In this episode, Elliot Berman and John Byrne dive into the latest developments in global financial crime compliance. They unpack the FATF’s new report on terrorist financing, explore upcoming U.S. legislation on cryptocurrency and stablecoins, and discuss AUSTRAC’s expanded AML/CTF regulations in Australia. The conversation also covers the FCA’s updated guidance on politically exposed persons (PEPs) and enforcement actions against digital banks like Monzo, and other issues affecting the financial crime prevention community.
FATF, AUSTRAC, FCA on PEPs, and Stablecoins - Transcript
Elliot Berman: Hi John. How are you today?
John Byrne: I'm good, Elliot. How you been?
Elliot Berman: I've been good too. How was your trip?
John Byrne: Excellent trip. We were able to visit four countries. So that was both interesting and very warm like it is in the States, but that was good. Not complaining about the heat, but definitely a lot of hot days.
We were in Germany, Switzerland, Netherlands, and France. It was worth doing along the Rhine River. So I'm very fortunate. Longest vacation I've ever taken in my life. So it was good. But anyway, thanks for asking.
The last time you and I talked, was after the June plenary of FATF. And as we mentioned then, besides the outputs from the meeting, there was a number of reports that they said were in the pipeline. And I know you with Jennie talked about one of the reports a few weeks ago on Proliferation Finance., Another report was issued very important report on what they consider to be evolving and continued serious threats in terrorist financing. A lengthy report with a series of recommendations and practical risk indicators.
So I thought there was a number of things worth mentioning. The report is 130 plus pages, and so it does say there's a lot of gaps in many jurisdictions. Some of the key recommendations relevant to things we've talked about are, strengthening how you implement FATF of standards. It's always important, but particularly in high risk areas of with virtual asset providers and of course dealing with the issue of shell companies, which again, in this country is gonna be a challenge going forward.
Expanding outreach to uncovered sectors. And that's also important given what's happening here in terms of coverage under the Bank Secrecy Act. But they talk about issues outside of banking, like social media and messaging platforms. Of course, embrace the age old important goal of private public partnerships.
But I just also wanted to mention that one of the issues that you know, that I'm passionate about and you've talked a lot about, and that is de-risking and access to humanitarian groups. One of the other recommendations is the following safeguarding humanitarian activity. And so they say, that terrorist financing measures must consider their potential impact on humanitarian operations. Quoting here, ensuring that measures do not impede activities conducted in accordance with international humanitarian laws by impartial humanitarian actors.
Again, a lot of other things in there and I want to get your take on some of the things that you focused on, but virtual asset service providers, shell companies, and making sure it doesn't unfairly impact humanitarian groups or just some of the things that jumped out at me.
Elliot Berman: It is a great report. Long but worthwhile. And we'll put the link to the report in the description that appears on our website. One of the things that caught my eye is that as much as things continue to change they still remain the same. And that's that the report identifies that terrorists continue to make use of formal financial services, including deposit accounts, wire transfers, and prepaid cards. And while we, the community spends a lot of time talking about new payment platforms and other tools that are being introduced into the marketplace and are also being used by terrorists and fraudsters and for other illegal activity. Traditional financial services are still a platform that needs to be tightened down. Needs to have good detection and good efforts because it's not that everything has gone into these undetectable tools.
It's just one of many recommendations and observations, but it caught my eye. The old stuff is still around. So I think it's important that while we look at the new, we also don't take our eye off the old.
John Byrne: Agreed. A lot going on. The FATF oversight of jurisdictions from a recommendation standpoint, bears watching. It's gonna definitely be an interesting next 12 to 18 months regarding the work that FATF is doing. So I think that's important.
Jumping to another, major issue, and that's cryptocurrency. Going back to the States for a few minutes. In the House of Representatives in the US next week, according to the Committee on Financial Services, is going to be quote, Crypto Week unquote. And the reason they're naming it, that is gonna be three pieces of legislation that's gonna be considered by the committee, not the full house. As everybody knows that, that's the way that works, gets through committee and then it goes on the calendar for the full house.
The house in the US is in session for the next couple of weeks. Just getting back from the July 4th holiday, but three bills. One is called the Clarity Act. There's an Anti-CBDC Surveillance State Act. And then the Senate's GENIUS Bill that I know we've talked about before. One of them would block the creation of a central bank digital currency. That's the Anti-CBDC Surveillance State Act.
There's also, as I mentioned, the Clarity Act that is supposed to give some guardrails around cryptocurrency, a framework for according to the authors of this. Next week, , there'll be a lot of coverage of this legislation. There's been a lot of activity in the crypto space. So I did wanna highlight that. I know you've seen some things in the crypto space worth mentioning as well.
Elliot Berman: Yes. Let's tie what I'm gonna talk about back to the GENIUS Act, which is the Senate's version of a stablecoin regime. And just for a reminder to our listeners, stablecoins are a type of cryptocurrency that are designed to maintain a stable value. So typically they're pegged to either another fiat currency, often the US dollar. Or to a commodity, sometimes to gold. Or sometimes to other cryptocurrencies, although I'm not sure that really works since those other cryptocurrencies aren't tied to anything.
And Tether which is a crypto platform, has issued a stablecoin, and The Economist in the UK, has done a deep dive review of what Tether's doing. And they come to the conclusion, that Tether has become, and I'm quoting here, the money launderers dream currency. They talk about that it is fueling a global shadow economy. That it allows users to store their money somewhere safe and move it between countries seamlessly. Which we understand is often one of the attributes that's praised about cryptocurrencies in general. In this respect, it functions less like a currency and more like a totally unaccountable underground bank.
And the other thing that's interesting here, and I don't want to get deeply into European politics 'cause I don't feel I really understand 'em very well, but there is a lot of discussion going on in the EU between the European Parliament and the European Council on what the EU stance on stablecoins will be. And, apparently there's a fairly significant rift.
I think the why this is important because stablecoin and crypto and virtual asset and virtual asset service providers, all this stuff is on the forefront because the US is now taking action at the congressional level to define it or maybe just announce that it's officially the Wild West. We'll have to see what comes out of crypto week in the House. For the community, it's something we have to continue to be knowledgeable about and follow what's going on. Look to trusted sources to learn about it. Not just the basics, but learn about what's going on. If you haven't already, start to get knowledgeable about blockchain analytics because that'll be important. And we'll see.
John Byrne: Going down to the proverbial land down under in Australia, AUSTRAC, the Financial Crimes Network there announced late last week that the reforms under their AML/CTF Act will be put in place next March for businesses that are currently regulated of March of 2026 and July 1st, 2026 for those businesses in the legal, accounting profession, real estate, and the jeweler industries that are now coming under regulation. So that's interesting. And in that same announcement they listed some of their quote expectations in just a quick review here.
If you're currently regulated AUSTRAC expects continued implementation of your controls, which makes sense. Show sustained effort and progress against your implementation plans and acting now to review and strengthen your existing frameworks. They also wanna make sure that your quote systems and controls are effective.
That word has been used in the US as well as from FATF. And then they say for those businesses that will come under regulation next July you need to be enrolled as a reporting entity. Have an AML program because you have to have adopted the starter program that's provided by AUSTRAC or develop your own. Have an AML/CTF compliance officer. So there's some job possibilities folks. Train your staff on your AML/CTF program and processes and then of course, be ready to ask clients and report suspicious activity. Wanted to highlight the fact that AUSTRAC has published that, it's available on their website.
Elliot Berman: And AUSTRAC also took action to announce that it was requiring Western Union Australia to have an auditor. This is very similar to what we see in the US where organizations who have had issues may have to have a monitor. There were a number of self-reported problems at the money service business. Including consistent problems with reporting or not reporting suspicious activity and also poor customer due diligence.
And what will happen with this is once the auditor issues their report, then AUSTRAC will decide whether there's further action that's necessary. But here's a big MSB. Operates in 130 countries. And, still struggling to get it right even under the old regime. The new regime isn't radically different, but just interesting to see again, what's old is new.
John Byrne: I don't know if in your last week's conversation you covered this. Did you guys mention the update at the FCA on their PEP guidance?
Elliot Berman: No. I don't think it was out when we recorded. So let's talk about that.
John Byrne: Alright. So again, that's PEPs. We're talking about politically exposed persons. This is the guidance is FG 25 /3, the Treatment of PEPs for Anti-money Laundering Purposes. There's a summary. The document. Is available on their website's, a 20 page document some of the highlights in there include clarifying that what they call non-executive board members of civil service departments in UK roles, should not be treated as PEPs. Changes to senior management approval for signing off business relations with PEPs family members or known close associates that's in there.
What are some of the other things that you saw there?
Elliot Berman: It's important to really focus on the distinction is PEPs within the UK and then PEPs outside the UK. The other thing that I thought was interesting is they talked about that the definition of PEPs does not apply to local government or more junior members of the senior civil service that would be at the federal level there, or anyone other than the most senior military officials.
I think the guidance among many things helps carve out some of that "how far do I go" question that is always on people's minds when they're trying to figure out how their PEP program ought work.
John Byrne: So take a look at that when you have the opportunity, but definitely wanted to wanted to highlight that. And I think that's it on my end, but other things that you want to reference.
Elliot Berman: Just one. As we've talked off and on, there have been a number of pretty large what are known in the UK as Challenger banks. They're fully online banks. One of them is Monzo, another one that's well known as Starling. The FCA has fined Monzo 21 million pounds, which is about 28.5 million US dollars for repeatedly opening accounts for high risk customers without proper KYC. And it reprimanded them for failing to keep pace with its FCC requirements in line with its customer and product growth.
FCA had been in several years ago and identified some issues. They entered into what we, in the US would probably call a public agreement. And part of the concern was that as the bank grew, would they be able to scale their systems. And they've failed to do that. And they've grown very rapidly according to the announcement. They had about 600,000 accounts in 2018, and by 2022, they had just under 6 million. So about a 10 x growth. And they have not grown their systems significantly at all, and certainly not proportionately to that growth.
Why is this important? Because even though they may not have any brick and mortar, it doesn't mean they don't have any obligation. And we've talked a lot about banking as a service in the US where organizations who wanna do similar things to what Monzo does or Starling, that has also had some problems in their compliance.
This just underscores the fact that it's not a US only problem, but it is an important one for us to keep our eyes on, particularly if your institution is providing banking as a service or is being contacted by someone who wants to, partner with you for that. It's important to figure out how you're gonna make all this work.
John Byrne: Before we end, I should mention that, while I was away Congress passed a massive new budget bill, and you can read all about it and all the papers, the trades and others, but I did wanna highlight that under that legislation, which was signed into law, DHS is about to receive an influx of funding that's gonna make it larger than the FBI and larger than the state of Israel's IDF. $165 billion is going additional $165 billion to DHS over the next decade. And much of that funding is going toward border security and immigration enforcement. So wanted to mention that was a major part of that legislation signed into law last week.
Elliot Berman: Okay. What else you got? Anything?
John Byrne: No, I know that there is a webinar this month on AI. You wanna tell us about that?
Elliot Berman: Yes. It's called How AI Can Impact Your Financial Crime Compliance Program. We've got three great experts. It's gonna be a great discussion. It's July 24th 1:00 PM Eastern Time. You can register as always at our website and if you can't see it in person a recorded version will be on our website about a week later.
John Byrne: And folks are probably aware by now that in terms of AI that someone did use AI to impersonate Secretary of State, Marco Rubio to contact at least five people, including foreign ministers, cabinet officials, as well as governors. That's obviously not related to anti-money laundering, but the FBI has announced that has occurred and obviously a national security issue.
Elliot, just as we get ready to close this out, I wanna just mention haven't read it yet, but the Basel Institute on Governance have just issued their 2024 annual report, so we'll talk about that next week.
Elliot Berman: Yep. We'll start off with that next week. John. Good to have you back. Glad you had a great time, and I'll talk to you next week.
John Byrne: Take care.
Elliot Berman: You too. Bye-bye.