Cultural Racketeering, Crypto Kiosks, and the De-Banking Debate

In this week's TWIA episode, John Byrne and Joe McNamara cover critical developments in financial crimes prevention across multiple jurisdictions.

Cultural Racketeering Crisis Insights from a recent Atlantic Council program reveal Russia's systematic assault on Ukraine's cultural heritage: 200 million books destroyed, 35,000 artifacts stolen, and 2 million artifacts lost. Russian museum officials are personally complicit, prompting President Zelenskyy to issue sanctions against museum directors. Experts highlight AI's growing role in tracking stolen cultural property.

Regulatory Updates FinCEN delays the investment advisor AML rule until 2028, citing deregulatory priorities despite acknowledging ongoing illicit finance risks. The President's working group releases digital asset market recommendations, while FinCEN warns about crypto kiosks being used for scams targeting older adults.

International Developments The IMF's Canada financial stability assessment raises concerns about banking oversight gaps. New UK guidance addresses Russian sanctions evasion, while a British solicitor faces fines for AML failures in an Azerbaijan-linked property deal, highlighting ongoing gatekeeper compliance debates.

The De-Banking Controversy Analysis of the proposed executive order targeting banks for alleged political discrimination. John Byrne challenges "Operation Choke Point 2.0" claims, emphasizing that banks make legitimate risk-based decisions considering credit worthiness and regulatory requirements. Discussion includes potential implications for suspicious activity reporting.

Additional Coverage John Oliver's examination of deferred prosecution agreements in corporate crime cases provides context on this controversial prosecutorial tool's AML applications.

Cultural Racketeering, Crypto Kiosks, and the De-Banking Debate - Transcript

Joe McNamara: Hey, John, how are you doing this week?

John Byrne: Hi, Joe. Good, thanks. Like last week, quite a bit going on. I wanted to mention something that I was able to watch yesterday. This was a combination program from the Atlantic Council and our friends at the Antiquities Coalition. It was an hour-long discussion on examining Russia's assault on Ukraine's cultural heritage.

I mention this because we were going to have a podcast with the folks from Antiquities Coalition, but we put it off because this event was coming up. We've talked about cultural racketeering before, and it has a major impact on societies and understanding history. This particular one was fascinating. They had the ambassador of Ukraine to the United States as one of the speakers.

They had Doctor Louise Shelley from George Mason, who I know very well because she runs the track program where I teach, and she talked about issues of relevance there. Just a couple things that jumped out at me that I think are relevant to those in our industry looking for ways to be proactive to find red flags and other financial footprints that could be indicative of cultural racketeering.

They said given the attacks by Russia in Ukraine, 200 million Ukrainian books have been destroyed, which is an insane number. 35,000 artifacts have been stolen and over the course of time, 2 million artifacts have been lost. A couple of the things that are relevant in terms of trying to figure this area out: they said museum officials in Russia are personally responsible for cultural racketeering. I thought that was interesting. President Zelenskyy issued personal sanctions against a number of museum directors there just last week.

Doctor Shelley called this a dual use crime. It undermines the communities besides being thefts of value. She also echoed the complicity of museum directors. I'm sure that recording will be on both the Atlantic Council's website and the Antiquities Coalition website. The last thing I'll mention because it's relevant to what we always talk about: they said the use of AI to find objects as being a good investigative tool. There's a lot going on in that space.

Let me jump into a couple of the other items that happened late last week. We have talked about the pausing of the investment advisors rule several weeks ago. The exemptive relief order to delay the effective date of that rule has been issued by FinCEN through the Treasury Department. This just came out yesterday.

According to the note, the rule was set to become effective January 26th. FinCEN is going to instead issue a proposed rulemaking to propose a new effective date no earlier than January 1st of 2028, which gives the investment advisors freedom from rules that others have had to abide by. Here's a couple of lines I want to read from the order:

"Consistent with the administration's deregulatory policies focused on reducing any unnecessary or duplicative regulatory burden on Americans, the Secretary, through FinCEN, has determined that this rule should be reviewed to ensure it strikes an appropriate balance," and that's going to exempt investment advisors from the obligations. What's interesting is the next line: "While the illicit finance risks associated with investment advisors remain, the review will allow FinCEN to ensure that the rule is consistent with the administration's deregulatory agenda."

They are making it clear that it's still a problem, but we'll wait until 2028 to address that.

Joe McNamara: There's nothing like getting a chance to read people talking out of both sides of their mouth. I think that's the easiest way to define that.

John Byrne: That's true. There's been some activity in the crypto digital asset space. What are some of the things that you've seen?

Joe McNamara: On that front, we saw an update on the 30th of last month. The President's working group on digital asset markets released recommendations. A couple things jumped out to me. Number one, it covers quite a bit of ground across different actors in this space - things like granting the CFTC authority over non-security digital asset spot markets, modernizing banking regulations or at least talking about it.

The interesting thing is as I was reading this, there's a lot of ambiguity. Given where we are in this process, I'm not shocked by that, but it was something worth calling out. For folks that are tremendously entrenched in the DeFi space or the crypto space, this is cause for excitement. At least we're talking about it. We're seeing some movement here.

I think the underlying expectation for anybody in the regulatory space is we need more thorough direction from a regulatory perspective, ensuring that as we're encouraging innovation and looking at things that come out of what we've talked about in previous weeks - the Genius Act and other things - we still want to create a safe and secure financial space to allow for these types of actions.

It's kind of a mixed bag for me. On one side, it's exciting because we're continuing to see movement in this space. On the other, I think it left me wanting in terms of what we're going to see from a directional perspective.

John Byrne: Staying with the issues related to crypto, FinCEN earlier this week issued a notice on the use of convertible virtual currency kiosks for scam payments and other illicit activity. The full notice is available on the FinCEN website. It's an overview of typologies that are associated with these kiosks, particularly the rise in scam payments as facilitated including tech and customer support scams, bank impostor scams, and some of these impact disproportionately older adults. FinCEN always does a really good job on their notices and providing information to banks and others.

Also, the Hong Kong Monetary Authority released final guidelines on implementation of their reg regime for stable coin issuers. Among other things, ongoing monitoring is mandated for customers using transaction monitoring and blockchain analytic tools among other things. There's a lot in there for those of you that do business or need to know what's going on in Hong Kong. That just came out this month. It's a 48-page document and it's a guideline for licensed stable coin issuers.

Joe McNamara: To kind of round it out, we're also seeing some developments to the north, our neighbors up north. I know you'd mentioned Nick Burbridge actually posted about this earlier this week. The IMF on Canada released the financial system stability assessment. What did you see in that that was worth calling out?

John Byrne: This came out from the IMF, the International Monetary Fund, late last week. This is a staff report on the financial stability of Canada. It's a lengthy document, but it talks about AML issues and regular oversight regulation.

From our board member and friend Nick Burbridge, he said they note that the concern is the exit from the regime by OSFI - that was the banking oversight agency - in 2021 and the need for better supervision. It's clear that was a strategic error. This is Nick's point of view. Remember, he was an OSFI official.

The report also notes the relatively unchanged high market share of financial services by six large banks designated as strategically important by the IMF. Take a look at the report and come up with your own conclusions. This is the IMF review of Canada's financial system.

Joe McNamara: The one callout I'd have there echoes your statement. It comes directly from the first pages: "While financial sector oversight and crisis management frameworks are robust, they could be further strengthened to proactively address emerging challenges," which solidifies what you've mentioned.

You also sent me a very interesting video, which we're not going to play here, but it was fascinating coverage by John Oliver on his HBO show.

John Byrne: Yes.

Joe McNamara: What's fascinating was he was essentially covering deferred prosecution agreements or non-prosecution agreements. There were some callouts in terms of folks, operators within our space. What was your take on it? Please refrain from any explicit language.

John Byrne: I can't do John Oliver. Last week's John Oliver program - you can watch it on YouTube or one of the streaming services - talked about both DPAs and corporate crime in general, corporate white-collar crime and corporate crime, and also corruption issues. DPAs have been a controversial prosecutorial tool for quite a while. In our space, in the AML space, you've seen that used quite a bit in the past 20 years. I had a presenter in my class that I teach at George Mason talk specifically about DPAs.

That's part of what Oliver was focused on. Basically, there's fines and penalties, but what happens is - as the acronym states - you're waiting to prosecute or holding prosecution to the side as long as the institution fulfills the improvements and changes that were required in the case. That's what DPAs are designed to do, but others feel that it's sort of a softer touch because sometimes the dollar amounts are certainly staggering to the average person, but they're not given the scope of some of these institutions. I'm not saying that's right or wrong.

It's hard to bring white-collar cases. I think another reason why prosecutors go to DPAs - not that it's easier, but certainly there's not as many evidence issues as there would be in a criminal case. That's pretty clear. It is worth watching, with some of it done with tongue-in-cheek, but there's a lot of good solid facts there, and frankly the cases that they mentioned we are well aware of.

Joe McNamara: Moving along from an enforcement perspective and moving into the UK, I know you had sent something over to me regarding a UK lawyer that was fined over due diligence failures. This was specifically in terms of a property deal that was linked to family members of an Azerbaijani official. I read that and it was kind of a reminder: hey, do your due diligence, know who your clients are. I have to assume that this was not overly nefarious, but even if it was, which very well could be, I think it's a good reminder to that group. From your perspective, what else came out of that press?

John Byrne: The whole debate on gatekeepers. One of the issues with oversight in the AML space is should gatekeepers - accountants, investment advisors, CPAs of any kind, lawyers - should they have an obligation above and beyond to their clients regarding AML? In Britain they do.

This was identified by the Organized Crime and Corruption Project, a group that if you're not already following them on LinkedIn and getting their newsletter, which is free, you should. The solicitor was sanctioned for breaching AML rules related to the funds from the children of that former security minister. The tribunal fined that lawyer for misconduct. In addition to the fine, this individual was barred from holding any legal management or compliance roles for five years and ordered to pay about $64,000 - 50,000 pounds - in legal costs.

It's interesting in that we do not have gatekeeper requirements in the US. That certainly was going to be proposed by the previous administration. That's no longer going to happen. FinCEN has been pretty strong on this issue, wanting gatekeepers to be included. I'm a lawyer myself. The American Bar Association has been adamant that should not be the case. This will continue to be an interesting debate going forward.

Since we're talking about the UK, I did want to mention something that also was just issued. This came from the Office of Trade Sanctions Implementation, which is a sub of the Department of Business and Trade. This is guidance from two days ago when we're recording: "Countering Russian Sanctions Evasion." This is guidance for businesses in that space.

This is specific to trade sanctions targeting Russia. As the document says, the advice can be translated to other countries where the UK government has imposed trade sanctions, which would include Belarus, Iran, North Korea and others. The guidance document on sanctions evasion gives you information on the range of goods at heightened risk of being diverted to Russia, red flag indicators of potential sanctions evasion via circumvention, suggestions for compliance best practices and enhanced due diligence, and additional resources to aid businesses in managing their risk and meeting their compliance obligations. This document was issued August 4th from the UK.

Joe McNamara: That will be an ongoing fight from a sanctions perspective, let alone the world conflict that's happening over there. The one added piece that I thought was interesting is they position this as a means to help protect technology from misappropriation and to prevent the financial loss and reputational harm which could arise as a result of engaging in sanction trade. When you think about it, nobody really wants to end up on the bad side of a sanctions list.

Worth reading, especially for our listeners across the pond, but certainly fascinating and interesting takeaways that could probably be applied here at home as well.

To kind of round things out, there was also an interesting article that came out of the Wall Street Journal earlier this week. The White House was prepping to punish banks that discriminate against conservatives. That was the headline. It goes into more detail around the expected executive order. From your perspective, John, what were a few things that jumped out to you on that front?

John Byrne: We've heard this. They've put it under the rubric of de-banking. We know it is de-risking when banks make decisions based on risk tolerance, risk appetite and risk mitigation. The argument is that crypto dealers and gun dealers and just conservatism and religious organizations have been discriminated against by banks who didn't want those accounts.

I'm very skeptical of the premise. I don't mind saying I think calling this Operation Choke Point 2.0 is insane. That's not what happened here. We know a lot of these banks. We work with a lot of these banks, whether they're clients or not, and they make risk-based decisions all the time.

This executive order has become personal for Trump because he said that he's been discriminated against by JPMorgan and other banks when he was in the private sector. I would suggest that part of the decision-making process - they look at risks, they look at bankruptcies, they look at loan defaults and other issues. That gets factored in by these institutions.

The Wall Street Journal article said they're going to have this executive order that would fine banks for dropping customers for political reasons. It'd be interesting to see what the wording is there, to say the least. It directs regulators to investigate potential violations of credit, antitrust and consumer protection laws by financial institutions. I thought they already did that, but we'll see.

Banks have been updating policies and meeting with officials and say that their decisions are based on legal, regulatory and financial risk, which I totally agree with. We'll have to wait to see the executive order. Remember, executive orders don't always have the authority that people think they do. The bottom line is certainly with a decision by the agencies to get rid of reputation as a factor in exam oversight, they're already going down that road.

There are several states which have already passed laws that if an individual or company feels they've been discriminated against for political reasons, they can bring an action in those states. I know Florida is one of them. No actions have been brought yet, because I've asked our clients and friends that have institutions there, but that's what they're going to try to do at the federal level.

At the end of the day, there are issues, there are priorities that are set by law enforcement, things that institutions should look for, and financial institutions have to make those decisions based on that, but also credit worthiness and other factors that go into that. This is going to bear watching. This could really change the landscape of how institutions handle accounts, how they close accounts.

The whole issue of are you going to have to disclose that you file the suspicious activity report? It's a felony to do that now, so I don't know what's going to happen with that.

Joe McNamara: We saw some other news that was almost directly linked to insider information that got out at a different bank. John, this also reminds me of what we covered, I think it was two weeks ago in Wolfsberg, our Wolfsberg group reiterating the risk-based approach. At the end of the day, I fully agree with your position on this. I find it interesting and kind of head scratching how the requirements, the criteria are going to be met in terms of a politically motivated de-risking or de-banking action that does not somehow incorporate a subjective set of criteria.

I'm with you. It'll be interesting to see how this progresses, but at the end of the day, my hope is that logic prevails and we look objectively through the lens of a risk-based approach across the financial landscape.

John Byrne: Joe, it's been fun doing these couple with you. I really appreciate your partnering with me on these. You were more than just a stand-in.

Joe McNamara: I sincerely appreciate the opportunity. Good opportunity also to remind folks - Elliot will be back next week, so we'll get the dynamic duo back together.

Couple other things for those of you that have not signed up yet, John, you're gearing up to lead a tremendous conversation at the end of this month for our monthly series of webinars. This one is fraud: coping with the growing threat of fraudulent activity. I know that in last week's episode we talked about the panel. For anybody that tunes in weekly, we hope that we can see you on August 28th that begins at 1:00 PM Eastern.

The last housekeeping item I will say is for our friends across the pond. AML Right Source has taken a significant interest and certainly will be fairly active in participating at the upcoming MLO event that's happening in London on September 11th. We're actually leading two separate thought leadership sessions. For more information on that, please keep an eye out on social. You'll start to see not only folks that we're sending, but other information.

John Byrne: I just want to mention one of the things - since you talked about that - on August 21st, I'll be moderating a panel at the SAS Counterterrorism Conference in Cary, NC. It's going to be a 20-year look back. It's been 20 years since SAS started this amazing program. My panelists will be Megan Hodge, Rick Small, Dan Soto and Jim Candelo. There'll be a lot of good debate going on that day regarding the past 20 years of AML/CFT. Looking forward to that.

Joe McNamara: Fantastic. All right, John. This will probably be my final sign off for a bit here, but hope you have a great rest of your week and we'll catch you guys next week.

John Byrne: Take care, man.

Joe McNamara: Bye, bye.