Foreign Investment in the US, Fentanyl Sanctions, Europol Report on Trafficking, and Much More

John and Elliot discuss several developments impacting the financial crime community this week. These include a report on foreign investment in the US, the interagency statement on the AML/CFT program proposal, and the regulatory agenda for the Treasury Department. They also talk about the report from the House Financial Services Committee working group on AI, new sanctions on fentanyl producers, and a Europol report on migrant smuggling.

Foreign Investment in the US, Fentanyl Sanctions, Europol Report on Trafficking, and Much More

Elliot Berman: Hey, John, how are you today?

John Byrne: Just great, Elliot. How are you?

Elliot Berman: Good, too. John and I have had all kinds of technical problems, which that appears to be the theme around the country this week.

John Byrne: That's for sure. Yeah. So let's just dive into it.

We've covered this before, Senator Menendez of New Jersey has resigned effective, I think, in mid August. Obviously, that was important from a political standpoint, but also as we've covered that corruption case, he was found guilty on all accounts. He's clearly appealing, but he will be leaving the Senate. Just closing the loop on that one.

Elliot Berman: In my opinion, the right thing to do if nothing else to let his constituents be represented by someone who's not distracted by appeals and things like that. Europol which is the European Union's shared law enforcement agency runs something called the European Migrant Smuggling Center. And they issued a report in the last few days, called Tackling Threats, Addressing Challenges, Europol's response to migrant smuggling and trafficking in human beings in 2023 and onwards.

And in the same way that the US State Department's trafficking in persons report is a valuable tool for all of us in the space to be paying attention to what's happening. I think this report is worth a look as well. You can find it on the Europol website. One of the interesting things that they talk about is both migrant smuggling and trafficking in human beings. And there is a difference. They also talk a fair amount about how trafficking is occurring through the EU across into the UK, which is everyone knows post Brexit is no longer integrated into the EU.

So again a valuable report well worth watching. John, what do you got?

John Byrne: Sticking with international, the Treasury Department issued their annual report from the Committee on Foreign Investments in the United States. As you remember, we talked, we had a podcast talking about some of the risk issues with foreign investments globally from FATF and OECD. So this particular report looks at 2023. According to the Treasury press release, they say this is a shifting of of resources and they've enhanced their regulations to make sure there's increased effort to identify transactions that were not submitted, but may raise national security considerations.

And some of the key highlights. The caseload remains high and even though there's decreased global merger and acquisition activity. In 2023, that organization cleared 66% of distinct transactions that didn't require mitigation. They assessed or imposed four civil monetary penalties for violations of what's called material provisions of mitigation agreements, and that's double what they've done in the previous 50 year history of CFIUS. And then in order to improve their efficiency in case processing they decreased, withdrawn, and refiled transactions. That starts the review period.

This annual report was submitted to Congress earlier this week under the Defense Production Act. But again, in terms of investments in the US, there is obviously a concern that some of those investments could impose national security issues.

So I wanted to mention that. And then there's a couple of things other things regarding the Treasury Department, a number of announcements in the past week. One I wanted to just reference because we've talked about this as well, and that's Treasury announcing a sanctions of certain cells that are linked to fentanyl.

And so OFAC sanctioned two Mexican members of a particular cartel and two Mexican companies, and that was done in cooperation with the Mexican authorities. So that's there. They describe who those individuals are in the organization. They've done a number of other things too, but one of the things that somebody identified for me the other day, which I knew was out there, but I hadn't really looked at it.

The regulatory agenda gets published each quarter. And what that is all the various federal agencies in the United States tell you where the status of a proposed rule or a final rule. And so under the categories of Treasury and FinCEN, some interesting postings. And this was posted early July, so it's a couple weeks old.

But a couple that struck me, one is consistent with the AML program proposal that FinCEN has released with all the other agencies. That's listed under the category of national exam and supervision priorities. Revisions to the CDD requirements is also in the proposed rules stage. Customer ID program requirements for registered investment advisors.

And of course, they highlight the final rules coming out this year on residential real estate transaction reports, AML programs, and SAR filing requirements for investment advisors, and implementation of a couple of different special measures. One regarding convertible virtual currency mixing as a class of transactions of primary money laundering concern.

But the other two things that struck me, one is I think we've mentioned, and if we haven't, it's because it's still underway, there's a project being done by the private and public sector looking at improving 314(a) of the Patriot Act, and there should be a final project report in the next month or so. But what I had not seen is a proposed rule stage from FinCEN on looking at 314(a) and 314(b) to protect shared information under that based on the response to the AML Act of 2020.

So it'll be interesting to see because one of the things we've heard from our clients in the community is the confusion and the hurdles with, 314(a) and 314(b). And the last thing I'll mention, what's not included in this posting is the status of the antiquities proposal that we saw last year, putting the antiquities community under the Bank Secrecy Act.

So that tells me clearly that there will not be a final reg anytime soon. So you can always look at those sorts of things and get an indication of the status of various things that you might be looking at. So wanted to mention that as well, Elliot.

Elliot Berman: That is a valuable resource, this periodic agenda that gets published. And good thing for all of us to be watching. And a great way to summarize what's going on, because particularly in this environment, with all the different AMLA related pieces in play it's a nice snapshot to say, okay, this is where we are, as opposed to you and I going, so what's the status of that one? The government actually helps us know that. So that's a good thing.

John, I know that we both saw the interagency statement get published on the issuance of the AML/CFT program notices of proposed rulemaking. So each of the banking regulators, as well as FinCEN, published a version of it, and this is a joint statement about that, covering what's in it.

I don't think there's anything significantly different here that was from any of the individual agency announcements. But this is another step in the process and it's a worthwhile quick read just to refresh your recollection on what people are trying to accomplish.

John Byrne: Yeah, the one thing, the section that references the supervision and examination, so the strengthening of training of examiners, the word smithing was pretty interesting, and I'll just read what the agency said in the last line of that particular section.

They said, as members of the FFIEC, the agency stand ready. to consult with FinCEN on this examiner training requirement. I was hoping there'd be a little more direct oversight, perhaps, maybe not of FinCEN, but of what FinCEN and Treasury want to see, but I think that the words mean something, and that is, of course, the examiners would argue they are trained, which is true, but as we've all said for many years, we would like more targeted training regarding AML, CFT, and sanctions. So it'll be interesting to see, but you're right. It's generally the same as the notice we saw a few weeks ago, all the agencies and FinCEN are signed onto this.

Elliot Berman: In connection with the training component that you just called out, the other issue, and it's something that you and I have both referred to in our prior discussions since these proposals have been coming out, is that a lot of the implementation really occurs in the development of changes to the FFIEC examination manual.

And particularly as we attempt to make a transition to a truly risk based program approach we're going to need to understand what risk based examination is going to look like. Because as we've talked before, there has been discussion and an urging to be more risk based in the program side for a long time, but it hasn't necessarily borne out as a successful strategy as it relates to going through the exam process.

It may be a successful strategy for using resources well to identify the information that law enforcement and other government agencies need, but you don't necessarily get the right kind of credit, if that's the right word for that, for it being risk based when you get examined under the current manual.

John Byrne: What's interesting, I was actually on a call this morning with some bank reps from the Midwest who said that they're hearing from their bankers that the examiners are already sending exam notices asking for AML/CFT responses. And that sounds like a minor issue, but the CFT addition to the BSA supervision and the officer requirements is added in this proposal, but it's not final yet, but the exam information has already put that in place. So that's interesting. And we'll see how this all translates after the comment period closes. I would assume we'd see a reg before the end of the year.

Elliot Berman: I think, I agree with you but given all the moving parts We'll have to see. Because again, since this reg is being adopted by all of the members of the FFIEC individually, they've got to get their drafting teams together so that it comes out jointly. And that may add time to the process beyond a single agency issuing the reg.

John Byrne: Yeah. The only other thing that I have is the House in a bipartisan vote passed a bill earlier this week. And the bill is designed to create yet another working group. In this particular working group, they're calling the Independent Financial Technology Working Group to combat terrorism and illicit finance.

So you don't always need legislation for working groups, but obviously it shows the support of Congress, as I mentioned, in a bipartisan manner. The bill goes into the specifics of who should be involved in this and obviously is the usual suspects in the government, but also in the private sector, they want to see folks from different areas of coverage to be part of that working group as well.

So from finance tech companies traditional financial institutions, blockchain intelligence companies, and then also institutions and organizations that are focused on privacy and civil liberties. If this does pass the Senate, the working group would meet during the course of the next calendar year, and I think they have a year to get a report back to Congress on recommendations. So just because it's bipartisan and it does impact in some degree, our community, we thought we'd highlight that.

Elliot Berman: Yes. And the last one that I want to talk about is a working group, an existing bipartisan working group out of the House Committee on Financial Services. And this one has issued their report. This working group focused on artificial intelligence and the report is worth a good read. What the working group did is they conducted six roundtables looking to get input on things related to financial services and housing, which are the two primary responsibilities of the committee.

They had a roundtable, actually two roundtables, with federal regulators. They had a roundtable with people from the capital markets space, housing and insurance, financial institutions, and non banks. And then they looked at things from a national security perspective. They came up with a number of takeaways, many of which are, again, this being a committee working group, what the committee should focus on.

But I think there are also some valuable things in here. Just to see what the various participants in the round tables talked about as priorities or areas of concern. And the last thing I'll say about the report is there is an Appendix A, which is a well written and well researched history of artificial intelligence.

And for those of you who are listening, who are occasionally asked to make a presentation. You could create a great timeline with the history of artificial intelligence using this appendix, or you could share it to educate and bring people up to speed. It clarifies some of the jargon in the space, and I think would be helpful to the less knowledgeable folks in an audience are on what are we talking about and where did this come from?

So I would commend the report itself to understand what the committee might be focusing on in the near term.

John Byrne: That sounds good, Elliot. Just a couple of things. The interview that I did with Les Joseph. Great public servant who spent years at the DOJ and then 14 years at Wells Fargo who just retired that got put up on our site and on LinkedIn.

And then by the time you hear this, we will have had a program on relationship or romance scams and obviously we will have recordings of that available in the near future. What's going on in August.

Elliot Berman: In August, we're going to be doing a webinar on high risk customers. So always a valuable topic and we'll be bringing together some excellent practitioners who can provide their insights to what they're doing today to try to effectively identify and manage high risk customers.

Also a couple of other things to watch for on the website. We posted an interesting blog on deep fakes which I commend to folks and we'll be publishing in the next week or so a nice blog written by one of our analysts who is focuses on the mechanisms of 314(b). So if you're if you're looking for a nice piece to help new folks in your departments learn about 314(b), I think you'll find it to be very useful.

John Byrne: All right, Elliot, good talking to you. We'll talk next week. Stay safe.

Elliot Berman: You too. Bye bye.