Last Wednesday, FinCEN Deputy Director Jamal El-Hindi appeared at the annual conference of the Money Transmitter Regulators Association and delivered prepared remarks. The topics of his address covered three issues of continuing interest: (i) innovation and reform with respect to implementation of the Bank Secrecy Act (BSA); (ii) FinCEN supervision of non-banking financial institutions; and (iii) maintaining a strong culture of compliance.
Innovation and Reform
El-Hindi’s first addressed the issue of innvoation and BSA/AML reform by promoting the ongoing effort by FinCEN to encourage innovation in banking practices, which follows upon a policy statement on innovation issued in December 2018 by FinCEN in concert with other financial regulators.
El-Hindi highlighted the recent launch of FinCEN’s “Innovation Hours” – a program held the second Thursday of each month, at which FinTech and RegTech companies have the opportunity to present products and services currently being developed for use in the financial sector. The goal, according to El-Hindi, is not only to keep regulators up to speed on what products and services may be coming down the pike in the financial sector (to “better understand innovation as it happens”), but to give FinCEN the opportunity to weigh in while these products are still in development, in the hopes that the finished products will have compliance and the promotion of AML goals baked in. Each month showcases a different industry focus: July’s meeting featured products utilizing machine learning and AI; August’s meeting featured blockchain-related services; and September’s meeting will focus on “innovations in KYC, BSA reporting, and core inter-bank payment and messaging systems.” El-Hindi highlighted several themes that have emerged from the presentations thus far, centered mainly around the ideas that these technologies have the potential to enhance both efficiency and transparency in financial regulatory activities, and that government actors have a constructive role to play in developing these technologies for this role. (The program’s website is here.)
El-Hindi emphasized that innovation is only part of FinCEN’s multi-faceted approach to reform of AML efforts, but made only cursory reference to the other elements: working with regulatory partners to review examination practices, better communicating law enforcement priorities to financial institutions, and expanding information sharing between and among regulators and institutions.
Non-Banking Financial Institutions
El-Hindi then turned to FinCEN supervision of non-banking financial institutions (NBFIs), such money services businesses (MSBs) and (most recently) virtual currency exchanges. El-Hindi emphasized that FinCEN is “actively prioritizing and engaging” in this sector after a period of quiet but “steady” enforcement.
El-Hindi made particular note of the importance of FinCEN supervision in the virtual currency arena, noting that “FinCEN has made it very clear how BSA/AML applies to any activities touching the U.S. financial system.” El-Hindi used his platform to issue a clear statement of purpose with regard to how FinCEN views the responsibilities of purveyors of virtual currency: “All actors in this space should know that they need to address AML and CFT (combating the financing of terrorism) issues now, not later. And that any operations that they begin should be in compliance with our rules at the start.” [Emphasis added.] This warning comes in the wake of FinCEN’s May 9, 2019 comprehensive “interpretive guidance” issued to “remind” businesses and individuals operating in the cryptocurrency markets involving “convertible virtual currencies” of the potential applicability of the BSA to their operations, about which we blogged, as well as the multi-national Financial Action Task Force’s recently-issued Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers, about which we also have blogged.
El–Hindi stressed both the value of having partnered with FinCEN’s counterparts in the United Kingdom, Canada, Australia and New Zealand in order to share regulatory expertise, as well as the value of state regulators responsible for licensing and overseeing MSBs.
El-Hindi’s remarks are a clear indication that FinCEN intends to take a proactive, rather than reactive, role in the latest wave of financial technological innovations. The message to Silicon Valley and beyond seems clear: when it comes to FinCEN, you’ll be better off asking for permission than for forgiveness.
Culture of Compliance
Finally, El-Hindi addressed the importance of a strong culture of compliance. Noting that he was speaking on September 11, El-Hindi linked national security with a culture of compliance. Summarizing here greatly, El-Hindi referenced 2014 Guidance by FinCEN on establishing a culture of compliance, and the basic principles that it highlighted:
- Financial Institution Leadership Should Be Engaged
- Compliance Should Not Be Compromised By Revenue Interests
- Information Should Be Shared Throughout the Organization
- Leadership Should Provide Adequate Human and Technological Resources
- The Program Should Be Effective and Tested By an Independent and Competent Party
- Leadership and Staff Should Understand How BSA Reports are Used
El-Hindi focused the rest of his remarks on the perceived need for FinCEN, other regulators and financial institutions operating globally to “talk to our overseas colleagues about the benefits of a strong culture of compliance.” The theme of his remarks appeared to be that certain other countries could benefit by emulating the AML culture of the U.S., “because we have a system both in the government and the private sector that is pretty good at identifying and thwarting corruption.”
