New U.S. FinCEN director must bolster agency under pressure over Iran sanctions, money laundering

September 21, 2012

By Brett Wolf

NEW YORK, Sept. 21 (Thomson Reuters Accelus) – When former Justice Department official Jennifer Shasky Calvery takes the reins at the U.S. Treasury Department’s anti-money laundering bureau on Monday, her first job is to revive the beleaguered agency amid pressure over Iran sanctions and money-laundering enforcement, sources said.

Shasky Calvery is a former prosecutor who cut her teeth dismantling international organized crime groups and tracking down their money. She will need all her leadership and diplomacy skills to boost the bureau’s morale, which has plummeted with the loss of skilled leaders and withering criticism from many fronts, and outline the policies with which she will make her mark as the new head of the Financial Crimes Enforcement Network (FinCEN).

FinCEN, a 300-person agency that some believe lacks the funding it needs to accomplish its rulemaking and enforcement mandates, in recent years has moved slowly to issue high-profile regulations – including those stemming from legislation enacted in 2010 aimed at cutting off Iran’s access to financial services.

Critics, including some on Capitol Hill, have publicly questioned FinCEN’s priorities and competence in a number of areas. Some sources said the bureau had excessively focused on mortgage fraud at the expense of issues such as international money laundering, terrorism and rogue regimes.

“This didn’t match the priorities of [Treasury’s Office of Terrorism and Financial Intelligence], which was more focused on systemic issues and issues abroad,” a source aware of the situation said. “Treasury had an agenda to really go after foreign nodes where they were seeing money-laundering problems, but they couldn’t get FinCEN to focus on that.”

In March 2011, U.S. Sens. Dianne Feinstein, Chuck Grassley and Sheldon Whitehouse wrote a public letter to Treasury Secretary Timothy Geithner; they complained that FinCEN was slow in making rules for prepaid cards and expressed concern about their potential for abuse by drug traffickers.

FinCEN’s obligation to oversee financial institutions’ anti- money laundering programs, and the public scrutiny it faces as the enforcer of the Bank Secrecy Act (BSA), the primary U.S. anti-money laundering law, makes the directorship much different from Shasky Calvery’s previous role as head of the relatively unknown Asset Forfeiture and Money Laundering Section at the Justice Department.

Shasky Calvery will be in the public spotlight and need to successfully navigate relationships with lawmakers, government agencies and the financial institutions she will regulate.

Shasky Calvery also must rebuild a strained rapport with the main Treasury Department, including its Office of Terrorism and Financial Intelligence (TFI). The office is run by Under Secretary for Terrorism and Financial Intelligence David Cohen, to whom Shasky Calvery will report. “She’s going to have to be aligned to David Cohen,” a former Treasury official said.

Thomson Reuters spoke with a number of current and former Treasury officials and banking industry sources to identify challenges faced by Shasky Calvery and her predecessors. Because Shasky Calvery will have authority over them when she assumes her new post, most of the sources requested they not be named.

Avoiding pitfalls

Outgoing FinCEN director James Freis Jr., who assumed the post in March 2007, was dismissed by Cohen after refusing to resign in May. Today is Freis’ last as head of FinCEN. He will stay at the Treasury Department, in a role that has not been determined, a source familiar with the situation said.

Although Treasury has not publicly explained Freis’ departure, and Cohen praised him when announcing his replacement, sources familiar with the matter cited personality conflicts between the two and irreconcilable differences in their visions for FinCEN.

Freis, who took seriously his statutory mandate to support law enforcement when he arrived at the bureau, looked for guidance on priorities to the Justice Department, a top consumer of the data FinCEN collects from financial institutions through the Bank Secrecy Act, a source familiar with his tenure said.

Freis made supporting the fight against mortgage fraud a top priority.

Meanwhile, issues of greater importance to Treasury’s terrorism and financial intelligence office, such as drawing on FinCEN’s powers to help Treasury keep foreign banks from aiding drug traffickers, terrorist groups and rogue regimes that threaten U.S. national security, were marginalized, the source said.

Cohen’s predecessor, Stuart Levey, did not challenge Freis’ priorities. However, after Cohen replaced Levey in mid-2011, it became apparent that Freis’ days were numbered despite his reputation as a competent leader and his success at upgrading the bureau’s technology systems, a low-profile goal that had eluded the costly attempts of previous FinCEN directors.

Freis, Cohen and Levey, who joined Britain’s HSBC Holdings Plc in January as chief legal officer, all declined to comment through their press representatives.

Tracking customers is a priority

Shasky Calvery has an established relationship with Cohen and the terrorism office. Since taking over the asset forfeiture and money laundering office in 2010, she has been working closely with Cohen’s office both in probing foreign banks suspected of violating U.S. sanctions and determining to what degree financial institutions should be required to determine the true ownership of companies they do business with, sources familiar with her work at Justice said.

The effort to develop rules in this area already sits atop FinCEN’s agenda, but it is controversial. Financial institutions, which are concerned about the costs and viability of such heightened due diligence, have long argued that the states that incorporate companies should be collecting the information themselves, and that law enforcement officials should get it directly from them where necessary.

In March, the bureau solicited comment on the matter and in late July held a public meeting in Washington DC, which Shasky Calvery attended. A similar event has been scheduled for later this month in Chicago, but Shasky Calvery is not expected to be on hand.

She will have to tread carefully throughout the rule-making process as any perceived attempt to impose unnecessary or unworkable requirements on the financial services industry could easily backfire, banking industry and former Treasury officials said.

Shasky Calvery must ensure that the bureau acts as an “honest broker” between law enforcement agencies that “would love to have every piece of information that ever existed about financial transactions,” and a financial services industry that would prefer to be “unburdened from the very expensive record-keeping and reporting and due diligence requirements of the BSA,” said Peter Djinis, a former regulatory policy official at FinCEN who now runs a private practice in Florida.

Need for aggressive enforcement

Similarly, Shasky Calvery will be expected to more aggressively use FinCEN’s enforcement authorities to crack down on illicit transactions, sources said.

For one, the terrorism office will expect her to make more use of powers under Section 311 of the post-Sept. 11 USA PATRIOT Act, which among other things empowered FinCEN to sever from the U.S. financial system any foreign financial institution that is found to pose a grave money laundering threat.

That power was invoked against financial institutions on a dozen occasions during the five years before Freis’ directorship, but it was employed in just two instances – against Lebanese Canadian Bank and JSC CredexBank – during his five-year stint.

As the Treasury Department tightens the noose around Tehran in an effort to end Iran’s nuclear program, FinCEN could play a key role in ensuring that the Iranian regime cannot shuffle proliferation-related funds around the world with help from rogue banks, sources said.

The USA PATRIOT Act powers can also be an important tool in the fight against terrorism, drug trafficking and other international crimes.

FinCEN must also more aggressively pursue U.S.-based banks that fail to meet their anti-money laundering obligations, former Treasury officials said.

The Senate Permanent Subcommittee on Investigations (PSI), the driving force behind key money laundering regulations, has given regulators a public drubbing of late over their perceived failures to oversee the financial services industry.

In July, the subcommittee held a hearing at which it pummeled the Office of the Comptroller of the Currency for its purported failures to regulate HSBC. The hearing came after the subcommittee released a report detailing an array of alleged anti-money laundering and sanctions compliance failures at the bank.

As a result of that pressure, the fact that Levey made supporting U.S. foreign policy a hallmark of his time as undersecretary, and dramatic bank misdeeds publicly exposed as the result of high-profile anti-money laundering and sanctions investigations, enforcement of related rules has emerged a top priority for Treasury.

Still, FinCEN, which is responsible for enforcing Bank Secrecy Act compliance by issuing stiff monetary penalties for noncompliance, has only acted against a handful of financial institutions in recent years.

Since Freis took over FinCEN in 2007, it has levied less than $195 million in penalties against 21 people and financial institutions.

Of the 11 enforcement actions FinCEN took last year, seven were against individuals and their small businesses, most of who were targeted for illegally wiring minor sums of money and whose fines totaled $132,500. Three banks were penalized a total of $25.9 million and a casino paid $250,000.

FinCEN has not announced any enforcement actions thus far in 2012.

Meanwhile, Treasury’s Office of Foreign Assets Control (OFAC), which is also overseen by Cohen’s office and enforces the U.S. sanctions program, has partnered with the Justice Department’s asset-forfeiture office and New York prosecutors to target a number of foreign and domestic banks accused of processing transactions for Iran and other blacklisted countries.

Billions of dollars in fines and forfeitures have been collected by OFAC and its partners during the past few years, grabbing the attention of transnational banks around the world and forcing them to take sanctions compliance seriously. FinCEN must work with the same partners to make noncompliance with anti-money laundering rules similarly risky for big banks, sources said.

Although Shasky Calvery’s background makes her well-suited for that task, some banking industry sources expressed concern she might go too far. In her previous role at the asset-forfeiture unit, she oversaw a reorganization designed in part to crack down on financial institutions seen as having egregious anti-laundering lapses or complicity with criminals.

While her work in this area has not yet resulted in high-profile prosecutions, she recently told Thomson Reuters that a number of cases against both banks and non-bank financial institutions are pending.

No “speed traps”

Still, Shasky Calvery will have to make judicious use of FinCEN’s enforcement authority or she will risk losing the cooperation of private-sector experts who know how to help the bureau craft effective regulations, sources said.

“If the view is that Bank Secrecy Act regulatory requirements are a trap for financial institutions — like a speed trap that exists not to protect the public but to generate revenue — you’re going to get very little cooperation from the financial services industry, because there would be no reason for them to dig their own graves,” Djinis said.

He added: “FinCEN will not work effectively at all if it appears that its policies are set by law enforcement, without consideration of the effects, costs and burdens that new regulatory requirements impose on the financial services community.”

A banking industry source said many are eager to work with Shasky Calvery, but she must demonstrate the feeling is mutual.

Aligning FinCEN with Treasury headquarters

Shasky Calvery will also need to renew ties between FinCEN, the terrorism office and main Treasury, sources said. Those familiar with her relationship with Treasury Department leadership say she is already in tune with their priorities.

Following its creation in 1990, FinCEN was an office within Treasury’s headquarters. That changed as a result of the Patriot Act, which made FinCEN a full-fledged bureau, granting it a budget of its own and a degree of independence.

Still, FinCEN cannot craft policies without consulting Treasury headquarters, sources said.

“FinCEN … still has to conduct itself in conformity with policies that are ultimately subject to the approval of the Secretary of the Treasury,” Djinis said.

Cohen has made it clear he would like to better integrate FinCEN with the terrorism and financial intelligence office and Treasury headquarters, one Treasury official said. He added that in the wake of Freis’ ouster, there are no doubts within FinCEN’s ranks about Cohen’s overriding authority.

FinCEN is based in Vienna, Virginia but has kept some of its regulatory policy staff in downtown Washington. It is considering whether to put more staff in the city early next year, in part to increase coordination.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. <a href=” ions/regulatory-intelligence/compliance- complete/” target=_new”>Compliance Complete</a> provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

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‘[Treasury?] sources said the bureau had excessively focused on mortgage fraud…“This didn’t match the priorities of [Treasury’s Office of Terrorism and Financial Intelligence], which was more focused on systemic issues..” a source aware of the situation said.’
Hundreds of billions reported by FinCEN on mortgage fraud isn’t a systemic issue? Are Cohen and his anonymous mouthpiece unaware that bad mortgages caused the financial collapse that crashed the national economy (with Treasury and the Federal Reserve “rescuing” financial institutions at a cost of hundreds of billions for taxpayers)? This is an interesting position offered by Treasury’s unnamed source, as it coincides with FinCEN’s roll out of new regulations on mortgage bankers and Fannie & Freddie. Notwithstanding insinuations above that FinCEN’s new director will crack down on financial institutions, the pretentious emphasis on Iran seems little more than a diversion to derail any meaningful reform to financial institutions. This is not surprising, given Cohen’s previous affiliation with Goldman Sachs.

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