There is an old idiom, attributed to the British that “March comes in like a lion and goes out like a lamb.” For the financial crime prevention community in the US, that probably won’t be accurate since we expect a whole host of studies, reports, and regulations throughout 2022. However, on March 1st, the Department of Treasury issued National Risk Assessments on money laundering, terrorist financing and proliferation financing. As there is quite a bit to unpack in all three, we will only focus here on the money laundering assessment or NMLRA.

The NMLRA makes clear that this report is a precursor to the eventual 2022 National Strategy to Combat Terrorist and Other Illicit Financing. This is the third NMLRA since 2015 and, for the first time, includes a “Special Focus Section.” As with other relevant government guidance or statements, this information should inform both the vast public sector charged with money laundering enforcement and the private sector members of the financial crime prevention community. Note: While the assessment does provide more detail around a myriad of new and continuing crimes, the failure to consult the private sector on our views regarding money laundering risk is a gap in coverage that will hopefully be covered through our sectors filing of comments in various ANPRMs and relevant studies.

The NMLRA Methodology

To perform the assessment, the US utilized the following concepts—threats, vulnerabilities, consequences, and risks. These elements are derived from FATF guidance so are global in nature.

Here are some examples of each concept and their impact:

Threats:

The Treasury notes that the threats align with the 2021 national priorities that we covered in earlier podcasts, webinars and blogs.

Fraud continues to be the largest “driver” of money laundering activity generating billions of dollars annually. Online scams continue to rise, including romance scams, increased use of money mules, and billions of dollars stolen from government programs and private companies. No surprise here but the NMLRA uses data from various reporting avenues including the FBI’s Internet Crime Complaint Center.

Drug trafficking continues as an age-old threat and the report focuses on illicit opioids, heroin and cocaine and points out that the pandemic did not significantly disrupt the use of illicit fentanyl in the US. The NMLRA adds that “the markets for fentanyl and heroin are substantially intertwined, as distributors often lace heroin with fentanyl to increase their profits while maintaining the potency of their product.” Also, it also highlights that drug trafficking organizations from Mexico use a variety of money laundering methods, including bulk cash smuggling, misuse of MSBs and banks, and trade-based money laundering.

Cybercrime has dramatically increased since the 2018 NMLRA in large part due to the COVID-19 restrictions responding to the pandemic particularly ransomware, business email compromise and the sale of personal information. Financial institutions are of course an attractive target to these criminals. 

Professional money laundering, human trafficking, and corruption are additional threats covered in detail in the assessment.

Vulnerabilities and Risk:

So what are the vulnerabilities that create opportunities to facilitate money laundering? No real surprises but the NMLRA focuses on cash (bulk cash smuggling), the use of postal money orders, funnel accounts, and overall cash intensive businesses. The report also adds misuse of legal entities, virtual assets, complicit merchants and professionals, compliance deficiencies in our community and luxury and high value goods such as real estate. As with other sections of the NMLRA, there are compelling case studies throughout the report that we should use as training and awareness tools for institutions, firms and other entities.

Special Focus

The assessment adds a series of new issues or topics for a “special focus.” Among those are COVID-19-related fraud and scams, synthetic identify fraud, Chinese Money Laundering Organizations, wildlife trafficking, trusts, and the art industry. In addition, it covers Puerto Rico and their non-federally charted financial entities. Brief points on each:

  • For Covid-19 fraud, it is important to note that during the pandemic, “illicit actors have taken advantage of several COVID-19-related measures, including the increased use of remote applications, virtual environments, and remote identity processes, to steal information and credentials and disrupt operations.”
  • For synthetic identity fraud, it is different from traditional identity theft in that both real and fictitious information is used to create a new identity. Also, the FBI says it is the fastest growing crime in the US.
  • Chinese money laundering organizations (CMLOs) have been reported to have utilized “underground banking” or “black market foreign exchange” to facilitate the exchange of foreign currency. Treasury says that these methods are “a black-market foreign exchange that relies on basic principles of supply and demand of currency and matches individuals that have a supply of U.S. dollars with those in the market that have a demand for U.S. dollars.”
  • For wildlife trafficking, the US is a major source and destination country but “because the financial sector is less familiar with money laundering typologies in wildlife trafficking”, most criminal investigations in wildlife trafficking cases are generated by law enforcement not financial institutions.
  • Treasury does maintain an interest on how trusts can be used for money laundering purposes but admits “the available evidence does not indicate that trusts established within the United States are frequently used for money laundering purposes.” They are, however, used for tax avoidance purposes by both U.S. and foreign persons so more studies are being done.

We have covered the debate on the art industry when we opined on the need for BOTH antiquities and art to be placed under the Bank Secrecy Act (BSA). The February 2022 report by Treasury on the art industry recognized the use of products to move illicit funds or disguise the source of funds but delayed moving toward a regulation. The focus in the NMLRA further confirms the potential for the misuse of art by documenting that there are “qualities inherent to art, the high-value art market, and market participants may make the market attractive for money laundering by illicit actors.” More to come here.

Finally, the focus on Puerto Rico seems unique in a risk assessment, but the Treasury appears concerned about the regulatory oversight and staffing resources of PRFEs (Puerto Rican Financial Entities). Among other challenges, it is emphasized that “there are relatively few examiners and supervisory staff assigned to supervise a considerably large amount of PRFEs” so this “may make these entities attractive money laundering vehicles, potentially allowing nefarious actors to misuse them to facilitate illicit financial activity.”

The NMLRA (as do the other assessments on terrorist and proliferation financing) offers extensive insight from a plethora of agencies and will be the basis for possible new strategies, guidance, and maybe even regulation.

You are urged to utilize the identification of new and continuing challenges for raising awareness from the front-line to the boardroom. There will undoubtedly be more changes…

[1] “Changes” was a David Bowie release as a single 50 years ago in January. It was 128 on Rolling Stone magazine’s 500 greatest songs of all time.