The Financial Crimes Enforcement Network (FinCEN), the regulator and administrator of the Bank Secrecy Act (BSA), recently announced that it will host a virtual Innovation Hours Program on September 9, 2021, devoted to new technologies that enhance online privacy. FinCEN Innovation Hours allows entities (which must not be the subject of civil or criminal enforcement actions) to demonstrate to audience members, including businesses, government agencies, or retail consumers, their unique products and services that comply with BSA regulations. These products or services may, for example, enhance financial institutions’ BSA/Anti Money Laundering (AML) compliance programs, including risk identification, transaction monitoring, and suspicious activity reporting, or may upgrade efforts at countering the financing of terrorism (CFT).
Perhaps paradoxically—since FinCEN aims for transparency to boost BSA/AML/CFT measures—its September virtual program will showcase companies that focus on “the important role of privacy-preserving principles.” An example is homomorphic encryption, by which a data owner encrypts their data and sends it to a server that performs relevant computations on the data without ever decrypting it and sends the encrypted results back to the data owner. Another example is zero knowledge proof, a method by which one party (the prover) proves to another party (the verifier) that they know a value, x, without conveying anything apart from the fact of that knowledge; the challenge is to prove this knowledge without revealing the underlying information—x—itself, or any additional information. These kinds of innovations in encryption may, for instance, play a role in ensuring the privacy of cryptocurrency transactions.
The September Innovation Hours will provide a platform for safe collaboration among those who are unable to travel to Washington, D.C. FinCEN invites financial technology (FinTech) companies, regulatory technology (RegTech) companies, venture capital firms, and financial institutions to “show how the[ir] innovative solutions work and how financial institutions or business and retail consumers might use them, or how they may support private- and public-sector efforts to enhance our financial integrity, while protecting national security and personal privacy.” (Emphasis added.)
The BSA, enacted in 1970 to fight money laundering and other financial crimes, requires financial institutions to keep records and file reports on certain transactions, which FinCEN collects and analyzes to track global money laundering trends and support U.S. law enforcement. The Anti-Money Laundering Act of 2020 (AMLA) (actually enacted in 2021), a recent amendment to the BSA, inter alia increases penalties for violations, and expands tools available to investigate and fight financial threats. Many BSA requirements are intended to take into account the risk to a financial institution that terrorist financing, money laundering, or other financial crimes might take place in or through. The AMLA requires that compliance program standards issued by the Secretary of the Treasury be “risk-based” and allow financial institutions to direct their resources to high-risk customers and activities. Also under the AMLA, FinCEN must establish and publish new priorities for AML and CFT; and the Treasury Department will create a pilot program to allow financial institutions to share information related to suspicious activity reports (SARs) with foreign branches, subsidiaries, and affiliates, subject to certain exclusions (e.g., Russia and China), and will propose updates to SARs and currency transaction reports (CTRs).
Against this background of increased transparency of currency and other financial transactions—the core of FinCEN’s reporting and recordkeeping obligations is the identity of those engaging in transactions—it is interesting that FinCEN plans a special program devoted to privacy. In September 2019, however, then-FinCEN Director Kenneth Blanco stated: “We understand that emerging solutions for issues like digital identity hold great promise for improving inclusion, privacy, security, and cost effectiveness for individuals and organizations to manage and use funds, goods, and information.” In holding its September Innovation Hours, FinCEN again recognizes that “advancing the integrity and innovative strength of the U.S. financial system” requires “balancing transparency and accountability with the important principles of privacy and security.”