This Week in AML

FATF June Plenary, Wolfsberg Group, FinCEN Proposed Rule, and More

This week, John and Elliot discuss several developments impacting the financial crime community. These include the results of the recent FATF Plenary, a new statement from the Wolfsberg Group on effective monitoring for suspicious activity, the proposed rule from FinCEN to strengthen and modernize AML/CFT programs, and other items.


FATF June Plenary, Wolfsberg Group, FinCEN Proposed Rule, and More  - TRANSCRIPT

Elliot Berman: Hi, John. How are you this morning?

John Byrne: Good, Elliot. Good morning. Doing fine. Obviously, we're getting ready in the States for 4th of July week. So we're recording prior to the 4th and a lot of things in the past 5 to 10 days. Some we've hit on a little bit last week, but a lot has happened in the past week we want to just highlight.

One is as we mentioned last week, the FATF June plenary just ended and that was the end of the second year term of President Kumar from Singapore. The incoming president has her priorities, we'll mention those in a second, but just a couple of items from the plenary, some of the outcomes.

Monaco and Venezuela were added to the list of jurisdictions that are subject to increased monitoring. Jamaica and Turkey are off that list. And then something that will definitely be interesting and relevant, because I'm going to mention something in a second, there will be a report this month, in July, from FATF, because they announced that they completed their review of measures to prevent gatekeepers, accountants, lawyers, real estate agents, trusting company service providers from being used to facilitate money laundering and terrorist financing.

I have it on a really good source while we don't expect the US Congress to really accomplish anything through 2024, that gatekeepers as a legislative direction is coming back. We will definitely see proposals, at least, to include gatekeepers in the United States under the BSA. Not necessarily in reaction to what FATF is doing, but I'm sure that'll be discussed when those pieces of legislation get introduced.

Wanted to mention that, and then, they also announced that India, from the mutual evaluation, reached a high level of technical compliance, and then a joint assessment between FATF and MENAFATF assessed Kuwait and concluded that country has adequate legal and a supervisory framework, but serious shortcomings remain in delivering what they call effective outcomes. And the new president is from Mexico, Elisa de Anda Madrazo, and she became president this week, and her term goes until June 30th of 2026.

She has five priorities. I just want to highlight two of them. One is something again that we've talked about quite a bit, advancing a financial inclusion by promoting risk based implementation of the FATF standards to be proportional. That was one. And then support effective implementation of the revised standards, focusing specifically on asset recovery, beneficial ownership, and virtual assets. They did a number of other things during the plenary, but those are just some quick highlights.

Elliot Berman: I'm looking forward to the gatekeeper report. Your comment about having some indication that we'll at least see proposals is interesting. Two things that FATF has been working on for a long time, one is ownership transparency, and the other is gatekeepers are both places where the US has been slow to the finish line. We've made almost no progress on gatekeepers and beneficial ownership, the US version of a registry went effective at the beginning of this year. In my opinion, not the best model because it's not accessible to the public or at least certain parts of the public. But it'll be interesting whether the FATF report recommends that it become part of the standards against which countries are judged during their reviews. So we'll see.

John Byrne: Sticking with international, FINTRAC the Financial Transaction Reports Analysis Center of Canada as of this week, they now have included entities that transport currency, money orders, travelers checks basically armored cars that do those things, will now be subject to the Proceeds of Crime and Terrorist Financing Act.

What does that mean in practice? It means that you have to register as a money service business, you have to implement a compliance program, report transactions, of course, suspicious transaction, keep records, as they say, know your client. and related related requirements. So FINTRAC will obviously be ensuring implementation of this and they'll do oversight and that sort of thing, but just that highlighted this week, so I thought we would add that to the mix.

Oh, and I should mention, I'm sorry, in terms of again international, the Wolfsberg Group, who we've reported on a number of times and actually done podcasts with their director Alan Ketley they just issued another report, this is on their take on effective monitoring of suspicious activity, what they're calling MSA, Monitoring for Suspicious Activity.

Couple quick things, you should read the entire guidance, but they make the broad statement that they don't believe the value being derived from what is considered a constantly increasing volume of SARS or STRs, which I think is true. They don't believe that it's contributing proportionately to effective outcomes to deal with financial crime.

They want to see a change toward a true risk based approach, to move away from prescriptive rules based risk management. And then they also offer up that they want to see the proportion of SARs or STRs that are viewed by relevant government agencies is highly useful. That needs to be increased and they offer up by technology related innovation and better feedback.

I would urge folks to take a look at that. As we said before, when Wolfsberg speaks agencies and governments do pay attention because these are the 12 largest international financial institutions. And they're not saying anything we haven't heard before. And there's certainly, as we'll talk about in a little bit the FinCEN proposal with the other agencies on changing the AML program requirements do address at least in description, that they want to see more value in the reporting that's being done by the filers.

Elliot Berman: We've talked a lot about feedback loops and getting the information and what's a valuable report versus a non valuable report and while statistics that are floating around about the percentage of SA.Rs or STRs that get moved, passed on from FIUs to law enforcement, specifically tend to be in some countries quite low and things like that.

Figuring out what is useful and being able to zero in on what is useful as opposed to creating factories to churn out reports, which would be a fair description of a lot of programs because that's what the regulators seem to expect when they come to examine. Heading in this direction, some of these same concepts, as we're going to talk about in a few minutes, are in the FinCEN proposal.

Getting everything aligned is a good thing, but we'll have to see how it actually unfolds in the final rule, how people follow this guidance, and then what it looks like on the ground.

John Byrne: I agree. Before we dive into that, because we could spend a whole time on the proposal, I just wanted to highlight two US Supreme Court decisions that came down last week that will, in my view, impact the financial services community, the regulatory community, and otherwise.

One is the case Relentless, Inc. vs Department of Commerce. Under US law, you go through a process of following what they call the Administrative Procedures Act. So that's a notice of proposed rulemaking, an advance notice, then a notice, people get to comment publicly. The agencies take in consideration, the comment process, and issue a final rule.

The court said that the APA requires courts to exercise their independent judgment in deciding whether an agency is active within its statutory authority. And courts may not defer to an agency interpretation of the law simply because the statute is ambiguous. So they say by that statement that the Chevron case of 1984 is now overruled.

My take on this is that in our space, financial service regulations, which do get challenged, from time to time will be contested now at a level I don't think we've ever seen before. That means that if Congress does not provide enough direction to agencies as they craft their regulations, the agencies will not be given the type of deference they were given before.

And the deference being because of their expertise and their analysis and all of that. So there'll be a lot more court challenges in my view based on this. But that was one item I wanted to mention because we always talk about proposals and final rules. So I think that's relevant.

The second one just baffled me. This is Snyder versus the United States. This individual was a mayor of a small town in Indiana. And that town awarded two contracts to a local truck company, and what ended up happening is that company cut a $13,000 check to the mayor after they got the contract.

FBI and federal prosecutors suspected that the payment was a gratuity for the city's trash truck contracts. Snyder said no, it was for, he was a contractor. As we know, in small towns, a lot of these elected officials have day jobs, too, so that's not that unusual. But a federal jury convicted this individual of accepting an illegal gratuity in violation of a particular statute.

District court sentenced him to a year and nine months. On appeal, they say that statute criminalizes only bribes and not gratuities, so the circuit Seventh Circuit affirmed the conviction. So what the Supreme Court said is that particular section of federal law prescribes bribes to state and local officials, but does not make it a crime to accept gratuities for their past acts. Baffling to me, we're talking corruption issues here. So basically, if you plan to bribe an official, do it after the fact and you got a chance of avoiding prison time.

Elliot Berman: So John, I wonder if this will give the person who agrees to accept the bribe after the fact if they do what they say I'll go fix this problem and then you'll pay me. If they don't get paid, do they have a claim for breach of contract?

John Byrne: Exactly. We'll see.

Elliot Berman: There was an interesting dissent in that case, by the way, that said, I don't know what statute the majority is reading, but the plain language includes I think the quote was bribe or gratuity. So it was interesting that somehow the majority was able to slice the legal baloney thin enough to somehow get around the plain language of the statute, which is interesting.

As it relates to the case that overruled Chevron the majority opinion basically said that agencies don't really have any special skill in determining ambiguity. But courts have to do that because that's what they're good at. But the majority opinion in that case indicated that they couldn't really define ambiguity in the opinion so that they could then set a rule that the agencies would follow. So they're really good at interpreting ambiguity. That's a special skill of courts. but not in this case.

John Byrne: So the last thing we did talk about the FDIC's first, they issued the first proposal on the rule to strengthen and modernize AML/CFT programs. This week FinCEN came out with their proposal. We're still waiting on some of the other agencies. They're all going to be virtually the same, but I know we haven't seen any as of this recording from the Fed and the OCC or NCUA.

But this is the response to AMLA that requires a whole host of things including how you're going to proceed with the priorities that were issued back in November of 2021. This is an update to the current requirements of now, AML/CFT programs, which we've talked about, for decades. And the at the add ons you can read through the fact sheet and the proposal, the thing that we wanted to mention and I'll defer to Elliot on the other part of it is the priorities.

So we've been waiting for a regulation that says, what do you do with these priorities? And basically, and I'm paraphrasing, basically what FinCEN is doing, it's taking those priorities and saying they're being now incorporated into the program rule. So you got to do a risk assessment to look at those priorities, see where you fit, and then plug in your response to your program.

So there's a whole host of things in there on the risk assessment process, which will now be mandatory. Most banks were doing these, but now it's mandatory. And there'll be other changes as well in the programs, but the priorities get included, risk assessment, and there is consideration to issues that we've also talked about before, de risking, increasing feedback loops, and encouraging innovation to make sure that when banks make a decision to innovate, they don't get criticized during that parallel process. What else struck you, Elliot, from the proposal?

Elliot Berman: You mentioned that the rule will add CFT. I don't know that's a huge add because clearly the shift coming out of the Patriot Act was from money laundering to terrorist financing. Again, this is going to memorialize it and you're going to have to make sure that you sprinkle CFT in your program documents so it's clear that you're looking for both. You mentioned the risk assessment and the ability to innovate. There's also what appears to be pretty strong support for information feedback loops, which was also a key point in the Wolfsberg document. It's something that you and I and the community have been talking about for a long time.

Tell me what's useful to you, law enforcement, so we can focus on generating that information as opposed to just, a pipeline full of information, hoping that you pick out the right stuff. Now I'm being facetious and oversimple, but programs have ended up turning into report generating machines as opposed to risk identification machines, if that's the alternative.

So we'll see. As you and I talked about before we started recording, the rule's going to come out the way it does. We encourage people to comment and things like that. But the reality is how well really risk based works and all of those things is going to be driven by the next version of the exam manual in the United States, because how banks, and other regulated or institutions are examined by their primary federal regulator for all these things is where the rubber meets the road.

And having helped clients when I was in private practice and having been in a bank where our program that I was indirectly responsible for was examined I'm not sure the regulators have figured out how to really do that and they'll need to because otherwise all these changes are going to be just a mess.

John Byrne: There is a reference within the proposal to training of examiners. So I think that's something that all of us, including the regulatory community, has asked for some direction because examiners are trained today, but the question is, should the training be adjusted or maybe additive to targeting now, AML/CFT issues, as opposed to program support and other things.

And again, I'm being, I'm also being a high level on this. But the bottom line is the proposed rule does offer, besides the existing training, FinCEN will consult with law enforcement stakeholders and the FFIEC to establish what they're calling an annual federal examiner training. And I think that training is designed, like I said, to identify potential risk profiles and warning signs, provide financial crime patterns, deal with de risking, all sorts of things. At least in description, that should be welcomed throughout our community, and I think that it probably will be.

Elliot Berman: Agreed. 60 day comment period that ends September 3rd of 2024. This is the kind of proposal that it wouldn't surprise me if it got extended by 30 days, but we'll see. I expect you'll see a lot of comments from larger institutions and trade groups because there's a lot to comment on in here. But as you pointed out at the very beginning, this is mandated by AMLA, and so this proposal isn't going to go away, nor should it.

And since AMLA was the biggest update to the structure in the United States since the Patriot Act, we need an updated regulation, and now there's a proposal for everybody to talk about.

John Byrne: Everybody, we hope you have a safe and wonderful in the States 4th of July holiday break. I want to mention very quickly that we have our webinar for July 25th will be on romance scams, and related illegal activities. We have two panelists, an actual victim who's done a lot of work proactively helping prevent other victims of this horrific financial crime and a nationally recognized fraud expert, our good friend, Will Voorhees. now at Bank of America and they will give us both practical and legal direction on an issue that has impacted so many victims in the US and globally.

Elliot Berman: And you can register for the, that webinar at our website, amlrightsource.Com.

John Byrne: All right, Elliot, have a great rest of your week and we'll talk next week.

Elliot Berman: You too, enjoy the 4th.