Most financial institutions operate in a global setting. Their customers use the global financial system to engage in activities in different countries and use different currencies to execute their transactions. Since the US Dollar is considered the global reserve currency, the Treasury Department in the United States claims jurisdiction over every transaction in this currency. Furthermore, the US Treasury interlinks financial institutions and by following money trails may designate international financial institutions as a primary money laundering concern. This designation is not a sanction but merely a global warning. Due to the importance of the US Dollar in international finance, most jurisdictions and their respective regulators follow the instructions of the United States. As a consequence, the designation as a primary money laundering concern often results in the isolation of the financial institution where market participants and regulators act accordingly.
The Financial Crimes Enforcement Network (FinCEN) is the intelligence agency of the US Treasury responsible for the investigation of financial crime, money laundering and terrorism financing. Its mandate, provided for by section 311 of the USA Patriot Act, allows the agency to issue a Notice of Finding stating that a financial institution is a treat to the US financial system and therewith a primary institute of money laundering concern. The Notice of Finding can include the intention to ban the designated institution from directly and indirectly transacting in US Dollars and a closure of all correspondent accounts dealing in the US Dollar. The Notice of Finding can be lifted when necessary changes are made or upgraded into a Final Rule. The Final Rule then implements the proposed sanctions.
A Notice of Finding issued by FinCEN is initially seen as a warning, some kind of financial pressure. It’s objective is to leverage commercial isolation and urge illicit actors to amend their policies. The public notification sends out a clear message to the international financial community whilst the market acts accordingly. Practical experience and historic events show that correspondent banks instantly terminate the relationship with a designated financial institution, regulators place the bank under special administration, and professional counterparts seize collaboration to limit their exposure and potential liability. This makes it difficult for designated entities to restore a situation as it previously were. The Notice of Finding is a preventive tool and not a prosecution. Therefore, an appeal is difficult unless the required improvements are made.
Bank customers whose bank received a FinCEN warning, often see their accounts blocked pending further review. Local regulators often have difficulties with the continuation of the banking license of financial institutions that are designated a primary institute of money laundering concern. As such, most of these financial institutions are driven into liquidation. This is a realistic scenario that bank customers must consider.