Challenges in Puerto Rico, Finfluencers, Axiom Bank, and FATF President’s Insights

This week, John and Elliot discuss remarks by the US Attorney for Puerto Rico, the UK’s FCA’s warning to “finfluencers” about not promoting scams on social media platforms, the OCC’s action against Axiom Bank for AML program problems, an interview with the new FATF president, and several other items impacting the financial crime prevention community.

Challenges in Puerto Rico, Finfluencers, Axiom Bank, and FATF President’s Insights - Transcript

Elliot Berman: Hi, John. How are you today?

John Byrne: I'm good, Elliot. Just finished up here in Puerto Rico, their Financial Services Forum yesterday. Good group of folks. Representatives from FinCEN, Treasury, the FBI, the US Attorney, which I'll mention in a minute. So some excellent content. They did sections on sanctions, on fraud we did one on de risking with the Banking Commissioner, so a lot of good stuff. But I just thought I would mention Stephen Muldrow is the US attorney here in Puerto Rico, and he kicked off the program with a description of some of the reasons why Puerto Rico is such an important area from a risk perspective.

Some of the things that he said was that Puerto Rico is actually, in his words, the gateway to the United States for cocaine trafficking from South America. And then there are many examples of South American based transnational organized crime. There's also mentioned the the price of kilos of cocaine and how that's been impactful and it fuels extreme gangs that commit violent acts here in Puerto Rico. And he said a lot of guns from Florida and Texas make it to the streets of Puerto Rico.

Then he talked about fentanyl. And so a lot of very dramatic descriptions factual, but dramatic in terms of, Puerto Rico does have a lot of things that they need to to work on both from a financial tracking standpoint, but obviously also from a law enforcement standpoint.

He also talked about one of the issues in Puerto Rico that was called out in the 2022 Money Laundering Threat Assessment was IBEs or international banking entities. And there's certainly a number of them here in Puerto Rico. And he said that his office has done a 12 month SAR review, so from August to August. And in some cases, he said some IBEs, and these are pretty small operations, but some of them he believes are, getting the message, doing the job, but he also said from the statistics that they have, some of these IBEs have filed less than five SARs in a year.

Some have filed none. He also corporateivos, which are the credit unions, and same with that. Many of them have filed less than five SARs in that one year period. And he said, the filing or not filing of a SAR in and of itself doesn't mean that your systems aren't strong, but he said it's certainly a good solid indicator. So I thought that was a very interesting presentation that he made to kick off this program and then throughout the day obviously we had the others and the content that I mentioned.

Elliot Berman: The analysis he talked about SARS, again, there's no minimum number that's the right number, but, based on the size, but, SARS are, at least currently, one of the outputs of a robust program, and a low number of SARS, as you said, doesn't necessarily mean there's a problem, but it's certainly something that I think most BSA officers would say, let's be sure we're not being too liberal in deciding not to file.

John Byrne: And as we talked about right before we jumped on there's As they say, breaking news out of Nigeria, that I'm sure by the time people hear our conversation, there'll be more information. But as of our recording, the Nigerian government, according to a Nigerian paper, has dropped, they say, all charges against Tigran Gambaryan, the executive of Binance Holdings, who had been on trial for money laundering, and currency speculations.

Some of the other items I've seen on LinkedIn and other places have said just the money laundering charges were dropped, not all. This one just came out and it says all, but it does say that the judge sustained the money laundering charges against Binance so that the company now stands as the sole defendant in the case.

So I don't know if there's anything you want to add to this.

Elliot Berman: Just that the importance of that is he is going to be released. As his group of representatives over the last number of months has been working very hard to get him released because of his need for medical care that he is unable to receive while he's incarcerated in Nigeria.

John Byrne: Also again, just this is happening in real time. FinCEN has just put out an alert to FIs to assist our client base in identifying and reporting suspicious activity that supports Lebanese Hezbollah, which is obviously a US designated foreign terrorist organization. So that alert was just issued moments ago.

Elliot Berman: Yes, I saw that. I had it on my screen, and if you hadn't seen it, I was going to mention it. This builds on some guidance that was issued in May of this year, so this is a continuing area of focus and more information coming on a regular basis.

So I know that the FATF's plenary, the October plenary, is in flight as we speak and you and I will cover the out the outcomes next week. But you mentioned before we started recording that you had seen the text of remarks by the FATF president that were delivered at the beginning of the plenary and I think those are worth talking about this week. So why don't you tell us what she had to say?

John Byrne: Yeah, that actually was an interview a reported interview on Monday, but Elisa Madrazo is the president of FATF this year from Mexico, so she begins the first of a two year term. And one of the things she says is they ask about financial inclusion as a priority, and she said it's always been a personal passion and a professional priority of hers. And she says something that I think is very direct, as vital as they are, if these new laws and regs are she calls it mis implemented, in money laundering and CTF, they can have unintended consequences for financial inclusion and civil society.

And so she said their job at FATF is to make sure the rules are compatible with fundamental human rights. And she goes on to talk about as you try to change the infrastructure of AML in a particular jurisdiction, you can't just change the regulations, right? You need to change training. You need to change working practices and enforcement decisions of supervisors, which I think is really interesting.

And I think it's going to be fascinating to see. So we'll get some sense of that this week. As a plenary, will talk about inclusion, but the president Madrazo seems to be very committed to this. And then she ends the interview with something that we've talked about before.

They asked her whether financial inclusion can actually help efforts to combat money laundering. And she said, yeah, the answer is simple. The safest space for money launderers and terrorist financiers is to hide in the gray market, in the informal sector. The more people are locked out of the formal economy, the bigger the playing field for bad actors to operate in.

And we've talked about that before. So again, like you said we'll cover the outputs of the plenary next week. But definitely think this was not just simply relevant, but obviously it's going to be a priority for FATF, certainly through the next couple of years.

Elliot Berman: And there was a sanctions item you wanted to highlight for our listeners.

John Byrne: There's an article in the October 19th edition of The Economist. It's a pretty lengthy investigation. And it looks at Iran through all the sanctions imposed on Iran. They're still able to navigate what The Economist calls a multi billion dollar oil trade. So it's lengthy.

They've got some good chart work here. The bottom line is they say there's a lot of financial institutions that may unintentionally be helping move monies to circumvent sanctions. And they talk about how they get that. So just something worth, if you're a sanctions expert, I think it's an interesting piece because, obviously we're always debating how sanctions, how can they work if there's no cooperation? And I think that's that's what this investigation is taking a look at. So it's in one part of it, they say that their investigation suggests that a number of front companies are successfully invading screening methods used by banks.

Most such accounts and many of those previously mentioned are denominated in dollars, others in euros, and they say transaction receipts show Iranian fronts use some global lenders as, quote, correspondents, unquote, international banks that clear smaller banks foreign currency transactions through big financial centers.

So there's a lot more in that article, but again, it's in the October 19th edition of The Economist in the finance and economics section.

Elliot Berman: Another thing we wanted to chat about briefly, the OCC has issued a written agreement with Axiom Bank in Florida regarding its AML compliance challenges.

And I think what's interesting about this is there's not a lot that's surprising in the written agreement. It's very comprehensive, I would say this is a general systems failure problem. But what's interesting about it is this is an $850 million bank, so a little under a billion dollars. And the lift that this bank will have to go through in a relatively short time to put a compliant program back in place, in my experience it's going to be very difficult for them to meet these criteria, both in the timeframe and just in terms of the resource allocation.

Some of the reports, not from the OCC, but from others have talked about the fact that this bank has been active in the banking as a service space. Not that's a problem per se. We've talked about that. We've done a, a webinar about it about how to do it effectively. But it appears that this bank was in the sweet spot of smaller size, more aggressive products and has really gotten itself into a tough spot.

John Byrne: Yeah, the we mentioned SARs before in terms of what they agreed to do, as you say, is going to be a big heavy lift. But what they agreed to do going forward, relating to Suspicious Activity Reports, it always amazes me, and just calling out a couple of the bullet points here, that they're going to have requirements for the maintenance of adequate documentation and support.

How they dispose of alerts in case investigations certainly makes sense. And then procedures for an effective SAR decision making process that require documenting individuals decisions on whether to file SARs. And key facts supporting each decision to not file a SAR. This has been around for a really long time, but it still drives me crazy.

It was never a rule that you had to have a no SAR, which is in fact what this is. And hopefully there'll be some adjustment, when the AML program requirements are finalized, dealing with priorities and all those other issues. But if you're going to continue to ask banks, not just banks in formal agreements, obviously, all banks, to have documentation, specifically on each decision not to file a SAR, versus broader themes about how those decisions are made, you're never going to get out from under the check the box mentality. Again, realize that this has been the case going, decades, but it's still, I believe problematic and will continue to challenge any of us that want to see a robust risk based system.

Elliot Berman: Agreed. So the last thing I have is I saw that the FCA in the United Kingdom has issued warnings to what it's calling finfluencers. So these are social media influencers who are suspected of illegally promoting financial products. That could be because the products require someone to have a license, or be affiliated with a bank, or a broker dealer, or other things.

But the concern here is that these folks may be promoting scams. I haven't seen anything like this in the US yet, but I wouldn't be surprised, because again, we have some similar rules about who can sell certain types of financial products. And the whole reason is the oversight of the sellers, which is part of the consumer protection regime in both the UK and the US.

So interesting that FCA is seeking out these folks. Where they live today, which is in social media, in the old days, you'd get an invitation to come to a lecture and we'll buy you dinner kind of thing, and it wasn't always clear whether the people hawking the financial products were really legally eligible to do that.

John Byrne: Yeah, it's, I do think it's going to be interesting to see in the next administration where we go with some of these issues. And I'm going to end my point on this, there's a CNN investigation that was just finalized earlier this week under the heading, How Elderly Dementia Patients Are Unwittingly Fueling Political Campaigns.

A pretty lengthy investigation that talks about Because we talk about elder abuse all the time but this is a case where campaigns using, online persuasion or texting or what have you, are actually getting not just one small donation from a grassroots supporter, but over and over again.

And it's not just one, one party, although one party, according to the investigation, seems to be more. Adept at this than the others, but it does happen across party lines. So it's going to be interesting to see if this has any impact because again, it's under the elder abuse umbrella.

There's no question about it But this was just published the other day It's on the CNN website and there's eight reporters involved in this so definitely worth your time to take a look at that

Elliot Berman: Yes, a lot of data analysis and charts that are interesting to try to put the scope of the problem in perspective. John, by the time people hear this episode on Friday, our October webinar Is Fraud, the New AML, will have already live streamed, and people will be able to access it by the end of next week on our website.

But I know you're working on a really interesting webinar for November. You want to tell us about that?

John Byrne: Yeah. So with everything that's gone on since last year with FinCEN, with all the work they're involved in, and I did talk to FinCEN person here on site at the Puerto Rican conference. Didn't pick up any new leads or anything, but definitely they have a whole series of things.

He talked about the investment advisors rule and then he also talked about the need to rein in insurance, which I thought was interesting. But we're going to talk about a whole host of things that's been on FinCEN's table. Some things that have gone out as notices of proposed rulemaking, some are advanced notices. Some are finalized. And so we have with us a great group of folks. We have Dan Stipano from Davis Polk, Rick Small from Truist, and Megan Hodge from Ally. So really looking forward to that conversation next month.

Elliot Berman: Yes. And that'll live stream 1 p. m. Eastern time on Tuesday, November 19th, and by the time you hear this episode, you'll be able to register for that at our website. John, you have a safe flight home and I will talk to you next week.

John Byrne: Thanks a lot. Take care. Stay safe.

Elliot Berman: You too. Bye bye.