According to the US Department of Treasury, money laundering refers to “financial transactions in which criminals, including terrorist organizations, attempt to disguise the proceeds, sources or nature of their illicit activities.” Recently, the Financial Industry Regulatory Authority (“FINRA“) fined Industrial and Commercial Bank of China Financial Services LLC (“ICBCFS“) “$5.3 million for systemic anti-money laundering (“AML”) compliance failures, including its failure to have a reasonable AML program in place to monitor and detect suspicious transactions, as well as other violations, including financial, recordkeeping, and operational violations.”
FINRA writes that “in late 2012, ICBCFS began clearing and settling equity transactions. Within a few months of launching its new business line, ICBCFS took on thousands of new customers, many of whom began purchasing and selling millions of dollars’ worth of penny stocks. From January 2013 through September 2015, ICBCFS cleared and settled the liquidation of more than 33 billion shares of penny stocks, which generated approximately $210 million for ICBCFS’s customers.” Despite these gains, ICBCFS failed to implement an AML program to detect and report suspicious transactions involving such penny stocks. As a result of ICBCFS’s failure of adequate record keeping and monitoring, the company was not only fined by FINRA, but also separately by the SEC.
What’s more, earlier this year, the Financial Crimes Enforcement Network (“FinCEN“) assessed a $185 million civil money penalty against U.S. Bank for willful violation of the Bank Secrecy Act in failure to investigate a large number of suspicious transactions. It was determined that U.S. Bank failed to: implement an adequate AML program from 2011-2014; report suspicious activity from 2011-2014; and, adequately report currency transactions from 2014-2015.
- The program has to be approved in writing by a senior manager.
- It must be reasonably designed to ensure the firm detects and reports suspicious activity.
- It must be reasonably designed to achieve compliance with the AML Rules, including, among others, having a risk-based customer identification program (CIP) that enables the firm to form a reasonable belief that it knows the true identity of its customers.
- It must be independently tested to ensure proper implementation of the program.
- Each FINRA member firm must submit contact information for its AML Compliance Officer through the FINRA Contact System (FCS).
- Ongoing training must be provided to appropriate personnel.
Further, in an effort to protect against the imposition of severe penalties, FINRA provides compliance guidance for companies in the form of a comprehensive template for Small Firms that may be found here.
Blockchain Use Case
Global spending on AML compliance is in the billions and Distributed Ledger Technology (“DLT“) such as Blockchain, is playing an increasing role in combatting money laundering. In fact, Blockchain is an immutable technology, meaning that the data may not be manipulated, only updated, once it is stored and verified on the distributed database. There is much certainty in this process, which is beneficial to regulators, banks and agencies that may instantly verify credentials in transactions and pinpoint discrepancies targeting possible criminal activity.
Blockchain is also cost-effective. As mentioned previously, failing to maintain proper AML programs may be hugely costly to businesses. On the same note, these programs may also be incredibly expensive to operate. Blockchain not only provides speed (decreasing the time-frame for lengthy checks), but also has the potential to reduce costs significantly.
In an increasingly digital landscape, DLT and FinTech methods provide a strong possibility for tackling and preventing money laundering.