Hearing unveils differences over roles in anti-money laundering efforts

A difference of opinion over whether federal anti-money laundering systems are broken, or not, emerged during a Senate Banking Committee hearing Tuesday – but both sides called for some adjustments going forward.

Dennis Lormel, a former chief of the Federal Bureau of Investigation’s (FBI) financial crimes program, told the committee that the federal Bank Secrecy Act (BSA) program, an anti-money laundering (AML) system, is not broken. “The system is fraught with many inefficiencies but it works,” said Lormel, who is now president and CEO of DML Associates, a law-enforcement consulting firm.

“Law enforcement consistently receives valuable intelligence from BSA data. The challenge is that the BSA system can and should be much more effective and efficient,” he said. “In this context, I applaud the Committee for dedicating the time to assess the effectiveness and efficiency of BSA enforcement and considering reform measures to strengthen BSA reporting requirements.”

Lormel said that at the “core level,” the flow of BSA data from financial institutions (the “front-end provider”) to law enforcement (the “back-end consumer”) is good. “When financial institutions can be proactive and more targeted in their monitoring and reporting, the BSA data they provide is more effective and efficient,” Lormel said in his written statement. “When data flow becomes convoluted and more constrained, the system becomes flawed and ineffective and inefficient.”

But Greg Baer, president and CEO of The Clearing House Association (CHA), took a directly opposite view. “Our AML/CFT (“countering the financing of terrorism”) system is broken,” Baer said. “It is extraordinarily inefficient, outdated and driven by perverse incentives.”

The leader of the trade group (which represents the banking payments system) said a core problem with the current system is that it is geared toward compliance expectations “that bear little relationship to the actual goal of preventing or detecting financial crime, and fail to consider collateral consequences for national security, global development and financial inclusion.” He said “fundamental change” is required to make the current system an effective law enforcement and national security tool, and “reduce its collateral damage.”

However, Heather A. Lowe of Global Financial Integrity (a security consultant) strongly cautioned against relieving financial institutions of reporting requirements.

“Banks are best placed to understand their business and their systems and the money laundering risks inherent therein, and create the systems that work best in their business models to combat money laundering,” she said in her statement. “FinCEN (the Financial Crimes Enforcement Network) and/or other regulators should review those assessments but cannot be responsible for carrying them out.”

Lowe noted that The Clearing House Association recommends greater information sharing among banks and with the government in a number of ways. However, she advised caution. “While we generally support greater sharing of information in the AML area, it must be done with appropriate privacy safeguards. Where it may result in a person being denied banking services at all, there must be a system for redress for people to be able to restore that access if they can demonstrate that they are involved in legitimate activity,” she said.

Combating Money Laundering and Other Forms of Illicit Finance: Opportunities to Reform and Strengthen BSA Enforcement