An Australian Casino, Crypto ATMs in the UK, ML with Art for Russia, and New Proposed BaaS Regulations

This week, Elliot and Joe McNamara discuss new proposed FDIC regulations regarding recordkeeping for custodial deposit accounts, supervision of crypto ATMs in the UK, money laundering risks in the art world, casinos in Australia, and other items impacting the financial crime prevention community.

An Australian Casino, Crypto ATMs in the UK, ML with Art for Russia, and New Proposed BaaS Regulations - Transcript

Elliot Berman: Hey Joe, how you doing this week?

Joe McNamara: Elliot, great to be back. Doing well. I'm super excited to once again get a chance to sit in one of the host chairs for This Week in AML. How are you this week?

Elliot Berman: I'm good. Our friend John is at the Missouri Bankers AML Conference. And so he took this week off. So I'm looking forward to doing this session with you.

Joe McNamara: Likewise, my friend. And again, always a pleasure to get a chance to get a little bit more involved in This Week in AML.

I'm actually going to start, because I saw some really cool stuff this week that I wanted to review with you. And I think, for starters, we saw something that came out of the FCA earlier this week around crypto ATMs and essentially a precedent of sorts that got set. Were you able to take a look at that?

Elliot Berman: I was. FCA for our friends in the US is the Financial Conduct Authority. It's the principal financial regulator in the UK and the UK has different regulations than we do in the US as it relates to crypto ATMs. Cryptoassets and transfer of crypto is much more tightly regulated in the UK than it is here in the US.

A person was charged for unlawfully running multiple crypto ATMs without FCA registration. Crypto ATMs continue to be highlighted in a lot of situations. John and I have talked about that off and on, as we've seen challenges both in the fraud space and in the money laundering space.

It turns out that currently there are no legal crypto ATM operators in the UK, and firms that want to provide crypto asset services that come within the scope of the money laundering regulations have to register with FCA. This fellow did not do any registrations, and these are the first charges that have been brought against a person in the UK related to this.

I'm sure there's more to come, and this is, again, a charging. He has not been tried yet so we don't know if there'll be some kind of a settlement or whether there'll be a trial, but interesting to see that they, FCA, are continuing to be aggressive in attempting to enforce the crypto asset regulatory regime there in the UK.

Joe McNamara: No doubt. And I just as a quick note, as I was reading through the announcement, what really jumped out to me was the language specifically towards the bottom of the article that said If you're using a crypto ATM, you are handing your money directly to criminals. Criminals can exploit crypto ATMs to launder money globally.

I thought that was just an excellent way to summarize not only the executive action that was taken by the FCA, but then just to remind folks, it's very cut and dry, there are no registered ATMs, as you mentioned live in the UK at this point.

Elliot Berman: Yeah. They weren't pulling any punches there.

Joe McNamara: No. In fact at times I wish we saw a little bit more of that kind of language here in the States as well. But speaking of the States, so another thing that I saw this week switching gears into art and antiquities was essentially the art market loopholes again threaten US economic integrity and national security.

So it sounds like we've got some friends from from across the pond that may have made their into the art market here in the US to attempt to launder some money, but were you able to see that one?

Elliot Berman: I did. So this appeared on the Antiquities Coalition website and John did an interview with Deborah Lehr and Tess Davis of the Antiquities Coalition about a variety of topics including the potential risks in the art market which has posted to the website. So for those of you who are thinking about the challenges in this space I strongly commend that you go to our website and you'll find that available to you.

The Justice Department unsealed two criminal indictments to some folks who are dual US and Russian citizens related to art. These folks did a couple things. One is they did a bunch of work with Channel One, the Russian TV channel to help them disguise the use of some funds here in the US.

The art market component related to assisting one of the oligarchs in purchasing art with sanctioned funds. And then holding those art pieces on behalf of the oligarch here in the US which is a violation of some of the sanctions related to the war against Ukraine. We're talking about laundering over a million dollars related to Channel One and we're talking about significant dollars related to the art pieces.

Joe McNamara: What was interesting was the fact that they essentially worked with over 30 dealers and galleries in both the US and Europe. When you think about any money that is laundered, especially through art, should definitely be tagged and made sure, and tried to be reprimanded from being able to do that, but when you think about just the complexity or the sophistication that they had to essentially elicit to move those funds it's jaw dropping.

And how easily, too, it seems that they were able to move those dollars through the art market.

Elliot Berman: And these were both what you view as traditional art pieces as well as antiquity pieces. Again, interesting, unfortunately not surprising. There's been as I think most of our listeners know under AMLA antiquities dealers and transactions were brought in under the Bank Secrecy Act. Art was set up for a study. And so there's no mandate to create regulations. We'll see how that unfolds going forward.

But these are certainly indications that there are potential problems in the art market. I don't think that's news, but John and I have followed this pretty closely over the years.

Joe McNamara: That's right. And again in terms of the language used, Deborah did an excellent job in saying, quote, the US art market remains a means for evading US sanctions and it is time for the Congress to close this loophole. Pretty cut and dry there. It's essentially exactly what you had just said Elliot, and definitely something that remains top of mind it should remain top of mind for all financial crime professionals.

Elliot Berman: Agreed. One more international piece, the New South Wales Independent Casino Commission in Australia. New South Wales is the area in which Sydney is located. And the regulator has served a show cause order on a large casino Star Casino.

And that notice contemplates either fining the casino $100 million Australian, which is about $67.4 million US for AML related failures or pulling its license. This casino's had compliance problems before not necessarily specifically in the AML space but compliance. They were doing things like failing to run source of wealth checks on high risk customers. So it'll be interesting casinos have been under some scrutiny internationally. And there are certainly fulsome regulations in the U S.

Joe McNamara: I think like you mentioned the underlying theme of today's episode is definitely a little bit more of an international focus, but that doesn't mean that there weren't some things that happened here stateside as well. In terms of a few of the things that we've seen was that OCC announcement that happened earlier this week that involved, Wells Fargo with a series of areas that, at the very least, professionals should be looking at, if not to simply educate themselves on what Wells is dealing with. But more of a comprehensive approach to ensuring that their individual programs are also, meeting and exceeding marks where they need them. But from your perspective, Elliot, and what were some of the key takeaways in terms of what we saw from the OCC this week?

Elliot Berman: This is an agreement between the Office of the Comptroller of Currency and Wells Fargo Bank N. A. which is, headquartered in South Dakota. So this is their consumer bank. Most of their consumer activity runs through this bank. There are other banks in the system. And this related to basic anti money laundering internal controls and financial crime risk management issues.

And specifically cited were the internal control pillar, suspicious activity reporting, customer due diligence, customer identification program, beneficial ownership, currency transaction reporting, and the travel rule, which has to do with wire transfers and reporting the movement of money. These are basic elements of a compliance program and the main reason this is interesting is because, as John and I regularly talk about, that these are useful for all of us in the space to go back and take a look and see, okay, are the things that the regulators picked out in this situation, things where we may have some exposure in our own program.

Like many of these it's somewhat lengthy. But it's worth a look for this self analysis self review purpose. There's no question that there's a consistent amount of regulatory scrutiny going on and some of it is in more the banking as a service space. This one is more, I would say, a basic program challenge. One of the things that is noted is that by the time the written agreement was reached, the bank was already working on improvements. And that's something John and I have also talked about, if something gets identified during an exam, then one of the really good things to do is start figuring out how deep the problem is and beginning to map a solution, if you can, while the regulators are still there.

Joe McNamara: That's right. Again, it's a kind of call from my football background it's the basic blocking and tackling. Just a healthy reminder to everybody out there to ensure that every aspect of your program should be evaluated, but certainly the basics and kind of foundational elements involved with both consumer and other types of banking. Elliot, you did mention, though, previous conversations about banking as a service.

So we did see some stuff that I would consider to be aligned with that from the FDIC this week, saying that banks need to keep a record of their FinTech customers. And I know that's something that not only you and John have discussed, but certainly some of our other subject matter experts like Chuck Taylor and some of the information that's been covered in previous webinars. From your perspective, what did the FDIC essentially ask the banks to do?

Elliot Berman: They are going to publish a notice of proposed rulemaking in the federal register. Their announcement of this was on Tuesday of this week. By the time you hear this episode, it may have published, but it is a set of requirements for banks that are involved in banking as a service activities to be sure that they have adequate knowledge of the actual owners of deposits that are placed in the bank by third parties.

So what prompted this? Our listeners will recall that in the spring, a company called Synapse Financial Technologies filed bankruptcy and they were offering what I'll call the middleware in these banking as a service setups. You have a financial technology company who's customer facing. They're offering customers the opportunity to do their financial transactions through them.

They want to be able to say that money on deposit is FDIC insured. They connect up with a bank that offers to take those deposits and hold them. And then they hook up with a middleware company like Synapse that actually manages the movement of the money. In the Synapse case, Synapse was doing all of the customer accounting, and the banks where they were placing the money were holding them in large custodial accounts.

They knew they had a million dollars in the custodial account. They didn't know that Joe was a customer, or Elliot was a customer, and they not only didn't know we were customers, they didn't know how much of that million dollars was ours. Now the middleware provider runs into trouble. The customers get very upset.

They're talking to the FinTech, who they've dealt with. The FinTech doesn't have the information, because they were relying on Synapse. The banks don't have the information. The customers go to the FDIC, and the FDIC said, we can only respond when there's a bank failure. And there was no bank failure here.

So the money was there, but the people who knew whose money each dollar was were not able to stand and deliver initially. I think this will change how banking as a service providers on the bank side do this. There's a couple of ways.

One, they can do it through their contracts and require more detailed information sharing so they're a separate repository for the customer accounting. There was a time when things that looked like today's banking as a service were being done and the banks did the accounting. They still held it in a large account, but they tracked the dollars in and out by customer.

I don't know whether that will come back into vogue, or whether these middleware players will continue to be the key. My guess is that the middleware players will stay, and that more real time information sharing will end up happening to meet the requirements of the new reg.

The new reg will have a 60 day comment period, we're in mid September, so that gets you to mid November. Then there's the, interpretation and the final rule. So maybe by year end we'll see a final rule. I don't know that, but maybe.

Joe McNamara: And again, a healthy reminder I think Danny Schneider from Lead Bank had mentioned this in one of the earlier webinars this year. It's essentially, the more information that you can gather correctly and efficiently about your customers and your customers will be advantageous. And I think we're certainly starting to see that both from, what we saw from the FDIC this week, but then also when you take a look and listen to some of the conversations happening around the space.

I think more and more of these traditional FIs are certainly looking at, ensuring that they have the right kind of information on file or working very closely with FinTech partners to make sure that this information is readily available so that they can avoid what is very unfortunate in terms of what happened once Synapse went belly up.

Elliot Berman: Agreed.

Joe McNamara: Alright we've traveled the world here, Elliot but I think I would be remiss if I didn't at least hang up my travel coat today in lovely Las Vegas. As a reminder to folks listening, a quick plug here, we're excited to return as exhibitors at this year's ACAM's Las Vegas conference September 23rd through the 25th.

And we encourage you guys, number one, come visit our team at booth 311. Especially during happy hour, so you can enjoy a glass of champagne, completely complimentary on us. But then also we encourage you guys to, to check out a thought provoking set of discussions and engage in cutting edge solution discussions that are transforming how financial organizations combat money laundering and financial crime.

If you find yourself out in Las Vegas next week at ACAM's Las Vegas conference. Make sure to swing by Booth 311.

Elliot Berman: On the 26th, you can tune into our livestream webinar which is on the use of AMM in your KYC and EDD programs. You know you're in an AML conversation when you can do the whole thing in three letter chunks. Adverse media monitoring continues to grow as a sophisticated tool to assist in managing the risk of your customer base. And I'll be talking with two great experts on that next week.

And then in October we'll be focusing on fraud. That webinar is on the 24th of October. This month is on the 26th of September, and you can register for that one currently on our website. Joe, I want to thank you very much. John and I have a great time doing this, but really appreciate your stepping in, and I think we've had a really good conversation, and I hope you enjoy the Inbound M arketing conference that you're at in Boston.

Joe McNamara: I appreciate it, Elliot, and again, thank you so much for for the invite. I look forward to catching up with you guys and for everybody else out there listening thanks for your continued support.

Elliot Berman: All right, you have a good week.

Joe McNamara: Yep, you too, Elliot.

Elliot Berman: Alright, bye bye.