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House Financial Services Subcommittee Hearing on Proposals to Detect and Deter Financial Crimes

House Financial Services Subcommittee on
National Security, International Development and Monetary Policy

“Promoting Corporate Transparency: Examining Legislative
Proposals to Detect and Deter Financial Crime”

Wednesday, March 13, 2019

 

Key Topics & Takeaways

  • Beneficial Ownership:  Lormel said collecting information is useful, but often law enforcement would not have the proper resources to track shell companies and hit dead ends. He stated that Rep. Hill’s bill prevents law enforcement from rapidly addressing concerns, as they would have to obtain a search warrant to coordinate with the Internal Revenue Service (IRS) to combat shell company ownership. Lormel also stated that Rep. Maloney’s bill needs to focus on the threshold levels, suggesting it is a more comprehensive bill. Lormel added that collaboration with the states and maintaining efforts between law enforcement, financial institutions, and regulators are needed in these reforms.
  • BSA: Cohen responded that FinCEN is able to engage in many global and domestic information sharing efforts and supports increasing FinCEN’s ability to continue expanding in this area. He also recommended using the Treasury’s international AML standard, sanction policies, and penalty polices as a standard, as well as increasing them. Lormel stated it is important to create realistic regulations that match regulatory enforcement requirements and not disrupt thresholds for law enforcement, financial institutions, and regulators to collaborate and properly do their jobs.
  • Machine Learning and Data Collection: Lormel said these bills are a very good start but much more complex issues require proper analytics being used by law enforcement, and suggested information that will maintain privacy standards under AML practices. Shiffman said machine learning would strengthen the bills, as communication, and that human intervention and training is vital for the process. Shiffman said FinCEN has a lot of data but that it is not useful, and reform should include producing accurate and useful data which can be used to program machines to follow patterns and create algorithms, through human intervention, which will better detect illicit activities.

 

Witness

 

Opening Statements

Rep. Emanuel Cleaver (D-Mo.), Subcommittee Chairman

In his opening statement, Cleaver said he would like to promote free and fair markets with policies that protect and deter financial crimes domestically and globally. He stated that with the rise of technology in markets, cyber-attacks have become a “paramount” national security risk. Cleaver said the U.S. should work to close loopholes that leave area for bad actors to committee financial crimes. He voiced his support for a bill to reform the Federal Bank Secrecy Act (BSA), Rep. Carolyn Maloney’s (D-N.Y.) financial beneficiary reporting bill, Rep. Stephen Lynch’s (D-Mass.) kleptocracy bill to allow the Treasury to seize assets for foreign corruption and assisting the Treasury department in addressing financial technology (fintech) concerns, noting that will all help bring U.S. financial institutions into the 21st century to fight these crimes.

Rep. Steve Stivers (R-Ohio), Subcommittee Ranking Member

In his opening statement, Stivers said he supports the committee’s efforts to modernize anti-money laundering (AML) policies, as well as the BSA to combat shell companies and the kleptocracy bill. Stivers said he and the committee are dedicated to preventing criminals and terrorists from accessing U.S. financial institutions. He stated his continuing to work on legislation which promotes effective and efficient means that does not create unintended burdens and consequences. Stivers continued that Treasury’s model to de-risk the closure of high-risk accounts is one the committee should explore, as well as work to determine AML policies rather than burdensome regulations.

Rep. Denver Riggleman (R-Va.), Subcommittee Vice Ranking Member

In his opening statement, Riggleman said BSA laws currently are in place to safeguard from financial crimes and the committee should continue to prevent illicit financing through practices that “cut off the snakes head.” He said the current policies are unable to keep pace with criminals, voicing his support for creating flexible, suitable, and effective mechanisms to equip and direct financial institutions to prevent illicit activities.

Rep. Maxine Waters (D-Calif.), House Financial Services Committee Chair

In her opening statement, Waters said she commends AML frameworks that address concerns like the increase in human trafficking, drug trafficking, shell companies used to support financial crimes, and advocate to close loopholes. Waters said she supports advances in technology to keep pace with the rapid changing environment as criminals and bad actors continue to innovate. She said there is need for better access to capital and intelligence for financial institutions, the Treasury, and other agencies to penalize intentional abuse of financial systems.

Rep. Carolyn Maloney (D-N.Y.)

In her opening statement, Maloney encouraged the committee to pass her legislation to require the disclosure of beneficial owners to solve the problem of criminals using shell companies. She said currently there are no standards for disclosures for shell companies, and this leads to law enforcement hitting a dead end in their investigations. Maloney stated this has affected New York law enforcement, especially with terrorist financing. She referenced support from the Obama administration for this legislation and the similarities of Financial Crimes Enforcement Network (FinCEN) rules from 2016 to require disclosure. Maloney said to secure privacy, only access to this information would be permitted to law enforcement and financial intuitions who need the information, after consent for disclosure.

Testimony

Jacob Cohen, Former Director, Office of Stakeholder Engagement, FinCEN

In his testimony, Cohen said he supports resources to expand collaboration to combat AML considering the complexity and difficulty to adapt for financial institutions. He said FinCEN must have the necessary resources to communicate information to all stakeholders, as FinCEN serves to collect information on financial intelligence. Cohen said as FinCEN leads AML regulation for the government, the BSA advisory group’s ability to share information is important. He said there are not sufficient structures to detect and deter financial crimes, and to address AML monitoring systems and production of valuable reporting, FinCEN needs more resources for research and analysis for public and non-public advisories. Cohen said limited analytical support for low level threats such as human tariffing, virtual currencies, and trade-based laundering often are missing in reporting due to a lack of resources. He said the committee should support the Treasury advancing sanctions, implementation of financial action, a task force to address threats, global partnerships, and FinCEN’s ability to address salary thresholds to hire and sustain qualified staff long term.

Dennis M Lormel, President and CEO, DML Associates LLC

In his testimony, Lormel voiced his support for Maloney’s beneficiary ownership bill to combat shell companies. He referenced the case study of One MBD to further support the bill, as well as kleptocracy. Lormel said Maloney’s bill will help State Secretaries and law enforcement address crimes, and recommended reporting provisions of thresholds under the BSA, as these levels are important and should not be diminished. Lormel said he likes information sharing, innovation, and partnerships under 314a to provide scenarios and concepts for collaboration.

Amit Sharma, CEO, FinClusive

In his testimony, Sharma said he supports modernizing AML policies to combat ongoing financial crimes through broad security objectives without deregulating and de-risking institutions. He said with the evolution of financing for banks and non-banks through direct extension of lending, peer to peer transactions, web banking, and digitization of assets, there is a need for increasing financial tools. Sharma said growth of activities outside of traditional channel and increase in information technology (IT) spending is leading to an increase in regulations for institutions, causing financial exclusion and exasperation. Sharma said these AML frameworks are a good start to creating practical steps with emphasis on de-risking in meaningful ways, coordination with examiners to drive fintech centers, and coordination for banks and non-banks across federal and state levels.

Dr. Gary Shiffman, PhD, Founder and CEO, Giant Oak Inc.

In his testimony, Shiffman said he is not interested in AML reform for the sake of compliance but wants policies to deter and protect against illicit and terrorist crimes. Shiffman said there is need for current “radical” reform, as the current system is inefficient. He referenced the United Nations (UN) estimating that money laundering globally is two to five percent of global gross domestic product (GDP) and current spending to combat crimes has exceeded $7 billion in the U.S. and $25 billion globally. He said out of two million generated AML reports, only five percent provide value, showing AML systems produce and spend with little to no productive results. Shiffman recommended using artificial intelligence (AI) to identify patterns in data in combatting these crimes, as machine learning must be included in reform legislation. He said as data is collected, machines must be built that patch vulnerabilities from information on suspicious activity reports (SARS) and currency transaction reports (CTR). Shiffman said under human supervision and algorithm computing, data and machine learning can be very beneficial to information sharing and preventing crimes. He recommended these core principles in supporting a framework: information sharing for law enforcement and financial institutions, avoiding opaque solutions humans cannot understand, and keeping humans in the process to make educated decisions from collected data.


Question & Answer

Cryptocurrency and Blockchain

Reps. Stephen Lynch (D-Mass.) and Brad Sherman (D-Calif.) asked questions about the use and endorsement of blockchain and cryptocurrencies. Sharma stated that blockchain will not be the “end all be all,” as not all cryptocurrencies are the same and cannot be treated equally. Sharma said it is important to harness the technology but should not endorse any specific one. Shiffman said cryptocurrency provides an easy ability to move money and should be monitored for patterns.

BSA

Reps. Cleaver, Roger Williams (R-Texas), French Hill (R-Ark.), and Blaine Luetkemeyer (R-Mo.) asked about SAR and CTR collection efforts and for recommendations in enhancing legislation to support FinCEN and the Treasury. Cohen responded that FinCEN is able to engage in many global and domestic information sharing efforts and supports increasing FinCEN’s ability to continue expanding in this area. He also recommended using the Treasury’s international AML standard, sanction policies, and penalty polices as a standard, as well as increasing them. Lormel stated it is important to create realistic regulations that match regulatory enforcement requirements and not disrupt thresholds for law enforcement, financial institutions, and regulators to collaborate and properly do their jobs.

Beneficial Ownership

Reps. Maloney , Jesus “Chuy” Garcia (D-Ill.), Anthony Gonzalez (R-Ohio), Sherman, Hill, and Williams asked about making advancements to beneficial ownership and combating shell companies. Lormel said collecting information is useful, but often law enforcement would not have the proper resources to track shell companies and hit dead ends. He stated that Rep. Hill’s bill prevents law enforcement from rapidly addressing concerns, as they would have to obtain a search warrant to coordinate with the Internal Revenue Service (IRS) to combat shell company ownership. Lormel also stated that Rep. Maloney’s bill needs to focus on the threshold levels, suggesting it is a more comprehensive bill. Lormel added that collaboration with the states and maintaining efforts between law enforcement, financial institutions, and regulators are needed in these reforms.

Kleptocracy

Lynch asked about ways to strengthen the kleptocracy bill, to which Sharma responded that oversight of non-banking from a regulation perspective needs to be addressed. He said new advanced technology and distributed ledgers provide opportunities to non-banks, and are macro challenges treated as compliance challenges and should be addressed accordingly.

Financial Exclusion

Rep. Ed Perlmutter (D-Colo.) asked how growing regulation costs have led to financial exclusions. Sharma responded that the combination of growing financial institution requirements and ongoing fines increasing over time have led to types of transactions and entities being perceived as compliance risks. He said when institutions weigh compliance costs, they choose to ignore trying to understand these systems, which leads to exclusion.

Machine Learning and Data Collection

Stivers, Riggleman, Williams, Perlmutter, Hill, and Gonzalez asked about the benefits of machine learning, inefficiencies of data collection, and areas for improvement for information sharing. Lormel said these bills are a very good start but much more complex issues require proper analytics being used by law enforcement, and suggested information that will maintain privacy standards under AML practices. Shiffman said machine learning would strengthen the bills, as communication, and that human intervention and training is vital for the process. Shiffman said FinCEN has a lot of data but that it is not useful, and reform should include producing accurate and useful data which can be used to program machines to follow patterns and create algorithms, through human intervention, which will better detect illicit activities.

For more information about this hearing, click here.