This Week in AML

A Very Busy Week

This week, several interesting reports were released. Eurasia Group issued its Top Risks 2024, Human Security Collective published The Future of FATF Recommendation 8, FinCEN issued a Financial Trend Analysis and much more. John and Elliot discuss these and their meaning for the financial crime compliance community.


A Very Busy Week - TRANSCRIPT

Elliot Berman: Hi John, how are you today?

John Byrne: Good, Elliot. I saw that you folks got some snow out there in Milwaukee the past couple days, right?

Elliot Berman: We did. I live pretty close to Lake Michigan, which is still pretty warm relative to the land. We probably got three inches. It was still raining by mid afternoon yesterday. Further inland, there was a lot more snow. But, it's a reminder that it is January and we do live in the north and even though there's no question that climate change is going on, we're still going to have winter.

John Byrne: That's true. We said last week Congress is back in the United States, lots of stuff going on globally. Let's start off domestically. FinCEN issued a report, a trend analysis on what they're calling suspicious activity tied to exploitation of identity processes. Now, this report looks just at calendar year 2021, but there were some highlights in there that I know you saw, and obviously they believe that the data is still valuable as a predictor. So what did you find there?

Elliot Berman: The top line number that they talked about was that of the total BSA reports that they received, 42% of them were related in some way to identity theft or false identities, things like that. That's the big picture, which, reminds us that it's important to keep paying attention to do we really know, who our counterparty is, whether that's as individuals, corporations, or, in other transactions. There's a lot of good information in the report they go through a good detailed analysis of how various identity related exploitations and topologies occur.

So I would, as we often do, I would recommend folks take a look at this use it as a good screen against how they're attempting to identify counterparties whether it's in the KYC process or in other circumstances, CDD, all of the places where we're really looking at identity there are implications coming out of this report.

John Byrne: Right, and staying with FinCEN Secretary of Treasury Janet Yellen on Monday of this week spoke there in part to highlight the opening of the Beneficial Ownership Registry, but also to highlight some of the other issues that FinCEN will be dealing with this year, and I thought it was interesting that besides emphasizing the Corporate Transparency Act output, if you will. They talked about issues related to virtual currency. They talked about real estate and investment advisors being the subject of an eventual proposed rulemaking.

And then also something that is also a global problem. She announced updated rather, that last June, FinCEN launched the US South Africa Task Force combating the financing of wildlife trafficking. And she mentioned that's still ongoing and obviously a challenge, but something they wanted to highlight.

Then they talked about how FinCEN is connected with the administration's response to the opioid epidemic. And also because of what's going on in Russia dealing with issues on evasion of sanctions and export controls.

Quite a bit going on. We've always said that FinCEN has a very challenging mandate. They don't have a ton of resources. A lot on their plate for 2024, so it'll be interesting to see how they prioritize the work that has to get done throughout the course of the year.

Elliot Berman: Reading Secretary Yellen's prepared remarks felt like I was reviewing all the things you and I talked about in 2023.

John Byrne: Right, no, that's true. Going broadly, globally the an organization called the Human Security Collective issued a report earlier this week. The title of it is The Future of FATF Recommendation 8. FATF Recommendation 8, I think, as many know, deals with terrorist financing and the adjacent impact it has on humanitarian organizations. Interesting report in that it is a series of interviews are anonymous, they do mention the categories of folks that they spoke to, but the interviews, take a look at the recommendation, whether there should be adjustments, changes, also looking at FATF as an organization.

I think it's pretty interesting, but one of the things that I would highlight, and just as a quick aside we've talked to the authors of the report and we are hopefully going to be able to sit down and do a more detailed podcast with them in the near future. But one of the things that they highlight is, that FATF in Recommendation 8 understands the need to mitigate de risking, financial inclusion misuse of what they're calling misuse of FATF standards and evaluations to justify exiting relationships.

And there's a very interesting chart in the report that talks about the consequences of what they're calling over regulation, something that we've talked about, and, just give you a handful of the points made there, and that's NPOs being shut down, as we know, reputational damage, NPOs having to redirect spending and time to comply with what they consider to be burdensome requirements, and the chilling effect in general on humanitarian aid, making donors reluctant to contribute to an NPO after being de risked.

So a very important report. Again, it doesn't have a conclusion per se, but it raises a ton of questions that I am very interested in talking to the authors about.

Elliot Berman: Yes. And the group Human Security Collective has been in engaged with the FATF process for a number of years. So Recommendation 8 has gone through several major revisions. There was a large one in 2016 that as I understand the report have been the result of the voice of NPOs being at the table in talking about how the standard set by Recommendation 8 becomes part of regulations or regulatory expectation in each individual country.

And as you and I have talked about for many years, when we discussed de risking, it often comes down to the question of, are organizations taking the easy way out and rejecting doing business with entire sectors or types of organizations, rather than really assessing the risk of each individual organization.

I agree with you it's a fascinating report. I'm looking forward to your interview. This is another report that I would certainly recommend all of our listeners take a look through it. It's 50 plus pages, but I think it's worthwhile and it's from a perspective that I don't know has always had an equal voice in the conversation.

John Byrne: That makes sense. Two other reports, both global as well. One by the Eurasia Group and one by the World Economic Forum. Why don't you tell us about the risks identified by the Eurasia Group in their report?

Elliot Berman: First let me tell you about the Eurasia Group. They are a consulting company that, focuses on the impact of politics on risks for businesses and investors. So a little different take. They have done a ten top risks list for a number of years, you and I talked about it last year as well. I'll just hit the, the very top level ones. One concern they have is continuing concern Russia, Ukraine, Israel, Hamas. So that's the Middle East and Eastern European issues. They have a risk called the United States versus itself, which is about the potential test of democracy coming up in the 2024 presidential election. They talk about ungoverned AI, a conversation that has been going on for a while now about is artificial intelligence, evolving faster than our ability to govern it whether that's with regulation or self imposed guardrails by the developers.

They talk about the so called axis of rogues. Deeper alignment and mutual support between Russia, Iran, and North Korea in terms of how that might affect global stability. They talk about the fact that China's economy is struggling and how that could be a problem globally because they are, the first or second largest economy in the world, depending on the moment.

They talk about the fight for critical minerals, which makes sense. I'm sure many of our listeners have heard the conversations about access to certain minerals for the production of electric vehicle batteries and many other manufacturing processes. But of course, those minerals are not. equally distributed geographically across the globe.

They talk about the continued concern about how in the inflation shock that began a number of years ago and continues in some parts of the globe how that will impact economic and political issues in 2024. They talk about the climate pattern El Nino in terms of its impact on logistics, water stress, food insecurity. They talk about decision making autonomy by companies caught in the US culture war, so they call that risky business.

It's a detailed report. Obviously what I just recited was long, but short compared to the total report. I think it's interesting. It's important to remember when you look at this report, that they're looking at political risks here and how they impact business decision making.

John Byrne: Another report dealing with risk and global risk is one just issued by the World Economic Forum. This is their perception survey. So this is a survey of what people think will be the issues based on their experience in the economic, geopolitical, and technological, and other spaces. And so they look at the risks in two years, the risk in ten years.

So in the short term, the risks in two years include misinformation and disinformation. By the way, that's not us making a political statement. That's, in fact, in the report. Extreme weather events, societal polarization, same thing. Cyber insecurity, which, of course, is a major challenge. Armed conflict, lack of economic opportunity, which is a global risk that we certainly have noticed.

And that's connected to the de risking that we mentioned earlier. Inflation, as Elliot has already alluded to. Involuntary migration. Economic downturn, and of course, pollution. I think it's important that you look at all of these various risks. Some are political, some are economic, some are technological, and factor that in.

For us, is it going to impact the AML community? But for your institutions and the firms you advise, what does it mean in terms of resource allocation? Number of reports, beginning of the year, it's always useful to state current. And take a look at the World Economic Forum's Global Risk Perception Survey, 2023 to 2024.

Elliot Berman: John, I know you've got a a great podcast, I'm sorry, webinar coming up in a couple weeks. You want to tell our listeners about that?

John Byrne: Also a great podcast.

Elliot Berman: Yes, that's true. I'm sorry. That's true.

John Byrne: In fact let me say that one first. Tomorrow I'm going to interview Jim Lee, the IRS CI chief, and we'll post that in the coming weeks, and he'll go back over 2023 and what to think about in 2024.

On January the 25th we'll be doing our focus on human trafficking since it is Human Trafficking Awareness Month and we're very fortunate we got three excellent panelists Rafi Aliya Crockett , who's the director of the FIU at Polaris. Chris Bagnall, who's at Quantexa and was the co author of the ACAMS Today article of the year regarding human trafficking and Doug Gilmore. Doug is the Senior Law Enforcement Liaison at DHS's Center for Countering Human Trafficking. So that's coming up on January 25th. We're really looking forward to the conversation with those experts.

Elliot Berman: And you can register for the webinar at our website. I also want to put in a plug. Earlier this week, we posted your look back on 2023, which I urge people to take a look at. And next Monday, we're going to post a podcast, you and I talking about our view of trends, not risks, but trends for 2024.

John Byrne: That sounds good. Elliot stay safe for the rest of the week and good luck with your Packers over the weekend.

Elliot Berman: Thank you very much. Be well. Bye bye.