U.S. Anti-Money Laundering Laws Are Outdated. Regulators Are Struggling With How to Modernize Them.

When lawmakers passed legislation intended to modernize the U.S.’s anti-money-laundering rules, many banks hoped the changes would make complying with the rules less burdensome, allowing them greater flexibility in how they allocate resources when screening for suspicious activity by customers.

As the adage goes, “Be careful what you wish for.”

Banks for years have struggled to maintain programs to effectively manage money laundering risks. Such programs are expensive and the costs of failing to maintain them can also be high. Last week, TD Bank agreed to pay $3 billion in penalties and limit its U.S. growth for failing to properly monitor and prevent cash deposits by Chinese criminals tied to the sale of fentanyl and other illicit drugs.

In charging documents, prosecutors alleged TD had maintained an anti-money laundering program that looked adequate on paper but failed in a number of crucial areas. TD executives enforced a “flat cost paradigm,” according to the Justice Department, which prevented its anti-money-laundering budget from growing despite an increase in both profit and risk.

For years, banks have looked for more guidance from regulators about how to best allocate resources toward stopping financial crime. This year, the U.S. Treasury Department took a long-awaited step toward updating the patchwork of rules and regulations designed to keep dirty money out of the financial system. The department’s financial crimes bureau has been under instruction to update its regulations since Congress passed the Anti-Money Laundering Act of 2020.

The Treasury’s proposal for doing so would require banks to formalize an already common practice of conducting periodic risk reviews. It also would require banks to begin incorporating a set of national priorities into their anti-money-laundering programs. On their face, the measures didn’t appear to be a vast departure from what banks were already doing to fight money laundering.

But industry groups have been critical, saying the proposal flies in the face of what Congress intended when it tasked the Treasury’s Financial Crimes Enforcement Network with reforming the U.S.’s financial crimes safeguards.

Influential groups such as the American Bankers Association and Bank Policy Institute have sent strongly worded letters to FinCEN, saying the Treasury bureau’s proposal was simply creating new regulatory requirements instead of getting smarter about the old ones.

“We believe the proposed rule will do little to change the status quo,” Gregg Rozansky, a lawyer for BPI, wrote in a letter last month to FinCEN. “It will neither implement the intent of Congress…nor facilitate a risk-based approach to identifying and disrupting financial crime.”

Treasury officials say they are reviewing the industry feedback.

“This is a work in progress,” Brad Smith, the Treasury’s acting undersecretary for terrorism and financial intelligence, told attendees of a conference hosted by the ABA last week.

The groups have also sent letters to other financial regulators, including the Federal Reserve, that examine banks on their anti-money-laundering controls and have issued parallel proposals.

Under the current regime, financial institutions ranging from banks to casinos are required to monitor transactions by customers and to file reports when they come across something that looks suspicious. Complying with those regulations can be costly: LexisNexis has estimated financial institutions in the U.S. and Canada last year spent $61 billion on financial crimes compliance.

Meanwhile, critics of the current system question whether it is effective. Instead of spending their resources looking for the worst types of financial crime, financial institutions say they often are forced amid pressure by regulators to focus on the technical aspects of complying with their anti-money-laundering regulations.

During periodic examinations, regulators often take random samples of the cases investigated by a bank’s staff and may question, for example, why they filled out a suspicious activity report in a certain way, or, in some cases, didn’t file one at all.

The upshot of that regulatory scrutiny, financial crimes experts argue, is a check-the-box approach that leads to financial institutions filing millions of suspicious activity reports a year, many of which may have little value to law-enforcement officials. The FinCEN proposal does little to alleviate that kind of regulatory pressure, banking groups say.

Instead, FinCEN’s proposal formalizes a requirement for financial institutions to conduct an assessment that identifies the risks facing their organization. Commentators have pointed out the practice is already widespread in the industry. Making it a requirement—which regulators say will increase consistency across the industry—adds to banks’ regulatory burden since they will then be examined on how well they complete the assessment based on newly formulated standards, according to some industry groups.

“As proposed, this approach risks prioritizing duplicative paperwork and technical compliance over goals of identifying and combating illicit finance activity,” Heather Trew, a lawyer and former Treasury official, wrote in a letter for the ABA.

The legislation passed by Congress made direct reference to banks’ concerns about inefficient resource allocation, and the ABA in its letter last month pressed FinCEN to adopt language straight from the law’s text.

“More attention and resources of financial institutions should be directed toward higher-risk customers and activities…rather than toward lower-risk customers and activities,” the legislation stipulated.

Figuring out how to design a system that lets banks more effectively allocate resources has proven trickier than lawmakers may have expected. Law enforcement, for example, may be hesitant to designate certain criminal activities as lower priority. When FinCEN first released a set of national priorities in 2021, few types of illicit activity went unmentioned.

How exactly FinCEN responds to the criticism remains to be seen. But Smith, speaking Tuesday, indicated it understood the industry’s complaints.

“We know, and have heard pretty acutely, the frustration that industry has sometimes, with trying to identify, let’s say risky behavior, trying to go after what they really believe—and we ultimately believe—is the real objective here,” Smith said. “But they feel forced to divert resources to avoid a bad audit” from banking regulators.

“We don’t want to discourage auditing. But we can also recognize there is sometimes space in which things can be taken so literally that it defeats the broader objective,” he added.