FATF on Gatekeepers, IRS on Scams, Pacific Banking Forum, and More

John and Elliot discuss several developments impacting the financial crime community this week. These include FATF’s Horizontal Review of Gatekeepers’ Technical Compliance Related to Corruption, remarks by US Treasury Under Secretary Nelson at the Pacific Banking Forum, a new IRS warning on identity theft, and other items.

FATF on Gatekeepers, IRS on Scams, Pacific Banking Forum, and More - TRANSCRIPT

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

John Byrne: Morning, Elliot. Doing well, thanks. As we talked about last week FATF completed its plenary. We gave you the highlights of that, but one of the outputs that they said was coming in July, there's been a number of them, but the one that I know we talked about offline is the report that they've issued about gatekeepers.

And so that's out now. It's on the website. They call it a horizontal review of gatekeepers, technical compliance related to corruption, and I think why don't you mention where we came in on that, and I just wanted to highlight one of the areas.

Elliot Berman: It's not always great to distinguish yourself And the United States did that. The average for compliance with the 2003 requirements related to gatekeepers is 74%. That's where the whole the whole body of countries is. And the United States, and we're not the only ones, but the United States, zero percent. We have basically done nothing.

So it says the United States, I'm quoting here, does not have requirements to cover any of the gatekeeper sectors. In the United States, these sectors are required. to implement none of the preventative measures that have been required by the FATF standard since 2003. The United States supervisors have none of the powers and tools to implement supervisory programs on these gatekeeper sectors.

And the sectors are lawyers and notaries, trust and company service providers, real estate agents and accountants. We know that something in the real estate area is percolating through a proposal, but not full on and these other three sectors there's nothing pending.

John Byrne: And we've talked about that when the AMLA was passed a couple of years ago in the National Defense Authorization Act, there were originally some provisions covering gatekeepers, which got kicked out. Obviously strong lobbying from that, from those those parts of the business community.

But I wanted to just reference, because you and I are both lawyers, and we know the legal profession has been opposed to being covered in any fashion under the Bank Secrecy Act. And I thought the reference in the report just, I'm just going to read a couple of lines from it, was pretty instructive.

They say, corrupt actors and their money launderers can exploit lawyers and other legal professionals to hide and move proceeds of crime. Lawyers provide transactional services to clients. That's opposed to litigation or defense. That's a key point. And that transactional service can acquire property, manage money, operate bank accounts, all sorts of things.

Those tasks are legal, but they can also be essential components in a money laundering scheme, which may not necessarily be identified by the lawyer if AML/CFT preventive measures are not applied. They do say that a number of criminal cases globally reveal that some lawyers have been involved in kleptocratic crimes and dictators and oligarchs, drug trafficking.

That's absolutely true. These legal professionals who participate in those actions are not representative of the legal sector writ large. And this is how they end the section. However, a lack of comprehensive AML/CFT obligations covering the legal profession, over reliance on self regulation, should be underlined, and a lack of guidance and enforcement can leave the sector vulnerable to money laundering.

I think those points are very well stated. This is gonna be interesting to see if this has any traction. Coming in with 0%, is obviously a problem say the least. So it's gonna be interesting to see what happens in future congresses.

And sticking with international, the Undersecretary of Terrorism and Financial Intelligence, Brian Nelson, spoke at the Pacific Banking Forum earlier this week in Brisbane. One of the things that struck me besides, the need to work closely in the Pacific region with the United States dealing with AML related issues is he covers in his presentation, de risking in the Pacific and the need to address that ongoing challenge.

What always strikes me as more than problematic is the way in which our Treasury Department and many in the government define de risking. They had a strategy that we talked about, there was some positive things in that strategy when it was released in 2023, but again, Nelson says this, the Treasury released its de risking strategy last year, which studied the phenomenon of institutions terminating or restricting business relationships Indiscriminately with broad categories of customers, rather than analyzing and managing the risk of those customers in line with regulatory obligations, and that's harmful.

I agree. That's harmful. That's not what's going on, though. I think you're never going to solve this problem if you don't deal with the premise. And the premise is two parts. Financial institutions making these decisions, but they're making these decisions because of regulatory confusion and sometimes business decisions, to be fair. But to make these sound like wholesale exiting of relationships is just not what's going on. And obviously, I know our colleagues in the world that deal with de risking or the impact of it, like humanitarian groups, charities, and correspondent bank clients care about this, but the bottom line is we need to have a more candid conversation about this.

And I'll end it on this note. The good news is as we mentioned last week, the AML program adjustments that FinCEN proposed with all the other agencies last week, and we're waiting for, notice and comment to go through for 60 days, whatever the period is. I think that's going a long way toward improving the infrastructure. But again, you have to understand that part of why financial institutions make these decisions is because they're not clear on what examiners want to see in terms of high risk profiling.

Elliot Berman: I appreciate your reference to the new program rule proposal. As I think I mentioned last week when we talked about it, I'm concerned about how the renewed emphasis on moving to a truly risk based approach is going to unfold on the ground because the de risking question is right in the center of a risk based conversation. And we haven't been able to get there in a clear consensus way for a long time, as you've just appropriately pointed out.

I'm hopeful that the program rules are going to help, but as I said last week, we'll see when the first set of changes to the exam manual comes out after the rule is effective, before we'll know whether the regulators really understand it.

John Byrne: I'm going to hand back to you in a second, but just also want to flag that the IRS and a group called the Security Summit met this week. I think there's several days during these discussions, but one of the things that they posted on the IRS site is a warning to tax professionals to be on the lookout for new and evolving schemes that are aimed at stealing business and taxpayer information.

So one of the things they say is identity thieves will pose as new clients, using phishing emails to trick people into sharing file information, as well as elaborate schemes involving calling and texting. And the IRS Commissioner Werfel said the Security Summit partners have continued to improve our defenses against identity theft. The thieves have upped their game.

That information is available on the website. Plus, I'm sure some recommendations will come out of these meetings, and they're going to have forums throughout the country in the next several months to talk about these issues as well.

Elliot Berman: And that's a nice segue into a reminder to our listeners that the July webinar, which is July 25th is about fraud and romance scams, which are not directly related to identity theft, but can be connected. We urge you to go to our website and sign up for that. The live stream will begin as it usually does at 1 PM Eastern time on Thursday, the 25th.

Couple other things that you and I talked about before. One is there is a bank in the Nordics called Nordea, I think I'm pronouncing that correctly, and they are in a dispute with the AML regulator in Denmark related to activity that they allowed to occur related to sanctioned Russian activities. A fine has been levied, but they are strongly disputing it. For our colleagues who are working in the Nordics or work with that company, just be aware it's going on. It's an ongoing issue.

And then the other thing that I wanted to mention for those of you whose organizations are either considering getting into the banking as a service space or already there. There's an ongoing set of issues related to the bankruptcy of a company called Synapse, which was providing several services to FinTechs and banks in the banking as a service space.

They filed bankruptcy earlier this year, and among other things, they were providing the sub account accounting services to the FinTechs, so when their end user customers made a deposit with the FinTech, that ultimately would end up in an insured bank the accounting was taken care of by Synapse.

There appears to be money missing. There were about $300 million in end user deposits. And about S90 million apparently is not accounted for. The end user customers, many of them, their accounts are frozen. They can't access the money. And many of them have been calling for the FDIC to step in, but there's been no bank failure and the statutes that govern the insurance fund in the United States authorize FDIC to start taking action and reimbursing customers up to the deposit limits as a result of a bank failure.

It's a unresolved and ongoing thing, but it's interesting and somewhat scary reminder of the critical nature of vendor management. Always, but particularly in the banking as a service space, because there tend to be layers of vendors that are going there. Just something to keep an eye on.

One more thing just to keep an eye on, as FinCEN has been doing on a regular basis, they issued updates to the Beneficial Ownership Registry FAQ. Just to keep yourselves up to date, take a look at those changes. And John, I know there's one more thing you wanted to talk about.

John Byrne: Yeah, sticking with FinCEN, I always go back to the comments made by Daniel Patrick Moynihan, a great senator in our history, who said, you're entitled to your own opinion, you're not entitled to your own facts. There is a 900 page document prepared by the Heritage Foundation called Project 2025, which is finally getting media coverage as we go to record today. I would urge people because this document is designed to give direction to the next administration if it is not the Biden administration.

Now, to be fair there are Democratic think tanks that do similar things anytime there's a new administration or a continued administration to give recommendations on additional legislation and regulation. So that's not unusual. What is unusual in this 900 page document? The section of the Justice Department that attacks our partners at the FBI, the references to FinCEN that I wanted to spend just a couple of minutes on, and I think it's important. Because we've been critical certainly of regulatory issues when we thought it was warranted.

But some of the things in this section, it's pretty short sections under the Treasury Department, but on the one hand, they say FinCEN is a relatively small bureau with a small budget. That's true because anytime there's been an increase in budget proposed, it's been rejected. So that's important to note.

It also says that it has demonstrable, I'm reading specifically from it, demonstrable, substantial and widespread economic harm that FinCEN causes, which is an interesting comment. And it says it's also been subject to extraordinary lax oversight by both Congress and the Treasury Department. That's interesting because Congress has had a number of hearings, certainly just in the past couple of years, with FinCEN testifying.

And the Treasury Department it's a Treasury Bureau. So FinCEN is not releasing anything without Treasury oversight. So I think that's pretty important. It also claims that there's no longer annual reports by FinCEN. I've seen a lot of guidance documents. I've seen certainly a lot of charts and graphs that look at SARs and look at particular issues. So I find that issue interesting.

And then I'll say two more things. One is says that the AML/CFT regime is a major contributing factor causing the decline in the number of small broker dealers and the decline in the competitiveness of community banks. Bet you didn't realize that. Some of the recommendations in this report is they want to see data regarding the number of SARs filed. I can share some of that because I've seen that publicly. They also want to know the number of AML/CFT convictions. Now, again, I think we understand the difficulty in showing a one to one correlation between reports and convictions, but I'll leave that for others. And they also clearly believe that the CTA needs to be rewritten because they argue that the Corporate Transparency Act should be withdrawn.

We've clearly talked about the the issues with access, the registry and who files and all of that. But so those are just a couple of things in there. Again don't take our word for it. Read it for yourself. If you're in our community, you certainly understand the pros and cons of some of these issues, but this is clear direction to a new administration if that occurs. And I think it's important to those of us that care about the infrastructure that we want to see improved, but we want to do it from a basis in fact, not fiction.

Elliot Berman: 900 pages. That's a lot of policy.

John Byrne: Yeah, that's right. And can't read it. Can't read it overnight. That's for sure.

Elliot Berman: Living here in the Milwaukee area, the RNC start officially starts here on Monday, although there's pre activity going on, and actually a friend of mine who works in the downtown area said that some of the security zones are already up, so there's streets already closed off and things like that. The Heritage Foundation is hosting what they're calling a policy fest, which even I'm a little bit of a policy wonk I never thought of it , as a fest.

John Byrne: That's right.

Elliot Berman: At one whole day during the RNC next week. As you pointed out, think tanks on both sides of the the aisle do these things on a regular basis, but it is interesting the level of focus in this particular policy document related to law enforcement and anti-money laundering, not directly, but in looking at FinCEN and other things like that.

John Byrne: Let me just end by saying the section on the FBI is particularly troubling 'cause our partners there have done such a tremendous job of working and partnering with us. So that section warrants your review as well.

But let me end on a more positive note. Today as we are finishing this recording, I'm gonna be sitting down and interviewing a really good friend of ours in the community, Les Joseph, who just retired from Wells Fargo and had been at the Justice Department. So we're gonna talk to Les about his career, some of the challenges moving to the private sector and where he sees this community going in the next, five to 10 years. We'll post it in a couple of weeks, but I'm really excited to hear Les's point of view now that he's done both. He's been done both the private and the public sectors, and again respected within both communities.

Elliot Berman: Yes, I'm looking forward to hearing the recording of that too. John good to talk to you, and we'll talk next week.

John Byrne: All right, stay safe.

Elliot Berman: You too, bye bye.