulators against the banks, as it is based mainly on past behaviour already fined and sanctioned. However, it is likely that the intense scrutiny upon some of the individuals who are said to have laundered money through their accounts may lead to renewed interest on the part of regulators and prosecutors.
ICIJ have published some of the leaked SARs on their DocumentCloud page. They have however stated they would not be publishing en masse but would be focusing on reviewing the materials and reporting on the stories with the greatest public impact. BBC Panorama and the ICIJ are currently investigating further and reviewing the documents.