Financial Regulatory Reform: AML/CFT and Economic Sanctions

One aspect of financial regulatory reform that has not spawned much discussion is the implications for the government’s anti-money laundering (“AML”) and combating the financing of terrorism programs and the various sanctions programs administered by the Treasury Department’s Office of Foreign Assets Control (“OFAC”).  However, I suspect that Treasury officials in OFAC, the Treasury’s Office of Terrorist Financing and Financial Crimes (“TFFC”), and the Financial Crimes Enforcement Network (“FinCEN,” a Treasury bureau) are studying the legislative proposals in order to see if there are ways they can piggyback their compliance programs on anything new coming out of the legislation.

For example, the requirement that effectively spreads SEC oversight to most of the hedge fund industry and other private pools of capital by amending the Investment Advisers Act will mean that TFFC, OFAC, and FinCEN will be able to ask the SEC to examine more entities for AML/CFT and OFAC sanction compliance.  It is not a new requirement that hedge funds are required to obey the applicable laws and regulations in this area, but they may have more scrutiny of the systems they have to ensure compliance.  The derivatives provisions may also result in more entities being require to register with the CFTC, the SEC, or both.

In the past decade the compliance programs in this area have taken more prominence because of the concern about terrorism and examples, such as Riggs Bank, of what can happen if there is a violation of the money laundering laws.

If not for government pressure, these programs would probably receive less attention at financial institutions than they currently do.  These programs in effect deputize financial institutions and others to assist in implementing law enforcement and foreign policy goals.  When it comes to financial crimes, money laundering, and terrorist financing, this is probably something that most people support in general, even if it does make back office operations somewhat less efficient.  There is, however, some doubt about how effective these measures are and whether FinCEN can adequately handle the data it receives given some notable problems it has had with contractors developing their systems.  

OFAC sanctions, which are technically separate from the money laundering laws but gets lumped together with them, also cause financial institutions operational headaches.  To cite a commonly mentioned example, the former President of Liberia, Charles Taylor, is on OFAC’s list of Specially Designated Nationals (“SDNs”).  Mr. Taylor most likely knows this since the list is public, and he probably arranged his financial affairs before his arrest in a way to avoid the U.S. banking system and that of any other countries that have similar programs.  However, if a bank is running an OFAC screening program, anyone with the name of Charles Taylor with whom the bank had not previously done business might be flagged in some way for verification the person was not the individual on the SDN list.

The biggest problem with OFAC sanctions though is the Cuba program, which does not have a lot of support in financial circles (nor in many other circles).  It is also unpopular in many foreign countries, some of which have laws prohibiting cooperating with the U.S. government on Cuban embargo matters.  This can easily result in a financial institution (or other global companies such as a hotel chain) in having to decide which countries’ laws to break, since it can be a logical impossibility to obey both countries’ laws at the same time.

The Cuban embargo has likely made other countries less enthusiastic to cooperate with OFAC, even though on many issues they may agree with what OFAC is doing, especially in the terrorism area.  OFAC of course knows that the Cuba program is unpopular, and they try to emphasize their programs aimed at terrorism and narcotics trafficking.   But they are faced with the obligation to administer the Cuban embargo.

AML/CFT issues are not currently getting same degree of public attention they once did when Riggs bank and others ran into trouble in this area, and the Obama Administration has a different Cuba policy than its predecessor.  Therefore, except for some hedge funds and, perhaps, derivative dealers and large derivative market participants, maybe not that much will happen in this area.  On the other hand, economic sanctions are not limited to Cuba and are not always unilateral as that one is.  New multilateral sanctions are definitely on the table.  Sanction programs, which have a mixed record, are attractive to policymakers wanting to do something more than making a diplomatic protest but less than going to war.  The financial regulatory reform legislation may, depending on how it turns out and the subsequent politics among agencies, provide the government a way to strengthen its AML/CFT and sanctions programs, though this may or may not be effective.