Bringing New Money-Laundering Law Into Force Falls to Tiny Treasury Unit

FinCEN—whose roughly 300 employees account for less than 1% of those working in the Treasury Department—will need to muster the technological expertise to build a system that can store and analyze the ownership information of possibly tens of millions of businesses.

The agency will also have to write a host of potentially controversial regulations surrounding the law, which is intended to protect national security and foster the innovation needed to catch the next wave of terrorists and financial criminals.

FinCEN will need to start a whistleblowers reward program, and establish national priorities that financial institutions can use to create risk-based compliance programs.

“A pretty big mandate for a small institution,” summed up James Freis, a former FinCEN director.

FinCEN is one of more than 160 financial intelligence units operating in countries around the world. Its mandate is to collect information on suspicious financial activity from banks and other financial institutions to fight money-laundering, terrorism financing and other crimes.

The unit’s mission has grown since its formation in 1990. Today FinCEN juggles a list of competing priorities—from intelligence collection and database management, to policy-making, enforcement and investigations. The anti-money-laundering act only adds to that load.

The agency has a year to promulgate regulations under the new anti-money-laundering law and another two to put them into effect. But the magnitude of the project could stretch the rollout beyond the bill’s Congressional deadlines. While Treasury Secretary Janet Yellen has called the law a priority, the Biden administration has faced delays in filling key positions.

President Biden has yet to nominate a Treasury undersecretary for terrorism and financial intelligence, a role that also oversees FinCEN.

The agency declined to make any of its officials available for an interview, including the current director, Kenneth Blanco. But a FinCEN spokeswoman said in an email that it is working to meet the congressional mandates laid out in the new law. Several provisions relate to initiatives already in progress, she said.

Putting new regulations into effect is likely to be a thorny process. The agency will have to navigate the interests of major banks and their regulators, law enforcement agencies, financial transparency advocates and business associations.

The fine print of the regulations is expected to most immediately touch owners of small businesses and entities such as limited liability companies, many of which will be required to submit information to the federal government unless they fall under one of more than 20 exemptions.

Financial transparency groups say exemptions should be kept narrow to increase the overall effectiveness of the law. Business groups—in particular the National Federation of Independent Business, a small business association—say they will fight to minimize the costs to their members of complying with the legislation.

“It’s a very significant piece of legislation and, for so much of it, the devil’s in the details,” said Eric Lorber, a former Treasury official and now a managing director of the compliance services firm K2 Integrity Holdings Inc. “The 800-pound gorilla is the creation of the beneficial ownership database.”

How FinCEN approaches the technological aspects of the registry will also be critical, experts say, since the underlying systems could determine how effectively banks and FinCEN’s law-enforcement partners use the new ownership records to prevent and investigate crime.

A Congressional Budget Office report on a 2019 version of the corporate registry bill estimated that it would generate approximately 25 million to 30 million filings a year. But the enacted bill doesn’t require covered entities to file annually. At present, FinCEN receives about 3 million suspicious activity reports a year, which are housed in a system that holds more than 300 million reports, according to the agency.

That system is already somewhat outdated, according to people familiar with it, and for years FinCEN has faced concerns over whether the data it manages is being used to the fullest extent possible. Worries over data security, meanwhile, were underscored by a leak of FinCEN data made public last year, which appeared to show banks continuing to do business with clients whose transactions they had flagged as suspicious, even as law enforcement took no immediate action.

“They are woefully behind the curve in technology,” said Tom Cardamone, the president of Global Financial Integrity, a Washington-based advocacy group that recently convened a group of 19 anti-money-laundering experts, including veterans of FinCEN, to explore ways to strengthen the agency.

J.R. Helmig, an innovation lead for Cary, N.C.-based analytics software company SAS Institute Inc. and a former senior adviser to FinCEN who has participated in GFI roundtables, said the agency should be looking to incorporate advanced technologies like machine-learning and artificial intelligence into the registry.

The new registry presents an opportunity to build such a system from the ground up, but the cost of doing so could far exceed the agency’s already stretched budget. The CBO in 2019 estimated the one-time cost of updating FinCEN’s IT systems would be about $40 million. For the fiscal year ending in September, the agency has requested a budget of nearly $130 million, with allocations for 346 full-time employees.

The anti-money-laundering bill authorizes $10 million in additional funds for FinCEN’s budget, and gives the agency special hiring ability, allowing it to offer more competitive salaries for the experts it needs to modernize its systems.

FinCEN’s immediate focus is on hiring and getting the funds it needs to bring the law into force, according to the agency’s spokeswoman.

“They need to plus-up on data analytics, data scientists,” Mr. Cardamone said of FinCEN. “The agency should be more of a tech agency that does financial intelligence rather than the other way around.”

Write to Dylan Tokar at [email protected]