The Breakdown - The FinCEN Files Show Banks Don’t Actually Care About Stopping Money Laundering

Episode Date: September 22, 2020

Today on the Brief Stocks down, dollar up on COVID-19 resurgence fears People’s Bank of China says digital yuan needed to fight USD dominance 140,000 have claimed UNI tokens Judge stops Trump WeChat ban Nikola founder resigns Our main discussion: The FinCEN Files  The FinCEN Files are a leaked cache of suspicious activity reports filed by banks with the U.S .Financial Crimes Enforcement Network. The more than 2,000 files, representing $2 trillion in transactions, were leaked to BuzzFeed News more than a year ago. BuzzFeed, in turn, shared them with the International Consortium of Investigative Journalists, who then helped distribute them to 108 publications in 88 countries.  This episode provides an overview of the leaks and explains why they show that, despite lots of PR bluster, banks are happy to file their reports and then keep on banking likely money launderers. 

This should forever end the notion of blaming an asset for the crimes committed with it. Put differently, the amount of USD used for illicit purposes just revealed by this tiny fraction of the total SARS that go into the FinCEN system every year makes scams involving Bitcoin and other cryptos look like a schoolyard shakedown compared to the mafia. It's a joke. It's incomparable. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, BitStamp, and nexo.io. And produced and distributed by CoinDes.

What's going on, guys? It is Monday, September 21st, and today we are talking the FinCEN files. And they told you Bitcoin was bad. This is a trove of financial documents that were leaked about a year ago. to BuzzFeed News, who then got in touch with hundreds of other organizations to comb through this huge amount of data to tell a very damning story about how little global banks do to actually stop money laundering. First up, however, let's do the brief. Today's brief actually has five rather than three topics, but I'm going to move through them a little bit quickly. First up,

stocks down dollars up, so major European indexes like Germany's Dax and the U.S. TFSE are down more than 3% on the day, while S&P futures are also down around 2%. At the same time, the dollar index is up 0.5%, suggesting people are moving to the dollar as a safer asset. The narrative that I'm seeing that's being used to explain this move is COVID-19 fears. A report came out saying that COVID cases were doubling weekly in the UK, and if the trend continues, there would be 50,000 cases per day by mid-October. There's fear of more shutdowns happening, with Denmark and Greece already having imposed some new restrictions.

We're also seeing some resurgence in the U.S. as well, with 12 states reporting at least 1,000 new confirmed cases on Saturday. It's a reminder that the COVID-19 fears, the fear of economic disruption, continues to loom large over our economy, even with any claims of sort of V-shaped recoveries. Next up on the brief, the People's Bank of China has made it clear why the digital yuan is so important. In an article in the PBOC's magazine, China Finance, the central bank argued that it needed a digital

yuan to break the U.S. dollars' dominance and internationalize the yuan. This magazine came out over the weekend. The PBOC sees digital currency issuance as a, quote, new battlefield of competition. And the reason it's worth noting this article is that it makes the real objective of the digital yuan very, very clear. It is no longer speculation. This is about explicitly breaking the US dollar's dominance. Now related, I just saw something hit the wires that said, Christine Lagarde said the ECB is about to open consultation on a digital euro within days. So far, the US hasn't seemed to feel a lot of pressure around accelerating its digital.

dollar project or any digital dollar project, but we'll see if that remains when both the ECB and the People's Bank of China are going gangbusters at it. Third on the brief today, let's talk about the scale of Uniswap users. Last week, Uniswap air dropped 400 Uni token crypto stimulus on any eth address that had used Uniswap in the past. Since then, 140,000 addresses have claimed that uni. Now, this doesn't necessarily mean 140,000 users, right? Many people have used dozens of addresses potentially, but it still provides some sense of scale. And speaking of all this defy craziness, I've said frequently on the show that one of the things that makes it safer than the ICO boom is that the barriers to entry are so high that most of the people who are getting into

this have some sense of the real risks involved. Affirming that, Binance has launched what they call an innovation zone to filter out users who want to really gamble with new defy coins. It basically involves self-answering a bunch of questions, specifically around whether a user is ready to take 50% or more losses, before being allowed to trade new and novel coins. Fourth on the brief today, a follow-up on TikTok. President Trump has approved the Oracle deal in principle and is insisting that Oracle actually, when all is said and done, controls the whole thing. Meanwhile, the WeChat App Store ban was put on hold by a U.S. judge on concerns that it would violate the free speech rights of Chinese American citizens.

Here's the key line from Bloomberg and the judge in question. The judge found the government provided insufficient evidence of a security threat. She wrote, Certainly the government's overarching national security interest is significant. But on this record, while the government has established that China's activities raised significant national security concerns, it has put in scant little evidence that its effective ban of WeChat for all U.S. users addresses those concerns. Expect this battle to continue. And speaking of battles last up on this brief today is the Nicola founder Trevor Milton has resigned. Earlier this month,

Hindenberg Research released a report with allegations of fraud that subsequently the SEC has followed up on. In the wake of those allegations, Trevor Milton, the Nicola CEO and co-founder, has resigned. Nicola is, of course, best known for intersecting two hot trends, the electric vehicle trend, as well as the SPAC, special purpose acquisition company trend. For much of the year, it's been a darling of the Robin Hood set, so it'll be interesting to see if the hullabaloo around this changes the appetite around SPACs, or if this is seen as just something of a road bump. With that, let's shift to our main conversation, the FinCEN files. First, let's do a little bit of background.

FinCEN is the U.S. Financial Crimes Enforcement Network, so it is the people at the U.S. Treasury who fight global financial crime. FinCEN is specifically concerned with transactions made in U.S. dollars wherever they happened. Suspicious activity reports or SARS are how these suspicious activities are recorded. They're sent by banks to FinCEN to flag certain types of suspicious behavior. FinCEN for their part follows up and even compiles intelligence into a report they call kleptocracy weekly. So what type of suspicious behavior are we talking about?

Well, money laundering. Basically, criminals need to get money that can be linked to crime, to a respected account where it won't be linked to that crime. This is everyone from drug rings to Russian oligarchs who are trying to avoid sanctions. Banks are, of course, in theory, not just supposed to file these reports, but to actively stop the flow of cash. The problem, as we'll see, and this is from the BBC's summary of the FinCEN files leak, quote, once a bank has filed a report to the authorities,

it is very difficult to prosecute it or its executives, even if it carries on helping with the suspicious activities and collecting the fees. That is going to be a key theme of our conversation today. First, however, let's look at where this fits in the recent history of financial leaks. In 2014, we had LuxLeaks. It was from Pricewaterhouse Coopers and clients using Luxembourg tax deals to reduce their costs. In 2015, we saw the Swiss Leaks, which was HSBC's Swiss Private Bank, which was using the country's bank secrecy laws to help clients avoid paying tax.

In 2016, we got the Panama Papers from law firm Mossack Fonseca that showed wealthy people using offshore tax regimes to avoid obviously taxes as well. 2017, the Paradise Papers continued this, similar offshore financial dealings of politicians, celebrities, and business leaders. The difference in the FinCEN file leaks is that they come from a huge array of banks rather than one single institution. They were leaked to BuzzFeed News over a year ago, and here is how BuzzFeed News framed it in their overview.

A huge trove of secret government documents reveals for the first time how the giants of Western banking move trillions of dollars in suspicious transactions, enriching themselves and their shareholders while facilitating the work of terrorists, kleptocrats, and drug kingpins. And the U.S. government, despite its vast powers,

fails to stop it. So BuzzFeed News got this leak from an unidentified source and then shared it with other investigative journalists. Specifically, they shared it with a group of investigative journalists that brings together those folks from around the world. This is the International Consortium of Investigative Journalists, ICIJ. That group then distributed these files to 108 news organizations in 88 countries. This means that hundreds of journalists have been sifting through this information. The FinCEN files are 2,657 files, including 2,121 Suspicious Activity Reports. They comprise 22,000 pages of documents and over 200,000 transactions. They focus on 10,000 subjects of suspicion, located across 170 countries and territories. They were sent to bank,

by U.S. authorities between 1999 and 2017, although primarily between 2011 and 2017. They cover $2 trillion in transactions, which is, as huge as that sounds, only a tiny portion of the SARS submitted during that period. For some scale, there were more than 2 million SARS filed last year alone. And again, we're talking about 2100 here. Now, BuzzFeed News didn't publish the full cash of documents, in part because there was a lot of information about people and companies that are not under suspicion, but that got swept up in the searches. What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is Crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there,

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this period. Two, that banks tend to be extremely lazi-faire about this. As BuzzFeed put it, Western banks could have blocked almost any of them, but in many cases they kept the money flowing and kept collecting their fees. The ICIJ put it like this. They show banks blindly moving cash through their accounts for people they can't identify, failing to report transactions with all the hallmarks of money laundering until years after the fact, even doing business with clients enmeshed in financial frauds and public corruption scandals. And here's the real nut of it. What these show, I think, more than

anything is that there is simply not enough incentive for banks to stop doing this. Here again is BuzzFeed. The FinCEN files investigation shows that even after they were prosecuted or fined for financial misconduct, banks such as JPMorgan Chase, HSBC, Standard Chartered, Deutsche Bank, and the Bank of New York Mellon continued to move money for suspected criminals. So let's get into more of the details. When banks first encounter these suspicious transactions, they're supposed to file one of these SARS reports, and they're supposed to do it within about 30 days.

That said, one of the things that these leaks show is that SARS often refer to much older transactions, including ones that are over a decade old. The objects of suspicion that appear in these files tend to be companies, not people. That said, there are at least 25 people named as sub-sumption. that have appeared on Forbes' list of billionaires in 2018, 2019, or 2020. In terms of who filed, keep in mind that this isn't necessarily a representative sample size, this is just the files that happen to be included in this particular cash. But of them, Deutsche Bank was the one who had filed the most SARS.

They had flagged $1.3 trillion in transactions across 982 SARS reports. The Bank of New York Mellon came in next, flagging $64 billion across 325 reports. Standard Charter flagged $166 billion across 232 reports. J.P. Morgan Chase flagged $514 billion across 107 reports, and so on and so forth. There are an absolute boatload of specifics that you can go get into research, find out about. I'm going to give the BBC's overview of some of the clearest big bank example. So this is from the BBC's summary. HSBC allowed fraudsters to move millions of stolen money around the world,

even after it learned from U.S. investigators, the scheme was a scam. J.P. Morgan allowed a company to move more than $1 billion through a London account without knowing who owned it. The bank later discovered the company might be owned by a mobster on the FBI's 10 most wanted list. Evidence that one of Russian President Vladimir Putin's closest associates used Barclays Bank in London to avoid sanctions which were meant to stop him from using financial services in the West. Some of the cash was used to buy works of art. The husband of a woman who has donated 1.7 million to the UK's governing conservative party

was secretly funded by a Russian oligarch with close ties to President Putin. The UK is called a higher risk jurisdiction and compared to Cyprus by the Intelligence Division of FinCEN. That's because of the number of UK registered companies that appear in the SARS. Over 3,000 UK companies are named in the FinCEN files, more than any other country. The United Arab Emirates Central Bank failed to act on warnings about a local firm which was helping Iran avoid sanctions. Deutsche Bank moved money launderers, dirty money for organized crime, terrorists, and drug traffickers. Standard Chartered moved cash for Arab Bank for more than a decade after clients' accounts at the Jordanian Bank had been used in funding terrorism.

Here's a few more from ICIJ. Standard-charted moved money on behalf of Al-Zaruni Exchange, a Dubai-based business that was later accused of laundering cash on behalf of the Taliban. During the years that Al-Zaruni was a standard chartered customer, Taliban militants staged violent attacks that killed civilians and soldiers. HSBC's Hong Kong branch allowed WCM-777, a Ponzi scheme, to move more than 15 million even as the business was being barred from operating in three states. Authorities say the scam stole at least 80 million from investors, mainly Latino and Asian. immigrants, and the company's owner used the looted funds to buy two golf courses, a 7,000

square foot mansion, a 39.8-carat diamond, and mining rights in Sierra Leone. Bank of America's Citibank, J.P. Morgan Trace, American Express, and others collectively processed millions of dollars in transactions for the family of Viktor Kropunov, the former mayor of Kazakhstan's most populous city, even after Interpol issued a red notice for his arrest. Kropunov, who had already fled to Switzerland and who claims the allegations are politically motivated, was later convicted in absentia on charges that include bribe-taking and defrauding the city through the sale of public property. So the question is obviously why banks aren't doing more? And the reality is that it comes down to incentives. And specifically, it comes down to the cost of fines for when

you get called out for doing something wrong versus the value of fees that you get for just continuing to do it. So I'm going to read another clip from ICIJ because it just puts it so crisply. In 2012, London-based HSBC, the largest bank in Europe, signed a deferred prosecution deal and admitted it had laundered at least 881 million for Latin American drug cartels. Narco-traffickers use specially shaped boxes that fit HSBC's teller windows to drop off the huge amounts of drug money they were pushing through the financial system. Under the deal with prosecutors, HSBC paid $1.9 billion, and the government agreed to put criminal charges against the bank on hold and dismiss them after five years if HSBC kept its pledge to aggressively

fight the flow of dirty money. During that five-year probationary period, the FinC file show, HSBC continued to move money for questionable characters, including suspected Russian money launders and a Ponzi scheme under investigation in multiple countries. Yet the government allowed HSBC to announce in December 2017 that it had, quote, lived up to all its commitments under its deferred prosecution pact, and that prosecutors were dismissing the criminal charges for good. You would think that in this five-year period where executives are worried about or trying to avoid jail time, that they would be super extra careful about anything looking questionable, but clearly that just wasn't the case, which means to me, or at least it suggests to me

that they were never actually that concerned in the first place. You can see this lack of concern in the allocation of resources that banks give to the departments that are meant to follow up with all of these challenges. This is again from the ICIJ. Inside big banks, systems for sniffing out illicit cash flows rely on overworked under-resourced staffers, who typically work in back offices far from headquarters

and have little clout within their organizations. Documents in the FinCEN files show compliance workers at major banks often resort to basic Google searches to try and learn who's behind transfers involving hundreds of millions of dollars. There is just an absolutely insane amount of information in these files. Go do a Google search for FinCENFiles. I'll include some links in the show notes. It's going to take a long time to process and unravel this, but I want to give just a few of my takeaways.

First, this should make us seriously question the commitment of financial institutions to combating this type of crime. It basically suggests that they are just a bunch of talk when it comes to that fact. Second, and relevant for our Bitcoin community, this should forever end the notion of blaming an asset for the crimes committed with it. Put differently, the amount of USD used for illicit purposes just revealed by this tiny fraction of the total SARS that go into the FinCEN system, a year, make scams involving Bitcoin and other cryptos look like a schoolyard shakedown compared to the mafia. It's a joke. It's incomparable. Third, to understand why this is perpetuated, you just have to follow the incentives. Here's the way BuzzFeed put it. Laws that were meant

to stop financial crime have instead allowed it to flourish. So long as a bank files a notice that it may be facilitating criminal activity, it all but immunizes itself and its executives from criminal prosecution. The suspicious activity alert effectively gives them a free pass to keep moving the money and collecting the fees. To really reinforce and put an example on this, J.P. Morgan is estimated to have made about a half billion in revenue by serving as chief banker to Bernie Madoff. A final takeaway is that it is impossible for this not to reinforce the meta-narrative that we live inside two entirely different systems of justice and economies as a whole. Senator Ron Wyden, who is a member of the Senate Intelligence Committee, put it this way. He said that the FinCEN files, quote, reinforces the

fact that we now have two systems of law enforcement and justice in the country. Drug cartels move millions through U.S. banks. Poor people go to jail for possession. If you're wealthy and well-connected, you can figure out how to do an enormous amount of harm to society at large and ensure that it accrues to the enormous financial benefit for all of you. Whether that's the right or wrong interpretation, it's very clear that this is going to be how many, many treat this. And it certainly has enough truth to be a legitimate perspective. There is an underlying theme across many of the explorations on the breakdown of this rift in society and what is driving it and the economic dimension of what's driving it.

It is impossible not to see the FinCEN files as affirmation of the position of those who feel that there are two fundamentally different worlds, one for those who have the capital to play, and one for the rest of everyone else. Thanks guys for listening, and until tomorrow, be safe and take care of each other. Peace.