This Week in AML

FinCEN is Very Busy

FinCEN has issued a new regulation, renewed its real estate geographic targeting orders, and published an alert regarding terrorist financing. John and Elliot discuss this flurry of activity and why each element is important in today’s operating environment.


FinCEN is Very Busy - TRANSCRIPT

Elliot Berman: Hi, John. How are you today?

John Byrne: Hi, Elliot. Good. And as we said last week, we thought by the time our This Week in AML got posted last week, there would be a Speaker of the House, but hopefully not an election denier. And we still don't have a Speaker of the House as we record this week. So this will be another interesting week in the US House of Representatives.

Elliot Berman: Yes. I saw a quote, it was a member of the House who described what's been going on as It looked like a bunch of members of the junior high school class trying to decide who's going to be president of the class.

John Byrne: That's very fair. I often thought about the House, in some instances, as a student council. So that's a good analogy. Hey, just a quick aside the former Trump lawyer, Michael Cohen, he's testifying in the fraud case against Trump today in New York, and I think he's probably still testifying as we're recording this, but reports are that he basically said that Trump would just make up estimates of values of his property, and it was up to Cohen and Allen Weisselberg to make the numbers work.

So that's obviously Cohen's version, so this will be something that the judge, I can't remember if it's a jury trial or not, will have to decide, but as we talk about fraud, as we know, if you simply make up value, that's a problem.

Elliot Berman: That is a problem. I believe it's a bench trial, if I'm not mistaken.

John Byrne: Yeah, I could get my trials all mixed up.

Elliot Berman: You've got a big whiteboard there in your office don't you, to track them all?

John Byrne: That's right. A lot going on over the weekend and this week. Just a couple of quick things to mention before we talk about some of the extensive work that FinCEN did late last week.

But this morning in Riyadh Saudi Arabia, Undersecretary Brian Nelson who's at the Executive Committee Meeting of the Terrorist Financing Targeting Center. He's the co-chair with the Saudis, our co chairs as well. And this is dealing with a variety of threats also humanitarian aid issues and all of that.

So he gave a opening comments this morning and he talked about besides the obvious of Hamas's atrocities that are jeopardizing the stability in the region and obviously harming innocent people. But he talked about the need for the various goals of this center to continue and just from his comments a couple things he mentioned was what we're going to talk about, the FinCEN alert to assist financial institutions in identifying funding streams that support Hamas.

He also said Treasury sanctioned 10 Hamas terrorist group members last week. And then the need for information sharing and all of that. I'm sure more to come out of that meeting, but that was the initial comments we saw this morning from Undersecretary Nelson.

Elliot Berman: Yeah, another interesting thing that we saw in the last few days is that IRS published an edition of their IRS Newswire . And the one this week was about how donors can determine if charities that they're being asked to donate to are legitimate. They actually have a database that, where you can go and look, it's called tax exempt organizations search- TEOS, and it's a tool and it lets you verify the legitimacy of the charity, check its eligibility to receive tax deductible charitable contributions, and search for information about status and filings of a tax exempt organization.

And then there's some good information in there about, how to identify fake charities that are trying to spoof and things like that. You and I have talked a lot about de-risking and the idea that if they're a charity or an NGO, we're just going to say no. We've talked about it at the provide services level, but the other side of it is the legitimate charities that do need donations to carry out their good work missions, you and I as donors and all the donors across the country need to figure out how do we check? This is IR-2023-196. And it's called IRS: Beware of fake charities; check before donating. That was, I think, useful. And those things that come out of IRS are often very practical and useful for all of us. And now to FinCEN.

John Byrne: One of the things they do is they proposed a new regulation. So this is a NPRM, so opportunity for public comment, and this is identifying what they're calling International Convertible Virtual Currency Mixing, CVC Mixing, as a class of transactions of primary money laundering concern. One of the things that strikes me is this is the first time they've used their Section 311 authority in a situation on a class of transactions of a primary money laundering concern. So it's a really innovative way of addressing this one issue. But what should we know about CVC mixing?

Elliot Berman: I wish I could articulate it, really simply. I'm going to quote a little bit here from the preamble of the proposed rulemaking, CVC mixing is a process by which convertible virtual currency transactions, are intended to become untraceable and anonymous. So while we've certainly seen over the last several years the fact that blockchain transactions are not as totally anonymous, as a lot of people may have felt that they were there are additional activities, such as mixing, that allow for adding an additional level of anonymity.

And the concern there is that these make them ripe for criminals and state actors who are involved in a lot of illicit activities looking for a way to move funds, collect and move funds in a way that isn't traceable.

This has been in the works for a while. They talk about WMD proliferation through North Korea and illicit dark markets and ransomware attacks.

John Byrne: The proposal is in the Federal Register as is commonplace, obviously for NPRMs and has a 90 day comment period. So another opportunity for the AML community, the tech community, and others to comment on what it is about this that perhaps. needs nuance. It was identified in the 2022 National Money Laundering Risk Assessment, and which included CVC mixing as one of several technologies that can hide source of funds.

Interesting, again, like you, I won't pretend at all to be an expert in this. This is a phrase that I only recently come across, but the bottom line is transparent process, opportunity to comment there's really no reason for the tech world to not weigh in here. And, FinCEN's trying to get it right, so I think they deserve credit for that.

Elliot Berman: Yeah as you mentioned 90 day comment period closes January 22 of 2024.

John Byrne: And as Undersecretary Nelson mentioned in his comments this morning in Saudi Arabia, FinCEN, among other things, has issued, which they did late last week, an alert to institutions to deal with the countering of financing of Hamas, and so that FinCEN alert is on their website.

It talks about suspicious activity reporting processes for that. What I think is, as you go through it, obviously they'll go through why it's important that institutions do this, but the key, I think, for practitioners is the red flags. There's a handful of them here. I just wanted to call out a couple of those.

And this sounds almost obvious, but this also is telling me that they expect pretty in depth analysis by the institutions. So one of the red flags is information that's included in the transactions between customers indicates support for terrorist campaigns. I'm sure it won't be as as blatant as that, but there are certainly ways in which you can decipher that from the information in the transaction. So I thought that was interesting.

Also, another example is a customer conducts transactions with an MSB, including one that offers services, again, in virtual currency, that operate in high risk jurisdictions that are tied to Hamas activity. And then also are reasonably believed to have lax CDD requirements or opaque ownership in those regions. Again, that red flag is valuable in other ways as well besides looking at people soliciting monies for Hamas.

A customer that's a charitable organization or an NPO that solicits donations but doesn't appear to provide any charitable services or, again more blatantly, openly supports Hamas terrorist activity or operations.

And a lot of times you find that out because they'll post on social media. And obviously if you can find out from law enforcement, sometimes they use encrypted message apps to solicit donations. So the NPO world is constantly focused on what it is that FIs need to do. They should read this alert, as well as banks, to understand what FIs are being asked to do by FinCEN.

But there's a lot of good things in here, and then they tell you include the key term FIN 2023, TFHAMAS, or terrorist financing Hamas, in the SAR field and that helps law enforcement get that information quickly.

Elliot Berman: Yes and some of our listeners may be wondering why there's so much focus on Hamas in particular. Obviously the backdrop here is the the recent attacks, and now the ongoing problems in the Middle East. But just a reminder that in 1997 the Department of State designated Hamas as a foreign terrorist organization. So that is the starting point for focusing sanctions and other things on Hamas as an organization. And for driving this alert. It's on the front page of the FinCEN website.

John Byrne: The last thing FinCEN has expanded and also renewed their GTOs starting earlier this week or the weekend, October 22nd and ending on April 18th of 2024. I think everybody listening to us knows that GTOs require US title insurance companies to identify persons that are behind the companies used for cash purchases of residential real estate or non financed purchases. This is an authority that laid dormant for many years until the FinCEN director, Jennifer Shasky Calvary, actually pulled it out and said, we should be utilizing this.

So ever since then, it's been an active part of FinCEN's oversight in this area that is constantly challenging law enforcement, and that's the cash purchases of properties. The purchase amount threshold for these, by the way, is $300,000 for each covered metro area with the exception of Baltimore, where the purchase threshold is very low. It's $50,000.

But they list in the GTO, the list of U. S. metropolitan areas where it's covered in some of the other areas as well. But again, I think this is a great example of utilizing an authority that becomes valuable in terms of information gathering, but also in terms of prosecutions and oversight.

Elliot Berman: Yes. And just for folks who are new to this area, GTO is geographic targeting orders. And this one does add new areas. So there's a number of areas in Massachusetts and in Florida and in Texas that were not covered by a targeting order prior to this one.

John, I agree with you. This was a good example of finding a way to gather information and also restrict transactions where the full real estate industry has not been brought under a set of regulations, but this has targeted a particular problem.

John Byrne: Right. And for those of you, the as old as we are the, these GTOs are not the muscle cars that drove in the sixties and seventies, and the basis of a Jan and Dean song, I think as well.

Elliot Berman: Yeah, although I wouldn't mind finding one of those if it was in good condition.

John Byrne: Yeah, it'd be worth something today, that's for sure.

Elliot Berman: That's true. So by the time people hear this, we will have completed the October live stream webinar. And the one for November is on exam management. We've got a good group of folks who are going to speak on that. Who are very knowledgeable and have a lot of experience. And by the time you hear this this podcast, you'll be able to register at our website. It is a week earlier this this coming month.

So please register quickly and don't miss us. But we're making sure that there's room for you to also have Thanksgiving. And John what else do you have in the pipeline?

John Byrne: I was still efforting a couple of folks we want to interview that will deal with some national security issues, some additional sanctions views.

And we're hoping to get a friend of the AML community, Aub Chapman from Australia on a call, we'll have to figure out a timing issue. Aub has been a a leader in Australia and other places in Asia on AML for decades and reached out to him recently and there are things going on in Australia, laws in regs that he wants to talk about.

So we're hoping to get that recorded in the next couple weeks as well.

Elliot Berman: Sounds great. And, we certainly appreciate you listening and invite you to come to our website and look at our other content besides just this podcast. John does great interviews with a lot of experts in the industry under our AML Conversations label.

And we also have a Solutions Series set of podcasts which focus on very practical things like choosing a transaction monitoring system or tuning the rules for it and other things like that. And then lots of good other written material that will be useful to you as you make your way through your day in the financial crime prevention community.

John, I know that you and I are actually going to see each other later this week because you're coming out to Milwaukee with your wife. I'm looking forward to that and we'll talk to you then and we'll talk to our listeners next week.

John Byrne: Thanks, Elliot. Take care. See you soon.

Elliot Berman: You too. Travel safely.