In this episode, Elliot Berman and John Byrne discuss the U.S. legislative gridlock around crypto regulation during “Crypto Week” and the Senate’s bipartisan recognition of the need for a crypto market structure. The conversation also highlights the Basel Institute’s 2024 report, a GAO study on organized fraud in federal programs, and troubling staffing cuts at the State Department’s anti-trafficking and counterterrorism offices. They also examine enforcement actions against Wise and other issues affecting the financial crime prevention community.
Basel, Crypto, GAO, and the State Department - Transcript
Elliot Berman: Hi John. How are you today?
John Byrne: I'm good. Elliot. Middle of July in the US. Congress is still in session, so a lot going on. We record in the middle of the week, so I just wanted to make a couple quick comments before we talk specifically. This was designed to be Crypto Week on the House side. We'll talk what's going on there. There's also a hearing today a friend of our podcasts Ari Redbord is testifying and the hearing is on artificial intelligence and criminal exploitation in the Judiciary Committee.
But it is a self anointed Crypto Week, if you will. And there are several pieces of legislation we've talked about the legislation in the past. But as of this morning there's been some difficulty in getting a floor vote on three separate bills. I don't wanna get too much in the weeds in terms of process, but in my George Mason class that I teach, we had a staffer from House Financial Services talk to us about that process.
And it looks as if there may be some difficulty in passing all three because they wanna put everything in one bill. And that will make some members not support the whole package. Bottom line is we will see what happens. But there's things on stablecoin, there's things on limited guardrails and some other provisions. I will say that what's happening right now is the Minority has held several press conferences this week opposing all of these crypto related bills and there's a lot of information on the websites.
Just referencing one here, this is from the Ranking Minority Member Maxine Waters. She wrote an op-ed this week basically attacking what she's calling the Republican led crypto bills. And she just said the following. The reality is that they would be, quote, passing bills written by and for the crypto industry, if either bill passes through Congress one day, we will look back on enactment as a pivotal moment in time much like we point to Graham Leach Bliley of 1999. I will leave that there. But this is something we will continue to watch.
Elliot Berman: Related to that there was a hearing in the Senate about crypto market structure and which isn't fully embraced in any of the pieces of legislation that have been passed so far or are on the table. And it was interesting because the reports that came out of that hearing were that there was actually some agreement on both sides of the aisle that there's need for regulation. There's clearly, differences in the potential focus and the framing of what a structure bill would look like.
One thing that was interesting is there was recognition that America is behind. Meaning behind other parts of the world in establishing a crypto regulatory framework. And you and I have talked regularly about what's happening in the EU and the UK who are several years ahead of us in terms of when they got a regulatory structure passed, and they're already into implementation and we're still trying to figure it out.
And there was also some recognition that existing laws tailored to traditional finance don't quite fit crypto. I think that's true, but I think, the current laws are adaptable. There's a lot of debate that continues about whether crypto is a security or a commodity. I think that's the wrong question. Why they're asking the question that way is whether it's the SEC or the CFTC that would be the primary federal regulator. But neither commodities nor securities are necessarily on an ongoing basis used in a way that people envision crypto evolving to.
There are certainly virtual assets. NFTs and lots of other things, but if you wanna use it as a transactional tool like a currency neither one of those regulatory organizations in the US regulates currency. And I know this will drive everybody crazy, but let's remember, monetary policy is the Federal Reserve who has basically been cut out of the conversation. It'll be interested to see, if a market structure bill comes out . But, it was interesting to see that there was probably as much agreement as there was disagreement.
John Byrne: You had mentioned before we jumped on something that you saw that AMLA did in the crypto space. Do you wanna mention that?
Elliot Berman: Yes, thanks. So two things actually. So this is AMLA, the centralized European Union organization on money laundering and financial crime. So one thing is the AMLA chair was giving a speech and she said it was important for crypto companies to have someone on their board who understands AML/CFT. I think that's a really interesting idea. Certainly not anything that you've seen contemplated before here in the US or in Europe.
The other thing is in that same speech she spoke about the major risks posed by crypto and indicated that it's a strategic priority by AMLA to get crypto assets service providers so that's CASPs and their supervision in line. And it shows up in their work program for 2025. So again, what we're seeing in Europe in terms of how crypto is being looked at and what we're seeing in the efforts here in the US are quite different.
John Byrne: Sticking internationally. We mentioned this filed or posted their 2024 Annual Report. And in that, among other things, they said that they've helped to confiscate or return over CHF 50 million in stolen assets plus several landmark crime cases across four continents. They've developed what they're calling innovative anti-corruption research and tools like social norms and behavior change approaches for development agencies. A political economy assessment framework for asset recovery assistance. They've helped state owned enterprises in high risk countries and industries enhance their compliance frameworks.
And they've also expanded what they call the use of collective action to strengthen business integrity, such as 14 civil society organizations working with them. A bunch of other things too. Wanted just to mention that's on the Basel website. So when you get a chance take a look at that.
Elliot Berman: And one more crypto item. The US banking agencies issued a joint statement on risk management consideration for crypto asset safekeeping. Banks are getting into the businesses safe, keeping crypto assets. Many banks in the US are already in the business of safe keeping other kinds of assets. Securities and things like that. And it highlights potential risk management issues for, holding crypto assets on their customer's behalf.
Most of the things you would see in this are normal risk management things. One thing to remember is because of the nature of how these are held you are likely to use sub custodians who already have the technology platforms or are technology platforms to hold these types of assets. And the whole third party risk management component of the program is highlighted in this release as well.
John Byrne: I'm staying with risk issues. The Government Accountability Office late last week issued a report Fraud Risk in Federal Programs. The subtitle is Continuing Threat from Organized Groups since COVID-19. What they found among other things is organized groups of individuals that work together have defrauded many public programs as evidenced during the pandemic.
And although the full extent is not known, estimates put losses at about $300 billion. So organized fraud groups that target government programs they fall into, according to GAO, three categories. Organized criminal enterprises, groups that organize around a program, so that would be groups of program participants or facilitators who defraud the program they're connected to, and what they're calling opportunistically organized groups. Which are clusters of individuals that collaborate to exploit program vulnerability. This report issued on July 10th is available on the GAO website.
Elliot Berman: The State Department is going through a significant reduction in force, and one of the areas impacted is the State Department's Office to Monitor and Combat Trafficking in P ersons known by its acronym OTIP. It's a small group to begin with, but at the end of last week, they reduced the number of professionals in that office to four. That office is responsible for monitoring, trafficking and human rights in 150 countries. And writing the National Human Trafficking Report, which comes out of the State Department, it's called the Trafficking in Persons Report. Which has been a very valuable and comprehensive report . I think it's an indication and I'll editorialize here, it's an indication of cutting to save without thinking about impact.
John Byrne: Yeah I go further than that. This is outrageous. What's happened. It went from 22 to four. This report is vital in the anti-trafficking space, which this administration claims is still a priority. You can't have priorities when you make changes like this. So this really gets at me and many others in the financial sector that have worked really hard in anti-trafficking over the years.
And Elliot, I want to add one more thing. In addition to doing that, they abolished last Friday, the Counter-Terrorism Bureau's Office of Strategy Plans and Initiatives. And that's the group that was tasked with strategic global counter-terrorism planning. So counter-terrorism is also priority at least on paper. This group which had a number of major interagency initiatives is gone. So between that and the anti-trafficking, what's happened here is not defensible under any situation. So again, going a little further I agree with you plus, and I think this is again, something that just flies in the face of everything that the AML community has worked so hard to make sure we pay as much attention to it as possible.
One other thing I know you wanted to highlight was the case against Wise in New York. So I wanna make sure we mentioned that. So why don't you go ahead.
Elliot Berman: Yes. Wise is British FinTech. They have a US unit and they had been identified as having problems and had an by the CFPB at the federal level. This was last fall. And in January prior to the change of administration CFPB ordered Wise to pay nearly $2.5 million after it found illegal remittance practices. So this is a payment platform. The company allegedly advertised inaccurate fees and failed to properly disclose exchange rates. But in May CFPB trimmed the penalty to $45,000. Although it did say that Wise has to still set aside a large amount of segregated account for redress to affected folks.
Six states have penalized wise and reached a $4.2 million settlement to boost its AML oversight. And those six states are Massachusetts, California, Minnesota, Nebraska, New York, and Texas. In addition to the penalty, they also reached an agreement that Wise would bolster its investments in anti-money laundering and terrorism financing programs, and file quarterly reports to the states for two years.
We've talked a couple times how federal enforcement and oversight, in a lot of areas, including things that touch AML, are being reduced. And this is another example of state action stepping in. It's better than nothing, but it's not as good in my opinion of a national level consistent enforcement effort. But I was pleased to see that something's happened.
John Byrne: A lot going on. The crypto legislation we will pay attention to and report on whatever occurs this week. I think this is one more week that Congress is in session until they go out for summer recess. I'm pretty sure that's true. So there certainly could be more activity in the US next week.
Elliot Berman: Yes. We have a webinar next week, and that's on how artificial intelligence can impact your financial crime compliance program. And there's still time to register at our website. It's gonna be a great session. And I recommend it. And then, john, I know you've got a few things that you're working on that people will start to see on the website over the next few weeks.
John Byrne: Yeah. I'm working on a couple of interesting interviews. One is gonna be with a recently retired, agency official that spent a good portion of that person's career in the AML space. So really looking forward to setting that up and going into a deep dive of career focus issues, things this person's seeing, challenges always liked that opportunity. So that's coming up in the next couple weeks as well.
Elliot Berman: John, I'm heading off on a vacation for a few weeks, so I know you and Joe McNamara will be doing at least one or two of the sessions while I'm gone. And you may also have a different guest along the way. I will be looking forward to talking with you when I get back.
John Byrne: And we can promise you, we won't do any updates on the Epstein file, so you don't have to worry about that.
Elliot Berman: Okay. I'm trying to decide if I'm disappointed, but no, I think that's a good strategy.
John Byrne: Safe travels. Take care. We'll see you in a couple weeks.
Elliot Berman: Thanks, you too. Bye.