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In assessments, strong AML program vital to countering rising terror, cyber, proliferation risks

Monday, January 28, 2019   (0 Comments)
Posted by: Brian Monroe
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By Brian Monroe
January 28, 2019

Through a combination of stronger financial crime compliance rules, more aggressive domestic and international investigations and cracking foreign email fraud hubs and illicit online sales portals – and their equally ignominious crypto exchanges – the U.S. has upped the challenge and costs for criminals, terrorists and weapons proliferators to launder ill-gotten proceeds.

Those are just some of the key themes from four recent reports the U.S. government released detailing the overarching strategies to counter a chilling array of criminal threats, from narco traffickers to rogue nation states, healthcare fraudsters to Nigerian princes and princesses, Indian “IRS” agents, to terror financiers and weapons and human traffickers.

The blueprint for U.S. counter-crime tactics is strewn across more than 250 pages, including three assessments – one each for money laundering and terrorist financing, an update to 2015 analyses, a new assessment revealing the financial tendrils tied to the proliferation of weapons and, lastly, a weighty hybrid national strategy summarizing the three underpinning reviews.

Didactic dollop of documents: U.S. strategies to counter illicit finance, terror, weapons

To read the National Strategy for Combatting Terrorist and Other Illicit Financing, click here

To read the National Money Laundering Risk Assessment 2018, click here.

To read the National Terrorist Financing Risk Assessment 2018, click here.  

To read the National Proliferation Financing Risk Assessment 2018, click here.

The reports come as the U.S. attempts to forge better relationships, communication, coordination and cooperation with domestic financial institutions and foreign investigators to crush larger, more international and varied groups attempting to obfuscate money trails across multiple institutions and jurisdictions.

In tandem, Europe is also working to strengthen oversight of banks and member state regulators to counter massive money laundering scandals in the hundreds of billions of dollars by creating a pan-bloc enforcement body, among other tactics.   

At the same time, global and regional watchdog groups are working even more diligently to name, shame and, hopefully with enough pressure, crack open countries that are havens for corporate opacity – and bring to light the armies of gatekeepers and professional launderers profiting from the patently profane.      

The assessments also echo some of the concerns of federal and state regulators, highlighting that large banks should more watchful of their correspondent banking networks, particularly if they connect to banks in or near regions with weak AML laws, are gripped by grand graft or in propinquity to known terror hotspots – or have gossamer strands threading to their shadowy supporters.

One soaring scourge connecting all of the assessments is that organized criminal groups, hacking collectives, terrorists and their ilk are engaging more broadly in “cyber-enabled” attacks, such as business email compromise (BEC) schemes to evade spam and scam filters and are more willing to use virtual currencies – some selling anonymity – to get payments and stymie authorities.

“Emerging illicit finance risks include an increase in cybercrime and cyber-enabled crime, which encompass a variety of illicit activity,” according to the reports. “Cyber criminals’ use of money mules complicates law enforcement investigations by placing throughout the ground level of the money laundering.”

A glimpse of compliance agendas to come

The assessments also give a roadmap of issues investigators and regulators are prioritizing, weaknesses that no doubt have strings to AML compliance and could take shape as new questions in compliance exams and upcoming regulations.

Some key questions in upcoming AML exams borne from the risk assessments include:

  • If you are a large, international bank, how are you monitoring correspondent transactions?
  • On that note, how did you score the foreign correspondent’s overall AML program and what is the underlying risk of their customer base?
  • How do you handle large international wires, particularly if they are from a business or personal account that doesn’t usually engage in such transactions?
  • Does your bank have any AML-style monitoring programs that review internal sales efforts, to ensure no employees are fraudulently opening accounts without customer consent?
  • Does your bank use its negative news, sanctions screening and politically-exposed person (PEP) watchlists, internal or vendor-created, to ensure the bank isn’t hiring the relative of a powerful PEP?
  • Has the bank read through the various risk assessments – the answer to this one better be yes – and, if so, how has the bank updated its various risk rankings for regions, products, customers and such?
  • For banks involved in international trade, what are the controls around supporting those deals, and does the bank ensure the parties involved, and items, are not illusory shells?

Rising risks: complicit merchants, professionals, insiders

The assessments parse out what groups like the U.S. Treasury’s Office of Terrorism and Financial Intelligence and Financial Crimes Enforcement Network (FinCEN) feel are the biggest illicit funding risks, and weak AML compliance programs hover near the top of the list.

U.S. financial institutions subject to the AML rules “play a critical role” in the framework of countering criminal threats, “detecting a wide variety of illicit finance and assisting U.S. authorities in combating those threats.”

However, there are always areas for improvement.

When it comes to financial crime compliance across the field, there “may be opportunities to leverage new technologies and broader information sharing arrangements among the private sector to improve both public and private sector effectiveness while reducing cost and burden.”

Those improvements are needed as financial institutions are at the vanguard of detecting and potentially preventing an expansive and widening panoply of financial crime risks.

The most significant money laundering risks in the United States include “misuse of cash; complicit merchants, professionals, and financial services employees; and lax compliance at financial institutions,” according to the reports.

Those financial crime tactics are the “residual risks after taking into consideration the scope and quality of U.S. anti-money laundering regulation, supervision, and enforcement,” according to the reports. “Although improvements can be made to diminish these risks, the fact that they exist to some extent should not be considered surprising.”


By the numbers, annual fraud, money laundering tallies

  • Ø  Overall global laundering: Roughly $1 - $2 trillion
  • Ø  Overall U.S. laundering: $300 billion
  • Ø  Overall money tied health care fraud: $100 billion
  • Ø  Market for illicit drugs in U.S.: $100 billion
  • Ø  Funds generated from human trafficking: $32 billion

Sources: U.S. money laundering, terror financing risk assessments, 2018

In that same vein, the U.S. also can’t tackle the depth and breadth of international money laundering schemes on its own.

“Finally, pursuing global money laundering syndicates requires U.S. law enforcement to partner with other countries to trace illicit proceeds, identify relevant parties, collect evidence, seize assets, and apply sanctions to problematic financial networks,” according to the assessments.

The reports also note that criminals also are actively searching for chinks in global fincrime defenses – gaps typically uncovered in regions with sparse AML compliance capacity at banks or with a dearth of knowledge of investigating complex international cases.  

“A continuing money laundering vulnerability for the United States is that some countries lack the necessary authorities, capabilities, or motivation to help U.S. law enforcement pursue money laundering investigations with a nexus to the United States,” according to the assessments.

Emerging, continuing risks require action

Overall, “emerging and continuing risks” requiring further action include:

  • Ø  Virtual villains: The growing misuse of virtual currencies, particularly anonymous “privacy coins.”
  • Ø  Crypto cops: A challenge exacerbated by a lack of regulation and supervision of virtual currency providers in many foreign jurisdictions.
  • Ø  Insidious insiders: Complicit insiders at financial institutions facilitating sanctions evasion and money laundering. These can also include complicit third-party payment processors and shipping companies turning a blind eye to obvious fraud flags.
  • Ø  Miscreant merchants: complicit merchants facilitating money laundering.
  • Ø  Dissonance of innocence: The recruitment of unwitting and unquestioning individuals to facilitate money laundering.
  • Ø  Empty nesters: The oversight of foreign correspondent portals and nested sub-entities. This has also been a major focal point for New York and federal regulators in dozens of AML enforcement actions.
  • Ø  Trading places: The assessments have, yet again, noted the perennial laundering vulnerability of global trade in the form of under- or over-invoiced items or simply lying about what is really in a particular crate or shipping container. These threats persists chiefly because of the sheer throughput of global trade and paucity of reviewers.

One technique to shore up some of these vulnerabilities domestically is more thorough and timely information sharing with financial institutions – through guidance, briefs and Patriot Act Section 314(a), which allows investigators to query the banking sector as a whole, or deliver details on a particular strand of transactional DNA linked to a certain terror or criminal group.

FinCEN has attempted to address some of the issues in the assessments, including beneficial ownership blindspots and laundering through trade and real estate.

Last year, FinCEN’s updated customer due diligence, or beneficial ownership rule, came into force, requiring banks to collect ownership details from corporates down to 25 percent and even 10 percent levels in some cases – that must be tied to a flesh and blood human.

As well, FinCEN in recent years has been more liberally releasing and updating geographic targeting orders (GTOs) focusing on fashion districts in California and real estate in some of the hottest markets in the country, including Florida, New York and others, requiring title insurance firms to capture more details on those purchasing in cash, and later, wires.


Here is a listing of the reports and some critical takeaways:  

National Strategy for Combatting Terrorist and Other Illicit Financing: At more than 120 pages, this hefty tome covers much of the same ground as the three risk assessments below, but without the bevy of case examples in the individual assessments.

The strategy notes that while U.S. AML rules are causing money launderers, terrorists and weapons proliferators to be more creative to move money through the U.S. system, or skip it altogether, they are still moving massive sums.

This is done through money mules, bulk cash and hawalas networks, criminals and groups more aggressively turning to cyber and cyber-enabled crimes, including ransomware and business email compromise (BEC) attacks – an insidious tactic that evades cybersecurity protocols entirely by exposing human vulnerabilities.

National Money Laundering Risk Assessment 2018: At a slightly more digestible 50 pages, the assessment – an update from a similar initiative in 2015 – notes that lax AML rules at financial institutions of all stripes, including banks and particularly for money services businesses (MSBs) can do more than open the door to transactional organized criminal groups to enrich their coffers.

Porous and paltry AML programs can also miss the more nuanced financial red flags related to weapons proliferations and inadvertently allow illicit funds to support groups attempting to get their hands on both the basic bullets and ballistic weapons of our warfare and the more dangerous instruments of mass destruction.

The NMLRA also highlights what many consider the biggest stumbling block for investigators, and bastion for launders, terror financiers and the corrupt – anonymous shell companies with impenetrable ownership structures. The report also highlights these vehicles are the stock-and-trade of professional money launderers, including attorneys, company formation agents and professional services firms.

That theme also wended its way to virtual worlds, adding another layer of complexity when attempting to tie criminal online acts to the true perpetrators behind them. The assessment noted that some crypto coins offer anonymity, called privacy coins, while other operations offer tumbler abilities to further muddy already threadbare money trails.

In addition, the NMLRA gave extra ink this time around to potentially the most damaging Achilles heel of even the stoutest AML program: corrupt and corpulent insiders.

The assessment more tightly ties the creation and implementation of AML programs to being instrumental in countering terror groups and weapons proliferators – a detail that won’t be lost on federal regulators and bank compliance teams.

National Terrorist Financing Risk Assessment 2018: This latest assessment identifies the Islamic State of Iraq and Syria (ISIS) and its regional affiliates, Al-Qaida (AQ) and its regional affiliates, Al-Shabaab, and Hizballah as groups posing the most significant terrorist financing threat to the United States and U.S. financial system.

In terms of global terrorist financing threats, Iran’s Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF) continues to provide hundreds of millions of dollars a year to Iran’s terrorist proxies, such as Hizballah, as well as to the Assad regime in Syria, according to the report.

Surprisingly, banks and money services businesses (MSBs) are the most commonly used channels for moving these funds abroad, rather than bulk cash or crypto.

The primary risk for these U.S. banks and MSBs, which typically maintain robust AML/CFT compliance programs, results from challenges in distinguishing terrorism-related financial transactions from licit activity, as well as weak implementation by foreign financial institutions of key AML/CFT measures.

National Proliferation Financing Risk Assessment 2018: The 2018 Proliferation Financing Risk Assessment finds that networks acting clandestinely to support state-sponsored WMD programs pose the most persistent threat to the U.S. financial system.

These networks vary widely in size and sophistication, but all employ tradecraft meant to obfuscate the source and/or purpose of funds and to mask the underlying illicit activity that generates these funds in support of their respective weapons programs.

Such networks often work on behalf of entities sanctioned by the United States or for countries on which the United States imposes stringent export controls with respect to military or dual-use technologies.

Their activities most frequently intersect with the U.S. financial system through attempts to finance the direct procurement of controlled U.S.-origin goods or technology, or through attempts to transact in U.S. dollars, regardless of the origin of the underlying goods, many of which do not have an obvious or direct link to weapons of mass destruction (WMDs).

While much of this activity takes place in foreign jurisdictions and involves non-U.S. persons, given the importance of the U.S. dollar and financial system to international trade and finance, these financial transactions are often processed through U.S. banks, which generally may be unwitting and can encounter difficulties in identifying the underlying illicit actors given the information available to them.

Strong AML programs also hamper proliferators

The reports, particularly the one on proliferation, more tightly tie strong AML programs to countering proliferators, not just money launderers.

The combination of AML rules, guidance on illicit funding methods, targeted sanctions against rogue nation states and designating technology that can directly, or through dual-use scenarios, be used to create bombs or nuclear weapons have also made it harder for groups seeking destruction on a massive scale,” according to the reports.  

The combination of a “strong AML/CFT framework and effective supervision makes it more difficult for proliferators and their facilitators to access the U.S. financial system,” according to the report.

“These laws, rules, regulations, and guidance have aided financial institutions in identifying and mitigating risk, provided valuable information to law enforcement, and created the foundation of financial transparency required to deter, detect, and punish those who would abuse the U.S. financial system to launder the proceeds of crime and move funds for illicit purposes,” according to the reports.

For example, “controls instituted to combat money laundering and terrorist financing have also strengthened the U.S. government’s ability to identify, deter, and disrupt” proliferation financing.

Positive changes coming for AML regime?

While the findings and conclusions in the assessments can be difficult to absorb, and reveal the totality of a creative and relentless enemy, there is also some good news in the documents, trends ballyhooed by federal banking regulators: The AML pendulum is swinging the other way, with examiners encouraging banks to innovate, rather than simply fine on minor fumbles and foibles.

“More broadly, Treasury and its interagency partners are currently working to identify ways to improve the effectiveness of the AML/CFT safeguards in place,” according to the assessments.

“This includes a Treasury and the Federal Banking Agencies Working Group on BSA/AML that is exploring ways to modernizing the regulatory regime in ways that support efforts by financial institutions to devote their resources toward addressing the areas of highest risk for illicit finance activities.”

As well, there are also efforts already under way within the Bank Secrecy Act Advisory Group (BSAAG) – which is chaired by FinCEN and is also comprised of members from financial institutions, trade groups, and law enforcement – to obtain feedback on opportunities to improve the BSA framework.

“Treasury is also conducting outreach with financial institutions and businesses in the FinTech and regulatory RegTech sector in order to understand and assess the potential of technological innovations coming to market,” according to the assessment, a positive move building on recent guidance by FinCEN urging institutions to pool AML resources and experiment with new technologies to improve compliance effectiveness and efficiency. 

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