Cybersecurity, Sanctions, and Regulatory Developments

In this week's episode, the discussion centers on cybersecurity risks linked to foreign interference in U.S. elections, the impact of Russian money transfers to the UK, and the latest SEC actions against financial institutions. John and Joe also cover the Federal Reserve's stance on decentralized systems, and important regulatory updates for the AML community.

Cybersecurity, Sanctions, and Regulatory Developments - Transcript

John Byrne: Good morning, Joe. How are you today?

Joe McNamara: Hey, John. I'm doing well. I'm actually, I am bouncing with excitement. The fact that I get to sit in this week in AML host chaired this morning. Obviously for our listeners Elliott Berman is out. I'd like to say he's on vacation, but part of me thinks he might be fighting crime at night in Milwaukee.

The jury's still out there, but John, how are you this morning?

John Byrne: Hey, I love Milwaukee. Don't make any disparaging remarks over one of my favorite cities, but Joe McNamara, for those of you that don't know, is the director of solutions marketing here at AML RightsSource and has been a mainstay for us for a number of years, giving us some great direction.

In terms of all the content we try to produce and he's got some really great ideas. So today you're right Elliot is mainly on vacation With his lovely wife Karen and they well deserve vacation, but let's couple things. I wanted to highlight very quickly Joe before we get started one is and we didn't talk about this before we jumped on, I do want to mention from a cyber security standpoint, everybody is well aware that the FBI is investigating perceived hacks, I say perceived because they haven't verified it yet, but we believe that's true, probably from Iran, both against the Trump campaign and the Harris campaign.

So that is something unfortunately that happened way back in 2016, as well as we know but the FBI is on that. And I think, as we record this, maybe we'll get more information by the time this is posted. on Friday. But I just wanted to highlight that we obviously are well aware that's out there because we do touch on cyber issues here from time to time.

All right. And the other thing is, let's let's just dive into a couple of reports that I saw that I know that our community would be interested in taking a look at. One is Transparency International has a Russia contingent of Russian exiles. So they actually produce research reports for Transparency International.

And the one that just came out this week is on illegal money transfers from Russia to the United Kingdom through electronic payments. It's a 26 page report. You can get it on TI's website. And the number of things that they highlight include that the researchers have determined that business accounts, unlike personal accounts, have fewer transaction limits, so that's certainly a lot of potential liability and vulnerability.

They're often sold and used under false identities that enable undetected money transfers, and they're also very active on the dark web where accounts are bought and sold. Again, Transparency Internationals, Russia contingent. These are Russian exiles. This report was just released earlier this week.

I think both interesting reading and something of value to all of us that try to stay on top of potential vulnerabilities, whether we're doing business in the UK or elsewhere. So I wanted to highlight that and then just sticking with the international side. The earlier this week was the 75th anniversary of the Geneva Convention.

Secretary of State Antony Blinken issued a statement, among other things, reaffirming the U. S. commitment to respecting international humanitarian law. We talk a lot about the the impact, many times unintended, in terms of humanitarian needs, in terms of financial needs, that sort of thing, and so this is important.

But I also wanted to highlight that based. Based on that, and based on that anniversary, a group of self described, we're not describing them progressive legal organizations around the world sent a letter to the Biden administration this week, coinciding with the anniversary basically highlighting in their view that sanctions which obviously are a very important national security tool, that sanctions cause what they would say collective punishment of civilians.

And so their letter is not simply directed at the current administration, but certainly Democrat or Republican administrations for years have used sanctions as a, as again, a valuable National security tool and this letter said that these unilateral economic sanctions are more than problematic. Just wanted to highlight that.

I think there probably won't be a policy. Yeah, go ahead, Joe. Sorry.

Joe McNamara: Interestingly enough, too, on that front, too I get the sense that at least what we've seen is this blanket statement in terms of sanctions are all bad and sanctions are hurting people, which in reality, in conversations that you and I have had in the past, too, that's not necessarily the case.

Obviously, there are. Multiple layers to these types of things. And ultimately, as you mentioned before, sanctions themselves are essentially the biggest tool in the arsenal of treasury. But with that certainly comes like exceptions. And I think we talked about, humanitarian aid and some other organizations that, are essentially exempt from some of those sanctions that are levied.

But. Anything else that, that you would add on that front in terms of just, ensuring, that we have a, an appropriate appreciation for what kind of tool these sanctions are?

John Byrne: Yeah, I think that's excellent points. Elliot and I have also talked about articles that have raised the criticism, as you mentioned, other sides that have said there is value, they can actually show value, but there's a lot of sanctions evasion that goes on around the globe.

And that's obviously, problematic as well. It's like anything else, right? Any tool, a legislative or regulatory tool is going to have positive impacts and potentially unintended negative impacts. We've worked fairly closely and interviewed a number of those folks from the humanitarian world because of their concern.

And there's certainly have been licenses issued by OFAC and other organizations that allow the distribution of, funds for medical supplies and utilities and that sort of thing. And are they perfect? No, but I think it's something that we have to watch carefully. It's like anything else, The U.

1. is going through a review of their AML infrastructure, and we've talked about it many times from the AMLA law that passed a couple of years ago, because there's this view that the, 40, 50 year old laws that haven't been adopted or changed or, modified at all over, over this time, Maybe needs a revisit.

So I think sanctions is part of that as well, but I also would argue that for the most part, sanctions is one of the key tools to try to change policy and try to change areas, but it's not perfect. So I think that's a very valid point.

Joe McNamara: Yeah, and on that note, too, from a ratification perspective, I think, moving domestically, I think some of the other things we saw coming out of FinCEN this week included a version of that, right?

There were a couple calls for comment as it relates to a few of the regs. Did you want

John Byrne: Yeah, so it seems that this sounds basic, but it is a requirement that every so often the agencies have to issue a comment request to look at current regulations, even if those regulations are not being changed at all.

So these are renewals without change of records for a series of current requirements. With a request for organizations and individuals to comment, and they include the renewal of, without change, the AML program requirement for casinos, for providers and sellers of prepaid access, these are separate ones, obviously broker broker dealers and securities.

And yeah, those three and then also to look at, without change exemption requirements for currency transaction reports. So all that, all those issuances are available on FinCEN's website, and, certainly, Even if there's no changes, those communities may feel that it's important for them to comment on potential changes.

That, that leads me, Joe, to something, because, one of them is on the records and requirements for brokers and dealers. There was a SEC charge this week to OTC Link LLC and this organization paid a 1. 1 1. 19 million dollar Settlement fine for a whole series of things, but basically failure to file suspicious activity reports over a 38 month period, which is crazy if you think about it, right?

So the SEC issued this and I want to give some credit to our colleague that we've interviewed a few times, Sarah Beth Felix, who posts on LinkedIn very frequently when she looks at, Orders like this and comes and, and gives you recommendations based on her years of experience. And she talks about this particular order and, mentions that you can't have your CCO.

in charge of AML. The order itself talks about that they only spent two hours a week on AML issues and some other things that Sarah calls out. But it's it's an interesting interesting analysis. But basically, again, this is the OTC's link LLC, Failure to File SARS, available on the SEC website.

So I wanted to mention that since the SEC, the broker dealer regs are out. are out for comment from FinCEN.

Joe McNamara: So a lot of C's in there, John. I think you lost count at

John Byrne: 12. Yeah, and Elliot reminded me before he went on vacation to mention these, this other one, and that is Federal Reserve of Philadelphia issued an action against.

Customers Bank. Customers Bank in Philadelphia for a series of deficiencies, including, since we just talked about sanctions, including OFAC deficiencies. So there's a whole series of things in there. This this particular bank, I don't know the asset size. I don't have that in front of me, but they offered banking services to digital asset customers.

And that's an instant payments platform that allows. Commercial clients to make tokenized payments over a ledger technology to other commercial. clients. So banking as a service violations, if you will. But bottom line is their BSA deficiencies were major according to the Federal Reserve.

And so there's a written agreement. There's obviously requirements over the course of the next 60 days to come up with a plan to improve this, which includes Board of Directors monitoring, includes improving the management information system and a whole series of other things. So again, the Federal Reserve just issued this late last week after we had recorded, and this is Customers Bancorp, Customers Bank.

They're based in West Redding and Malvern, Pennsylvania.

Joe McNamara: Ah, the home state for me. There you go. That's right. If anything, a call to action, right? Like any of these notices that are coming out is, and we've covered this previously on some other programming, Wonderful opportunity for us to stay in engaged and certainly up to date in terms of what regulators are looking at.

And especially when it breaks down into things like banking as a service, right? I know that's certainly a hot button area that a lot of folks are certainly waiting into and some are doing better than others. But ultimately it's just a friendly call to action. Take a look at what's going on around in the neighborhood, making sure.

That your program can stand up to the same level of scrutiny.

John Byrne: And we've obviously done programs on Banking as a Service webinars and podcasts, and our good friend Chuck Taylor has done a lot of work in this space. Just a quick, just to tie up a couple quick things HSI announced a multi agency investigation into illicit massage parlors in New Jersey and New York with four arrests.

So that information is up there, and obviously that in many cases is an adjacent issue to human trafficking and related topics. So Homeland Security's done a lot of excellent work in that space. And then there was one other thing I wanted to wanted to mention and just saw this actually this morning.

The Federal Reserve Bank of New York in a staff report just issued, and the staff report title is Regulating Decentralized Systems. evidence from sanctions on Tornado Cash. So Tornado Cash was sanctioned several years ago and the analysis from the staff is to look to see when this was done back in 2022 that what was the impact?

So the staff of the Federal Reserve Bank of New York analyzes this. I won't pretend to be as smart as those folks. It's a 40 page report, but as I look through it, they, I don't say they claim, they conclude that the sanctions, while initially were impactful, there is still ways in which organizations and others outside the U. S. can get around those sanctions. So an interesting report. especially looking at organizations like Tornado Cash. I would urge folks that are in that space to take a look at that. One of the conclusions is evidence on cooperation, they say, is mixed, so that's cooperation on sanctions. And so that's one of the things that they say indicates a fragility to it.

How sustainable these things can be, which they call censorship resistance, meaning once you're sanctioned, how do organizations and countries react to that?

So an interesting report, like I said, New York Federal Reserve Bank staff report number 1112 just issued earlier this week, so I just wanted to mention that as well as another item in the area of looking at cryptocurrency and related topics, but this one connected specifically to how sanctions are, how they are impacted or not impacted, if you will.

Joe McNamara: That's right. New Jersey, New York, come on guys, you keep popping up in the news cycle here, can't we get a break? Anything else from you, John?

John Byrne: Yeah, so a couple of things a a stellar AML professional, Alan Ketley, is stepping down his role with the Wolfsburg Group, he's retiring, and so I reached out to Alan, congratulated him on that, he's done some excellent work with Wolfsburg, we've obviously talked about Wolfsburg, and so I'm efforting at some point to once he gets some time to sit back down and do a podcast with Alan.

So I think that'll be very interesting. As everybody knows, Wolfsburg is the international banking organization of multinational banks that produces guidance and direction and strategy that are not only useful to the industry, but useful to the broader AML community. Alan. Great work, great career, and looking forward to chatting with you.

And then later on in the month I mentioned this last week, we're going to be sitting down with the head of the Antiquities Coalition, Deborah Lair, and talk to her about her views regarding antiquities and art and some of the things that organization is seeing. And as always, Joe, we're looking for topics and additional folks that we could interview, so if anybody out there has some ideas about that, we're More than willing anything related to security, international related issues on financial crime, and in any fashion, we're happy to sit down and talk to them.

Joe McNamara: Absolutely. And if you guys need Some place or some mechanism to connect. You can always reach us at this week in AML at AMLRightsource. com. Um, John, just a couple of things on my end too. So like we mentioned we've certainly done some programming in the past, both around cryptocurrency.

We had a great conversation earlier this year with Ari Redbord. You guys can certainly take a look at the AMLRightsource website and find that in our resource center. Along with. A plug for this month's webinar. So as we mentioned before Chuck Taylor our head of financial crimes advisory here at AML Rights Source is moderating a panel on best practices for managing high risk customers.

That'll take place on August 22nd at 1 p. m. Eastern. And again for anybody that's experienced the the interactions and the programming with Chuck at the helm it's quite a great free flowing conversation. They do a lot in terms of being able to deliver insightful information that depending on what you're looking for, both from a strategic and tactical perspective can put in your back pocket and take with you into some of the challenges and opportunities that exist in your institutions.

But yeah, In terms of wrapping this up, John, this has been exciting but I'll give you the last word. Anything else this week?

John Byrne: I told Elliot for those old folks out there that him not being on today, it's not going to be tantamount to Wally Pipp sitting down and Lou Gehrig taking over and playing first base for the rest of his career, and Wally Pipp being just a footnote in history.

If you don't know that story, google it. Wally Pipp, played first base for the Yankees, wasn't feeling great one day, Lou Gehrig went in and never stopped until he retired. So that's not going to happen. Even though you're great, Joe, Elliot will be back next week.

Joe McNamara: Yeah, I'm always willing to step in, but yeah, that next man up mentality certainly applies.

All right, John hey, thanks again. And we'll catch you next week.

John Byrne: Take care.

Joe McNamara: Bye bye.