Counterterrorism Blog

I frequently speak to financial sector groups at Anti Money Laundering (AML) conferences and financial institution training sessions about terrorist financing. Among the points I stress is that terrorist groups require financial support in order to achieve their goals. They must have effective financial infrastructures to include:

• Sources of funding
• Means of laundering funds
• Availability of funding

The means for laundering funds requires use of the formal and informal financial systems. In the formal financial system, this makes financial institutions the conduit between the source of funds, and the availability and application or use of funds. This places everyone with responsibility for Bank Secrecy Act (BSA) compliance in the financial sector on the front line in the economic component of the war on terrorism.

This position was reinforced on May 10, 2007, by Thomas D. Fleming, Assistant Director, Office of Regulatory Policy, Financial Crimes Enforcement Network (FinCEN). Tom spoke at the West Coast AML Forum in San Francisco and emphasized the critically important role banks play in National Security. He described the Federal Bureau of Investigation’s (FBI), Investigative Data Warehouse (IDW) and announced that FinCEN had established a classified mechanism to receive information directly from the FBI generated by IDW.

IDW is a powerful data mining platform. It accesses multiple data sources, containing more than 659 million records in single queries and links important pieces of information together for criminal and terrorist investigations in a very timely manner. IDW was developed by the FBI’s Terrorist Financing Operations Section (TFOS). Its capabilities are extremely robust. IDW has been used to run information concerning terrorism cases against data sources, to include Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs). In testimony before the House Committee for Financial Services on May 26, 2005, Former FBI TFOS Chief Michael F. A. Morehart sited the value of BSA data in counterterrorism matters. He advised that using IDW, the FBI reviewed approximately 71 million BSA documents for their relevance to counterterrorism investigative and intelligence matters. The review identified over 88,000 SARs and CTRs that bore some relationship to subjects of terrorism investigations.

With respect to Mr. Fleming’s comments at the West Coast AML Forum, he noted that TFOS was in the process of providing FinCEN with information for analysis from a sampling of terrorist related names run against SARs and CTRs. There was a 40 percent hit rate. Tom stated that these numbers demonstrated the significance of BSA reporting requirements. We should keep in mind that the two areas of vulnerability for terrorists are communication and finance. The exploitation and analysis of BSA information by the government is an important element for disrupting and preventing the flow of funds through the formal financial system.

Mr. Fleming also noted at the aforementioned conference that new FinCEN Director James H. Freis, Jr., had two priorities. One was to focus on regulatory efficiency. The other, was to increase feedback to the financial community concerning the benefit of SARs and CTRs. In addressing the Bank Secrecy Act Advisory Group (BSAAG) at its plenary on May 17, 2007, Mr. Freis pledged his commitment to ensure the BSA is being administered in the most effective and efficient manner. The BSAAG is a working group comprised of high ranking representatives from financial institutions, federal law enforcement agencies, regulators and selects other individuals.

On May 10, 2007, the House Financial Services Subcommittee on Oversight and Investigations held a hearing to discuss SAR and CTR reporting requirements. Government and financial services executives testified about the benefits and burdens of BSA reporting requirements. The benefits and burdens issue was heightened with the passage of the U.S. PATRIOT Act. It is a significant issue of debate and concern. Both sides of this sensitive debate have valid arguments, as were thoughtfully articulated in this hearing.

Law enforcement is the direct beneficiary of BSA information. In a perfect situation, they would like to maintain, at a minimum, the current level of reporting. Industry, on the other hand, bears the burden of BSA reporting requirements in terms of exorbitant cost and resource demands. Industry firmly believes BSA reporting requirements are outdated and must be modified to more realistically balance the burden versus benefit.

FBI Deputy Assistant Director Salvatore Hernandez delineated the importance and benefit of SARs and CTRs to law enforcement. Unfortunately, he did not present compelling statistics such as Mr. Morehart or Mr. Fleming did, as mentioned above.

Each of five industry witnesses who testified at the hearing made persuasive arguments about the undue burden of BSA reporting requirements. Each witness made recommendations to raise reporting thresholds and to reduce the burdens. Each of these witnesses also commended the House for passing HR 323, the Seasoned Customer CTR Exemption Act of 2007. If enacted, HR 323 will exempt CTR reporting for qualified seasoned customers. This will result in significant cost and resource savings for financial institutions.

Megan Davis Hodge, RBC Centura Bank, testified on behalf of the American Bankers Association. Ms. Hodge’s written statement offers an excellent framework for Congress to consider in addressing the burden issues.

In my view, the industry arguments were compelling and reasonable. It is incumbent that the government and industry work together on this issue and establish a middle ground that both sides can benefit from. There must be genuine communication, cooperation and coordination. Both government and industry witnesses recognized the importance of working together to ensure the integrity of the financial system.
In their written statements, none of the witnesses discussed the systemic vulnerability and risk any actions will have if reporting requirements are diminished and/or reporting thresholds raised. For example, if HR 323 is enacted into law, new vulnerabilities will evolve and most certainly be exploited by criminals, fraudsters and terrorists. Likewise, if SAR and CTR monetary thresholds are raised, new vulnerabilities and methodologies will evolve to exploit the financial system.

It is clear that Congress must take the lead and enact legislation to reduce the burden of BSA reporting requirements on the financial sector. However, Congress must ensure they maintain oversight. Industry must develop and implement mechanisms to identify and minimize vulnerabilities and risks that will evolve. Make no mistake about it, fraudsters, money launderers, other criminals and terrorists will identify new vulnerabilities. They will exploit systemic weaknesses immediately. Collateral to the cost and resource burden, Congress should consider the issues of feedback to financial institutions concerning the value of SARs and CTRs to law enforcement, regulatory examination consistency, and the issues caused by the subjectivity of the SAR process.

I’ve consistently noted during presentations, training forums and in written papers that when I was in the FBI, I was the direct beneficiary of BSA reporting. I experienced first hand the value of BSA information. SARs and CTRs are essential weapons for law enforcement in the fight against fraud, money laundering and terrorist financing. The financial sector must recognize the fact that they are on the front line in this fight. The more effective the level of communication, cooperation and coordination between government and industry, the better the odds of denying criminals and terrorists the means to the sources and availability of funding.