In September 2020, over two thousand documents leaked from the United States Department of the Treasury’s Financial Intelligence Unit (FIU), the Financial Crimes Enforcement Network (FinCEN), made news globally. Known as the ‘FinCEN’ leaks, the documents were published by American news website, Buzzfeed News, and shared with the International Consortium of Investigative Journalists (ICIJ) and other individual news organisations globally.
As the Buzzfeed News summary of the leaks describes them: “the FinCEN Files…offer an unprecedented view of global financial corruption, the banks enabling it, and the government agencies that watch as it flourishes”.
For years, powerful onshore jurisdictions and certain non-governmental organisations (NGOs) based in those countries have perpetuated a narrative of offshore International Financial Centres (IFCs), such as those in the Caribbean, being the main facilitators of dirty money flows globally. The FinCEN leaks demonstrate how powerful onshore jurisdictions frequently turn a blind eye to wrongdoing by banks in their own backyards, while castigating offshore IFCs which are often more tightly regulated than their onshore counterparts. The ‘do as I say and not as I do’ approach by onshore jurisdictions undermines the global fight to combat illicit financial flows and betrays ordinary persons harmed by the criminality these flows emanate from and facilitate.
FinCEN Leaks: No Ordinary Leaks
The cache of 2,657 documents known as the FinCEN leaks are the latest in a series of confidential document leaks within recent years which provide a glimpse into the extent of the global problem of money laundering. The previous leaks came from private entities like a single bank (2015 Swiss Leaks), a law firm (2016 Panama Papers) and a private company (2017 Paradise Papers). These previous leaks involved secret documents comprised mainly of confidential financial and other personal information involving some of the world’s wealthiest and most powerful people. The FinCEN leaks, however, largely comprise suspicious activity reports (SARs) - documents filed by banks themselves to FinCEN, reporting suspected illegal activity or wrongdoing – dating back several years. Sensitive US government documents accounted for the remaining documents leaked. It is little wonder, therefore, why compared to the previous leaks which played into the offshore ‘boogeyman’ narrative, outrage against the FinCEN leaks has been more muted.
Under the US Bank Secrecy Act, US banks are required to file SARs in instances where they suspect money laundering, terrorist financing, sanctions, evasion or other illegal activity or wrongdoing by a client. FinCEN, the administrator of the Bank Secrecy Act, collects and analyses these SARs, and shares them with law enforcement agencies which are required by law to keep the SAR information confidential.[i] As such, FinCEN released a short but terse statement condemning the breach of its Anti-Money Laundering (AML) filing database and warned of the leaks shortly before they hit the press.[ii]
As the name suggests, filing and submitting a SAR, is not proof that a crime or wrongdoing has actually taken place. In recent years, banks have engaged in some defensive filing of SARs to safeguard themselves from huge fines in the event a client whose transaction they allowed is later found guilty of money laundering.[iii] Nonetheless, the unlawfully disclosed SARs showed that banks flagged some US$2 trillion dollars’ worth of transactions as suspicious. They further illustrate that, in some cases, the banks filed the SAR months or years after the transaction took place. When one considers that the leaked SARs represent only a minute percentage of the total SARs banks filed with FinCEN over that period, it demonstrates that trillions more dollars of suspected dirty money could have flowed through the global financial system during that period.
‘Do As I Say, Not As I Do’
Offshore IFCs, most of which are small, open economies, are constantly threatened with arbitrary blacklisting by powerful onshore jurisdictions. The FinCEN leaks come against the backdrop that the European Commission has chosen, in the middle of a pandemic, to include four Caribbean countries, including the IFCs of Barbados and the Bahamas, on its draft updated List of High Risk Third Jurisdictions which have strategic deficiencies in their Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regimes that supposedly pose significant threats to the financial system of the 27-nation bloc.[iv] Such arbitrary blacklisting not only poses reputational risks, but real economic consequences. For instance, since 2015 many Caribbean countries have raised the alarm about the de-risking practices of large global banks which have either terminated or restricted the provision of correspondent banking services to Caribbean-based banks because they feel the profits do not justify the perceived risks involved with doing business with the Caribbean. Without correspondent banking relationships (CBRs), those countries’ access to the global financial system would be cut off, with implications for trade and domestic livelihoods.
Moreover, the money laundering threat supposedly posed by the countries on the EU’s pending revised blacklist overlooks that it is primarily global banks in onshore jurisdictions, including within the EU, which have been the subjects of repeated money laundering scandals.[v] Take, for instance, Denmark-based Danske Bank, whose Estonian branch is suspected to have laundered €200 billion in dirty money between 2007 and 2015 in one of the largest money laundering scandals in history.[vi]
Similarly, the majority of the banks mentioned in the FinCEN leaks are based in onshore jurisdictions. A review of the consolidated data provided by the ICIJ shows that in the transactions flagged as suspicious, by far Latvia and Russia were the primary locations of the originating banks, followed by the US, Switzerland, United Arab Emirates and the UK. Yet one would never find these jurisdictions appearing on a Financial Action Task Force (FATF) or EU AML/CFT list. By contrast, transactions involving banks based in Caribbean IFCs accounted for only a small amount of the number in the FinCEN leaks.
Five banks, namely Deutsche Bank, JPMorgan, Standard Chartered, Bank of New York Mellon, and Barclays accounted for the majority of SARs filed.[vii] In some cases, these banks allegedly processed the transactions even after flagging them as suspicious. Among the many revelations, it was found that western banks were used by Russian oligarchs to evade sanctions.[viii] Buzzfeed reports that several of the large banks in the leaks processed transactions linked to Viktor Khrapunov, a former mayor in Kazakhstan wanted by Interpol.[ix] Moreover, the UK was the country where the majority of companies named was based – over 3,000 companies.[x] The scandal-plagued Deutsche Bank, which was fined US$600 billion by US authorities for laundering US$10 billion worth of dirty money for Russian interests in 2015, is again mentioned in the FinCEN leaks.[xi]
Another issue is the failure of regulators to adequately follow up on the reports, even in cases where multiple SARs for the same transaction were filed. While FinCEN has handed out billions in fines and deferred prosecution agreements over the years to banks found to have facilitated money laundering, one possible reason for the failure of follow-up on SARs could be that FinCEN’s allotted budget has not kept pace with its expanded workload in recent years.[xii] Nonetheless, the much less resourced FIUs of small offshore IFCs, which are constantly called on to comply with an ever-growing panoply of international regulations, do not have the luxury of pointing to capacity constraints when threats of blacklisting by powerful nations are made.
Indeed, several empirical studies over the years have found offshore IFCs to be generally better regulated than onshore jurisdictions. One study, for instance, which probed the ease of establishing shell companies globally, found a higher level of compliance with global rules on shell companies in countries generally labelled as ‘tax havens’ than in onshore jurisdictions like the US and the UK.[xiii] Only recently has the US House passed a bill requiring companies to report beneficial ownership information, but a Senate vote remains pending.[xiv] The US has also not signed on to the OECD’s Common Reporting Standard (CRS), arguably because it has its Foreign Account Tax Compliance Act (FATCA). It is therefore the only major economy that does not automatically exchange tax information with foreign authorities.[xv]
As several Caribbean IFCs prepare for the fall-out of their questionable inclusion on the EU’s draft AML/CFT blacklist due shortly to come into effect, the FinCEN leaks have proven yet again why such heavy-handed actions against offshore IFCs are misplaced. The integrity of the global financial system is undermined when powerful onshore jurisdictions fail to hold themselves to the same standards they impose on weaker offshore ones. It is, however, unfortunately the general public - the victims of the criminality and wrongdoing emanating from and facilitated by dirty money - which ends up being the biggest loser from this failure.
[ix] Ibid note i
[xii] Ibid note iii
Alicia Nicholls, B.Sc.(Hons), M.Sc. (Dist.), LL.B. (Hons) is an international trade and development specialist with over a decade of experience working in, and writing on, trade and development matters of interest to the Caribbean. She holds a Bachelor of Science in Political Science (First Class Honours), a Bachelor of Laws (Upper Second Class Honours), and a Masters in International Trade Policy (with distinction) from the University of the West Indies, and an Associate Degree in French, Spanish and German for Business and Tourism from the Barbados Community College. She also holds the FITT Diploma in International Trade from the prestigious Canadian-based Forum for International Trade Training (FITT) and has been a FITT General Member since 2015. She is also a member of the Michigan-based Academy for International Business (AIB) since 2016. Alicia presents and writes on a wide gamut of trade and development issues for regional and international publications and industry magazines. Her research interests include international business, MSMEs, AML/CFT issues, investment law and policy and investment migration programmes. She is also the author of one of the Caribbean's leading trade and development blogs www.caribbeantradelaw.com. Alicia is currently part of the research team of the Shridath Ramphal Centre for International Trade Law, Policy & Services of The University of the West Indies, Cave Hill, the premier trade policy training, research and outreach institution in the Caribbean.