Financial Crime World

Terrorist Financing Risks: New Regulations Pose Challenges for Financial Institutions

Washington D.C. - The Financial Crimes Enforcement Network (FinCEN) has proposed new regulations aimed at strengthening anti-money laundering and counter-terrorism financing (AML/CFT) programs, but experts warn that the rules may pose unintended consequences for financial institutions.

Proposed Rule Raises Concerns

The proposed rule, published on June 30, 2021, requires financial institutions to conduct risk assessments and subject their AML/CFT programs to oversight and governance. While FinCEN claims that the rule will promote “clarity and consistency” across different types of financial institutions, critics argue that it may lead to:

  • Increased regulatory burdens
  • Lack of clear guidance on prioritizing among existing money laundering and terrorism financing risks

Unclear Prioritization Guidelines

One major concern is that the proposed rule does not provide sufficient parameters for financial institutions to prioritize their AML/CFT programs. Without clear guidelines, firms may struggle to identify the most critical threats and allocate resources accordingly.

  • “Without clear guidelines, firms may struggle to identify the most critical threats and allocate resources accordingly,” said a senior financial industry expert.

De-Risking and Derisking Concerns

Another issue is that the proposed rule may exacerbate concerns around de-risking and derisking of underserved populations. While FinCEN claims that the rule addresses these concerns by empowering financial institutions to tailor their programs to provide “more efficient levels of services and access” to underserved communities, critics argue that the rule’s emphasis on risk-based approaches may lead to over-broad de-risking strategies.

Innovation in AML/CFT Compliance

The proposed rule also raises questions about innovation in AML/CFT compliance. While FinCEN claims that the rule will encourage financial institutions to consider innovative approaches to comply with BSA requirements, critics argue that:

  • The lack of clear guidance on ongoing risk mitigation efforts may stifle innovation
  • Potential penalties for new technologies may discourage innovation

Ongoing Concerns and Unclear Guidance

Furthermore, the proposed rule does not provide sufficient guidance on how financial institutions should incorporate FinCEN’s AML/CFT priorities into their programs. The 2020 AML Act requires financial institutions to review FinCEN’s published AML/CFT priorities and incorporate them into their programs, but the proposed rule is silent on how firms should prioritize among the listed concerns.

Board Oversight and Approval Requirements

The proposed rule has also been criticized for its lack of clarity on board oversight and approval requirements. While the rule requires all covered institutions’ AML/CFT programs to be subject to board oversight and approval:

  • The new requirements may “require changes to the frequency and manner of reporting to the board” for some financial institutions

Industry Experts Urge Revisions

Industry experts are urging regulators to revisit the proposed rule and provide clearer guidance on:

  • Prioritizing among existing money laundering and terrorism financing risks
  • De-risking and derisking of underserved populations
  • Innovation in AML/CFT compliance
  • Board oversight and approval requirements