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Federal Regulators Issue Joint Statement Encouraging Banks to Use Innovative Technologies to Combat Money Laundering and Terrorist Financing

December 5, 2018

On December 3, 2018, FinCEN released a Joint Statement on Innovative Efforts to Combat Money Laundering and Terrorist Financing. The Joint Statement, co-signed by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration, and the Office of the Comptroller of the Currency (OCC), encourages banks to use “innovative approaches” to meet their regulatory and anti-money laundering compliance requirements under the Bank Secrecy Act. The Joint Statement expresses approval of the steps some banks have taken to enhance the analytic capabilities of their financial intelligence units and of other banks who are now using Artificial Intelligence and digital identity technologies to build stronger compliance programs and improve transaction monitoring. The statement even goes a step further to provide what could be interpreted as an informal safe harbor for those that employ new technologies. 

Regulators’ Prior Innovation Initiatives

The regulators’ December 3rd statement follows earlier developments and statements by some of the signatory agencies regarding the importance of innovation. For example, in August 2015, the OCC launched its “Innovation Initiative” aimed at improving the agency’s ability to understand developing technologies and work directly with regulated entities on their implementation. Since then, the OCC has provided updated guidance on the integration of new technologies and their impact on regulated institutions’ risk profiles. The FDIC and the Federal Reserve have made public statements acknowledging that the financial sector can benefit from the use of emerging technologies, including those that enhance compliance operations. On the other hand, FinCEN has not formally addressed the use of developing technologies for compliance purposes in any detail in recent years. With this Joint Statement, FinCEN announces that it is joining other federal agencies by launching its own innovation initiative in order to gain a better understanding of the opportunities and challenges that developing technologies present when leveraged for compliance functions in the financial services sector. FinCEN indicates that its initiative will include outreach to regulated entities and the establishment of dedicated offices or projects focused on emerging technologies.

Support for Pilot Programs

In the Joint Statement, FinCEN and its fellow bank regulators highlight the important role of pilot programs when testing or implementing transaction monitoring systems that rely on developing technologies. The regulators recognized in their statement that banks may have concerns that implementation of any particular new technology may prove unsuccessful, or that successful implementation may expose compliance gaps. The possibility of either outcome naturally deters financial institutions from taking the risk that their regulator may fault their approach. To address this concern, the Joint Statement promises that regulators will not use a bank’s implementation of a pilot program to test new technologies to support a finding that the bank’s existing systems were in some way deficient. This provision, although not codified in regulation, is important in light of prior enforcement actions that are routinely based on the results of separate “look-back” analyses that were used to define the scope of suspicious transactions that should have been reported.

The Joint Statement further provides that regulators will continue to assess the bank’s suspicious activity monitoring process on the basis of its existing systems, and will not add regulatory expectations based on the new technology being piloted. Nonetheless, the Joint Statement does indicate that regulators expect banks to transition from a pilot program to full implementation of successful technologies as soon as is prudent and practicable.

A Call for Engagement

Although federal regulators in general have been stepping up efforts to provide channels for direct communication with banks and other financial institutions related to emerging technologies, the regulators issuing this Joint Statement have added a public commitment to engagement with banks on the topic of pilot compliance technologies and programs. In a small nod to the concept of regulatory sandboxes, FinCEN specifically commits to “consider[ing] requests for exceptive relief under 31 C.F.R. § 1010.970 to facilitate the testing and potential use of new technologies and other innovations, provided that banks maintain the overall effectiveness of their BSA/AML compliance programs.” Section 1010.970 allows FinCEN to make exceptions or exemptions to any of FinCEN’s BSA regulations for particular regulated entities.

Finally, the agencies issuing the Joint Statement collectively express their intention to pursue further innovation outreach and their interest in receiving specific feedback from the industry related to how the supervisory and regulatory processes can better support innovation. Industry feedback may be submitted through FinCEN at FRC@fincen.gov.

It cannot be said, however, that this promise of engagement offers anything particularly new or suggestive of the type of faster feedback that most banks would hope for in this dynamic market. Nonetheless, for any bank implementing a new pilot program involving enhanced anti-money laundering compliance programs or technologies, it will be critical to engage directly with the appropriate regulator at all significant stages of the program to ensure transparency and lay the groundwork for the protections promised by the Joint Statement.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Nicole Argentieri, an O'Melveny partner licensed to practice law in New York, Laurel Loomis Rimon, an O'Melveny senior counsel licensed to practice law in California, and Mary Pat Dwyer, an O'Melveny associate licensed to practice law in the District of Columbia and Pennsylvania, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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