Meredith Moss Quoted in FinCEN Files Scandal Article in FinLedger

Regtechs see opportunity in FinCEN Files scandal

U.S. regulators are “bullish on regtechs” as need for collaborative tech skyrockets
September 28, 2020, 9:49 am By John Hyatt

Leading multinational banks and the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) are failing to stop billions of dollars in money laundering, according to an investigative report dubbed the “FinCEN Files” – from Buzzfeed News and the International Consortium of Investigative Journalists.

The findings are shocking, but not surprising to the regulatory experts and regulatory technology (regtech) startups working to prevent money laundering. The scandal sets the stage for why U.S. regulators are bullish on regtechs.

“This was 100% confirmation of what people already knew,” said Adam Shapiro, a former U.K. regulator and partner at Klaros Group, a regulatory and business consultancy.

U.S. and Canadian financial institutions spend over $30 billion annually on anti money laundering (AML) compliance costs, but less than 1% of laundered funds are caught, estimated the United Nations in 2011.

The industry experts FinLedger spoke to all agree the system needs tinkering, if not an outright overhaul, and that better regulatory technology will be essential for affecting substantive change.

Beefing up SARs

Suspicious Activity Reports (SARs) are the primary legal mechanism by which U.S.-based financial institutions report suspicious financial activity to FinCEN. Over 2 million SARs were filed last year, “the vast majority of which are shelved or overlooked,” according to Buzzfeed’s report. Addressing the insufficiency of SARs is at the top of reformers’ bucket list.

“Think of SARs as a communication channel between industry and law enforcement,” said Joe Robinson, CEO and co-founder of Hummingbird, a Los Angeles-based regtech that automates SARs filing and provides a platform for managing compliance teams. “There can be improvements to the ways that communication happens, making it more real-time and collaborative.”

Meredith Moss, founder and CEO of Finomial, a Boston-based regtech focused on improving Know Your Customer (KYC) procedures, agrees.

“Regulators need to take a stronger stance in expecting banks to have technology which automates client diligence and can flag exceptions, rather than filing SARs and dumping the ex post facto responsibility on the regulators,” she told FinLedger. “It is essential to focus on client onboarding and monitoring to eliminate money launderers before they start using banking systems for illegal transactions.”

Regtechs can also make individual SARs more robust, which is among the things that ComplyAdvantage, a London-headquartered regtech, is seeking to achieve. “Thick-file SARs” should be “the standard,” according to CEO and founder Charles Delingpole, who believes that SARs should include “extensive information on transactions, recipients, behavior, frequency, the ultimate beneficial owners of related companies, and other companies those people own.”

Most regtechs use (or are seeking to use) artificial intelligence (AI) and machine learning (ML) in their products. For compliance staff sifting through reams of customer data, AI and ML can save time and free up humans to do higher level analysis.

“AI is going to be huge in this area,” said Shapiro of Klaros. “But we need to walk before we can run.”

AI brings potential second-order effects that must also be considered. For example, Robinson of Hummingbird expressed concern that AI risks “introducing systemic bias into the system,” which echoes worries in other contexts about AI discriminating against women and people of color.

Increasing industry collaboration

Introducing new technology is only part of the AML equation. Some experts say that technology must contribute to information sharing among financial institutions and between companies and government agencies.

Public-private partnerships – arrangements where compliance staff work directly with regulators to walk through suspicious activity and patterns – are one option, said Rick McDonell, executive director of the Association of Certified Anti-Money Laundering Specialists (ACAMS). This model has been effective in Australia, the United Kingdom, and other countries, according to McDonell.

Shapiro believes a more comprehensive solution is needed. He calls for the creation of a “centralized, industry-funded utility,” in which financial institutions pool transaction information and associated tax IDs onto a single data platform, from which FinCEN can pull information to help their investigations.

Robinson agrees that more industry collaboration is needed, but cautions against potential side-effects.