Fentanyl in North America, FinCEN on CIP, OCC, and FATF on VASPs

In this episode of This Week in AML, Elliot Berman is joined by Joe McNamara to unpack efforts across North America to combat fentanyl trafficking—including Treasury’s designation of Mexican financial institutions and Canada’s new FinTRAC intelligence unit, FATF’s latest update on virtual assets and VASPs, he OCC’s report on key risks in the federal banking system, FinCEN’s change on TIN collection under the CIP rule, and other issues affecting the financial crime prevention community.

Fentanyl in North America, FinCEN on CIP, OCC, and FATF on VASPs - Transcript

Elliot Berman: Hi Joe. How are you today,

Joe McNamara: Elliot, it's a pleasure to be back, man. Doing well. How about yourself?

Elliot Berman: I'm good too. I appreciate you joining me. John has been on a trip. Last week I had Jennie Jonas join me and we had a great chat and I'm looking forward to talking with you today. Where would you like to start?

Joe McNamara: Good question. I figured there were probably two quick hits. I think the biggest one right off the bat is we saw is day one for official business for a AMLA. Did you see that?

Elliot Berman: I did. Since the legislation was passed in the EU to create AMLA they've been working toward getting up and operational. Choosing their headquarters in Frankfurt. Creating their executive committee and other things. Supervisory authority transferred this week.

Long term, they expect to have about 400 people and they, as everybody remembers, have the responsibility to harmonize the statutory activity across the member states as well as harmonize the activity of the FIUs. They will be what I'll call a Super FIU and they'll be working with the member state FIUs to align their activities and continue to increase effectiveness.

Joe McNamara: No doubt. And I think the overarching message here, is that, at the end of the day, we sit here in the United States and clearly, there's been some discussion, albeit a little bit slower than normally what we've seen from a regulatory stance and progress, but it's not stopping any of our partners across the pond from continuing to push this issue forward and really looking for opportunities to strengthen the global financial system at large.

Elliot Berman: Absolutely. We're seeing a lot of activity in the UK too. Post Brexit they're going on a separate path, but it's very aligned with what's happening in the EU.

Joe McNamara: So the other quick hit that I saw this morning, was the official lifting of the country level sanctions on Syria. Did you see that too?

Elliot Berman: I did. And you made a very careful and accurate distinction there about it being the country level. There are still sanctioned individuals and those sanctions have not been lifted at this point. But the country level sanctions, which President Trump announced were going to be dropped has now operationally worked its way through Treasury and is effective this week.

Joe McNamara: And the one call out that I would make too, there were two separate statements and remarks. One from the Secretary of Treasury, Scott Bessant said, the Syrian government must continue to take steps forward in trying to build a stable, unified country that is at peace with itself and its neighbors. It's my hope that the actions taken by the United States will not only provide much needed relief for the Syrian people, but also give the country a chance to succeed.

There've been plenty of discussions around the impact that economic sanctions can have on a country, especially from a development perspective. It's real. And this is a day of celebration, in my opinion, in trying to, get a country back on its feet and back to progressively growing and doing better by its people.

Elliot Berman: I hope that's what happens.

Joe McNamara: Same. I'm optimistic. A little bit closer to home we did see some movement and traction, especially from Treasury as it relates to the underlying topic of fentanyl. We saw there were some stuff that came out from the northern border as well as the southern border. I'll give you choice. Where do you wanna start?

Elliot Berman: Let's start with Treasury's actions. They used the authority that they have to counter fentanyl and its precursor chemicals coming into the United States.

They designated three financial services companies in Mexico as organizations of primary money laundering concern. There are two banks, CIBanco and Intercam. And there's a brokerage firm Vector. All three have been identified as, being involved in facilitating, purchase and movement of precursor chemicals. Mexico's financial services regulator took control of those three financial services entities. So what did you see about the Mexican activity?

Joe McNamara: I saw a lot of the same, I was actually a little bit more interested in what we saw to our neighbors in the north. But, along the same lines from a fentanyl perspective, one of the things we saw coming out of Canada this week was FinTRAC and creating its intelligence team to help target fentanyl traffickers. Which again, I think is, when it comes to just overall progress in the space, it's certainly better than not progress. I think the one interesting thing that's certainly come out of the additional scrutiny or focus on the inflow of illicit drugs like fentanyl is we're not really seeing, the levels that we probably were first told about in terms of just the amount coming across the northern border.

However it is still, it's promising to see that just because the volume isn't necessarily there, that the focus isn't there. And so being able to see that FinTRAC has really launched this rapid response intelligent unit in order to combat this is promising. From your perspective. Was there anything else that kind of came out of that announcement this week?

Elliot Berman: The Canadian side is interesting because the Canadian government views the country as having a fentanyl problem of its own that needs to be dealt with.

Joe McNamara: True.

Elliot Berman: And this group will be doing that as well because FinTRAC is gonna provide a financial crime expert to a new agency to focus on the fentanyl problem and FinTRAC 's embedding an expert in that group. Which is good 'cause that's tying all the facets together as opposed to running around in silos.

Joe McNamara: Absolutely.

Elliot Berman: The Mexico problem is a much bigger problem. Each of the three financial services entities were identified to be connected in one way or another with one of the major drug cartels in Mexico. And those cartels have already been sanctioned.

Joe McNamara: My recollection is that this is really the first example of, actions that have been taken under this FEND Off Fentanyl Act, which again, I think is monumental in itself. It'll be interesting to see certainly how things progress and are we going to see, additional identifications coming down, let alone, some regulatory actions.

We'll see . And I don't mean to be cheeky, but when you get a new tool you want to go find a project to try it out.

That's right. When you have a hammer, everything becomes a nail, right?

Elliot Berman: Yeah. And this is a serious problem. I'm not trying to make light of it at all. There were many tools in the toolbox prior to this new authority. This additional authority used effectively may add to the effectiveness of our efforts to fight this terrible scourge. So I'd be curious to see how it unfolds. The interesting part is the cross-border nature of it.

Joe McNamara: I would say it would not be a This Week in AML episode if there wasn't something coming out of the digital currency world. And we saw a couple things. I think the one that stuck out to me, and what I'd love to hear more from you about is FATF's urging of stronger global action to address the illicit finance or financial risks with virtual assets.

Elliot Berman: Yes. FATF has been paying attention to the digital assets space for a long time. This is their sixth update in this space dealing with both virtual assets and virtual asset service provider, often called VASPs. They have one recommendation and several related notes to that recommendation. So for those of you who are FATF nerds, this is Recommendation 15.

This update highlights the need for further work on licensing and registration. And on the fact that jurisdictions continue to really have difficulty identifying natural or legal persons that conduct VASP activities. You've got VASPs that are organized as companies. That's their business. You've also got individuals who are moving virtual assets in the same way that a company is doing it, but mu on a much more illicit and below the radar basis. And that is one of the key issues.

The other thing is that virtual assets are borderless and the increasing focus on stablecoins, including recent adoption in the US Senate of stablecoin legislation raises issues. North Korea, which is a very active player in the illicit use of virtual assets, they use stablecoins. They had the largest theft, $1.4 billion from a VASP. They continued to increase their use of on chain illicit activity. Which now includes stablecoins.

I would recommend to our folks that you take a look at this update as I think most of what comes out of FATF F is worth a read. It's a good way to do a double check to see if you are doing what you can in the virtual asset space for detection and things like that.

Joe McNamara: Correct. And the final note I'd say too, and just kudos to them, is including, the best practices on the Travel Rule supervision. Which again, as you mentioned with digital currencies being borderless, it's always good to just stay apprised of that stuff.

Elliot Berman: Related to virtual assets and anonymity this week, Treasury did issue sanctions against Aeza Group which provides, bulletproof hosting services in support of cyber criminal activity. There's a business line. There's the business line for you.

Joe McNamara: That's right. Elevator wise, I think they did a great job. They nailed it. This is what we do.

Elliot Berman: Yeah. Exactly. And this was coordinated with, a number of agencies in the US and in the UK where the Aeza group was running a front company.

OCC came out with a key risks in the federal banking system report. What are your quick ones from that?

Joe McNamara: The things that jumped out to me, number one was, for us sitting here domestically, there's been a ton of economics up and downs, especially from a consumer sentiment perspective. It was good overall that kind of came out and said that the strength of the federal banking system remains sound. And we certainly see that. We're seeing consistent efforts across the space and really trying to not only, service customers, but thwart the bad guys and figure out ways that we can better uncover and combat illicit nefarious actors in the global financial system.

The one thing that I found also compelling in terms of the way they positioned it was around the retail credit risk. They said that it's remained stable despite some of the economic uncertainty that I just mentioned. But it goes as far as to say, but look around, as consumers are a little bit more hesitant to extend beyond their means we're eventually going to see a deceleration of some sort as it relates to, overall growth. At least in that space.

Overall, I thought if anything it was for those of you that may be having similar type discussions with family members or certainly, colleagues in the space, I think it was a healthy reminder that in terms of where the United States economic or banking system is today it was good to see that it was still labeled strong. That those were just my takes. How about you, Elliot?

Elliot Berman: In the operational risk side, they did acknowledge operational risk as elevated. They called out criminal exploitation of the traditional payment methods. They also talked about fraud. The increasing fraud schemes . They talked about evolving cyber issues targeted at banks and their and their service providers. Things to continue to pay attention to. Nothing surprising, but acknowledging that what we do in the compliance and operational risk management space is still, always under pressure. My words don't take your eye off the ball

Joe McNamara: A hundred percent. And again, I think, in terms of what we just saw across the pond with the sanctioning of that bulletproof hosting, there are things that are happening that are taking place to help combat those risks. The only other thing that I saw, Elliot was a quick hit from FinCEN in terms of banks using alternative collection methods for obtaining TIN information. For a little inside baseball, for everybody listening, I had to ask Elliot, Hey, why is this important? But, for everybody else that may be asking the same questions, why is this important? Elliot

Elliot Berman: Going all the way back to the passage of the PATRIOT Act. The CIP rule is embedded in section 326. This was 2003 when the regulation was finalized. The rule required among many things, that banks obtain tax identification information, so either TIN or Social Security Number, or ITIN directly from the customer. If you, roll the calendar back to 2003, if you opened a transaction account at a bank, you went into the bank and sat down across the desk from a human being and actually went through that process.

Joe McNamara: Correct.

Elliot Berman: If you roll forward to a little over 20 years ago they created an exception to that rule for credit cards. And why was that? If you think about how most people open a credit card and even did 20 years ago you would get a solicitation in the mail, now you get 'em by email too, and you could actually do the whole thing without being in the physical presence of a person from the credit card company. So they got an exception because that was the way business had evolved.

Banking now has evolved in many respects in that same way.

Joe McNamara: Correct.

Elliot Berman: You can't open a transaction account online now without being in the presence of a banker. And so that makes the requirement of getting it directly from the customer more complicated. And there had been talk for a long time about the idea of creating an exception for banks as well to get TIN information from third party providers. There had always been a give and take about whether there was more risk about doing that. Both are you really getting the TIN of the person who's opening the account and also privacy risk.

But in the end FinCEN in March of '24 put out a request for information on this exact topic. And they got a lot of comments and in the end when they balanced everything they said, given where the business is today it made sense to grant an exception. They've issued now an order, I believe it's publishing this week in the Federal Register a nd it'll become effective.

And that's why it's important. It's technical, but if you look at how business is done today compared to how business was done in 2003, it makes sense to at least talk about these kinds of changes. And we do have 20 years of experience with the credit cards.

Joe McNamara: Yeah.

Elliot Berman: And many of the issues that have been raised about why to do it or why not to do it, we've at least got a case study to work from. This will result in the need for organizations to decide how they're going to implement the change. They're not required to make the change. They're allowed to make the change.

Joe McNamara: I would assume most of them are probably going to lean that way.

Elliot Berman: I would expect the vast majority of financial service providers covered by the order will take advantage of it.

Joe McNamara: Bingo. That's right. All right, so lots to cover this week. Anything else, any final thoughts before we wrap this thing up?

Elliot Berman: For those of our listeners who didn't see the live stream of our June webinar last week you can find it on our website. It was on effective risk assessments. It was a great session, and I would recommend that if you are not the person who does risk assessments in your organization let your risk assessment team know about it.

And Joe, I know you're gonna be moderating the July webinar. What are you gonna be talking about?

Joe McNamara: Yeah. I'm telling you, these folks aren't gonna be able to get away from me.

Super excited about this month's webinar though. It's on how AI can impact your financial crime compliance program. I think I'm most interested and excited about in terms of a practitioner perspective, we've got some heavy hitters including, Carrie Gilson from US Bank, JR Helmig, who's a co-founder of FININT.ai, as well as an incoming AI and machine learning postdoc at the University of Chicago, Tahseen Rabbani.

And what I'm most excited about is that we're gonna have a collective mix of voices in the larger AI space. What I'm hoping to get from this conversation and what folks that are joining us should get is a little bit on the practical side, a little bit of the anecdotal case study side, there's gonna be some theoretical. But ultimately I think all encompassing, it should be a really good holistic view on, how AI can truly, positively impact your financial compliance program.

So that's July 24th at 1:00 PM Eastern.

Elliot Berman: And you can register for that at our website.

Joe McNamara: That's right.

Elliot Berman: So Joe thanks for joining me this week. John will be back with me next week and so for those people who like the guests we're sorry, we'll be back to the old.

Joe McNamara: Let us know. Let us know if you like the guests.

Elliot Berman: Yes. Let us know if you like the guests. Joe, you have a great week.

Joe McNamara: You too, Elliot. Thanks.

Elliot Berman: You too. Bye-bye.