GAO on AI, AUSTRC, FINTRAC, OCC, and North Dakota

This week, John and Elliot discuss the recent GAO report on AI in financial services, AUSTRAC’s media release about crypto ATMs and their use in scams, fraud, and illicit finance, a new Canadian proposal to strengthen its boarders, including efforts to crack down on money launderers, a new North Dakota data security law impacting financial service providers, and other items impacting the financial crime prevention community.

GAO on AI, AUSTRC, FINTRAC, OCC, and North Dakota - Transcript

Elliot Berman: Hi John. How are you today?

John Byrne: I'm good, Elliot. A lot going on. I thought I would mention since I did, talk about it a little bit last week. In the NBA playoffs, the Knicks who had not been in the conference finals in 25 years did not make it to the finals. So that's over. But as we both know, 'cause we're both the fans of our teams in the NBA, baseball season continues through the rest of the summer. So we move on from one sport to the next.

Elliot Berman: Correct. So where would you like to start?

John Byrne: Let's start under the broad category of corruption. We know there was a dinner last week where the Trump administration invited a number of, crypto firm leaders. And that got a lot of press. I thought it was interesting that on Sunday George Stephanopoulos on his Sunday talk show started with a very interesting opening. And remember, ABC has agreed to a payment, a settlement to Trump, a $16 million payment to settle a defamation lawsuit. And Stephanopoulos was obviously involved in that case.

He started off Sunday saying the following, he said. Trump and his family are making hundreds of millions, potentially billions of dollars as Trump and his administration are taking official actions that benefit contributors and investors. Just this week, we learned of pardons to tax cheats, including a man. His mother was pardoned just weeks after she attended a million dollar ahead fundraiser for the president. The Trump media and technology group raising $2.5 billion from 50 institutional investors whose identities have not been disclosed.

And then he also added the SEC has dropped a lawsuit against a crypto firm after a number of things occurred there. But bottom line is more public focus on corruption, if you will. And it's gonna be interesting to see how this plays out, given that the DOJ earlier this year got rid of their kleptocracy task force and decided that statutes like the FCPA they would be a pause on enforcement, let's put it that way. So anyway, I thought we would start with that.

Elliot Berman: Okay. As long as we're in the US let's talk quickly about the OCC. The Acting Comptroller was giving a speech in front of US Chamber of Commerce, and he talked about the four elements of the OCC"s regulatory agenda for the purpose of charting a path for American financial resurgence. The first is accelerating bank FinTech partnerships. The second is expanding responsible engagement with digital assets. The third is advancing financial inclusion as an economic imperative. And the fourth is modernizing regulation to unleash growth. I'm assuming you saw that.

John Byrne: Yeah. That's from Rodney Hood, who's the Acting Comptroller. What's interesting about it is not the first one about bank of FinTech partnerships but it's digital assets and how that's gonna work going forward. That's gonna be an interesting area of focus given pending legislation and the concern about oversight. But also from my perspective, advancing financial inclusion 'cause as you read through his comments, he talks about it as a civil rights issue.

Which would lead you to think it's issues on not the statutes, but on fair lending and credit and that sort of thing. Not about how it was characterized earlier this year. And that is de-risking or de banking issues. So the area of financial inclusion, getting people access to accounts, I think is something that most Americans would support. So it's gonna be interesting to watch how that plays out. So in any event a speech to the Chamber of Commerce, and this is something that Hood has mentioned in several public forum since he became acting comptroller.

Elliot Berman: One of the things that I saw that I thought was interesting is that North Dakota has adopted a data security law that will impact certain financial service providers. So banks, credit unions and other entities regulated by North Dakota's Department of Financial institutions are exempt, but mortgage lenders, data collection agencies, debt service providers, payday lenders, they're among the covered entities.

And it's pretty comprehensive. For example they need to have a governance structure. They need to have a qualified chief security officer or the equivalent who's responsible for implementing and enforcing their program. They have to do periodic internal risk assessments, implement access controls and authentication protocols. They need to encrypt customer information and they need to perform regular penetration and vulnerability assessments.

Why is this interesting? Because where oftentimes you'd think of that as being the kind of thing that might be done at the federal level by Congress so that there's a level playing field across all the states and a more comprehensive approach to something like data security. This is being done by a state. And as we see Congress at least thus far, doing less and less, and taking on the role of the federal government in terms of passing consistent laws and then generating consistent regulations through the agencies, I think we're gonna see more of this.

And it'll be important for organizations to understand whether they're covered. It's not only if you are located in North Dakota. But it's also, I believe there's coverage if you are dealing with customers in North Dakota. What's the lesson here? Be on the lookup, not only for federal action, but also, and not only for your home state's action, but find a source and keep an eye on state action across the country.

John Byrne: I completely agree. And what's also interesting in terms of what Congress is and is not doing in the area of artificial intelligence. Two things to mention. One is as we record this, Congress is still grappling with the the reconciliation package that's been actively reported in the press, and there's a number of provisions in there that one would think are not connected to budget type issues. And one is there's a provision now which has been identified by actually Democrats and Republicans. There's a provision in there right now that prohibits any legislation for a decade in the areas of artificial intelligence, which obviously is problematic.

I think that's gonna be targeted and probably taken out, but we'll see what happens. But see that's interesting because Congress is not acting quickly on anything as you just mentioned. So to tell the states, Hey, hold off, I think is a bad public policy in general, even though there are issues when states do things and the feds don't. I get all that.

But in any event GAO just released a report, both the Dodd-Frank and other earlier legislative provisions require GAO to annually report on financial service regulations. So they did one that's called artificial intelligence use and oversight in financial services. What they found, and this is very brief, so you read the whole report, they said, basically AI presents both benefits and risks, obviously. It's being applied in areas such as automated trading, credit decisions, customer service.

There are benefits, but there are challenges and the risks include potentially biased lending decisions, data quality issues, privacy concerns, and new cyber security threats. So generally the report says, and again, read it for the specificity, that most of the banking agencies are integrating AI into their general operations, but they called out specifically the National Credit Union Administration NCUA, and said that they do not have two key tools that could be used to aid its oversight of credit union's AI use.

First, it's model risk management guidance is limited in scope, in detail. It doesn't provide its staff or credit unions with sufficient detail including models and guidance should be more detailed to cover more models that would strengthen NCUA's ability. Second, it lacks the authority to examine tech service providers. So in any event, take a look at the report. Sure we'll see many others. And as we just mentioned the current reconciliation package is interesting on a number of levels, but what they say regarding state activity is pretty important.

Elliot Berman: Shifting to more global things. Next week Thursday and Friday, the 12th and 13th of June FATF if is having their June plenary and they're having it jointly with MONEYVAL, which is the European regional part of of FATF. And there's been some leakage, if you will, about what countries may be going on the gray list. AML Intelligence is reporting that Bolivia and the British Virgin Islands will be added to the gray list coming out of next week's plenary. And we'll talk about that in detail the week after. See what they came out with, what they're gonna be considering, who's been naughty and who's been nice. But since we saw this, we thought we'd mention that. There's already there's already chatter.

John Byrne: And as we've said before, it's gonna be interesting to see how the US fairs. When their mutual evaluation is completed. So I'll just put that out there. Some quote experts, unquote, are saying there's no chance the US would ever be placed on the gray list. We'll see. Other things going on internationally?

Austrac, the Financial Intelligence Unit in Australia came out with a guidance document on scams and frauds related to crypto ATM operators. They said that this is as of earlier this week, AUSTRAC has refused to renew a crypto ATM operator's registration and placed operating conditions including transaction limits on other Australian crypto ATM providers.

And that comes after a task force flagged what they call worrying trends in crypto ATM compliance. The AUSTRAC CEO said that the task force looked at customer activity that they believe bears the hallmarks of scams, fraud, and other illicit activity. And according to the press release, a huge concern that people in the this demographic, the demographic being 60 to 70 year olds are overrepresented as customers that use cash to purchase crypto. And as the evidence suggests that a large number are victims of scam activity. So more information available on the AUSTRAC website just issued earlier this week.

Elliot Berman: And in prior conversations that you and I have had about scams. Crypto ATM seemed to be playing a larger and larger role. Not surprised to start seeing, governments focusing on that source for scammers to get the payout they're angling for.

John Byrne: Our board member Nick Burbridge, wanna give Nick some credit he posted on LinkedIn a new proposal from. Canada in Parliament regarding a ML. I'll turn to you in a second, Elliot, but one of the things that Nick highlighted in his posting is that it would strengthen AML supervision and increasing civil and criminal penalties. It would address what they're calling some of the more prevalent types of money laundering through new restrictions on large cash transactions. I'll turn to you for that. And third party cash deposits and also permit disclosures from FINTRAC to the Office of Commissioner of Canada elections, which is obviously dealing with an issue specific to Canada. But what else did you see in that proposal?

Elliot Berman: The proposal, as you just mentioned, would prohibit certain entities from accepting cash deposits, cash payments, donations, or deposits of $10,000 or more. Interesting that the $10,000 threshold, which is also embedded in the Bank Secrecy Act is being used. But, there's clearly an effort here to attack another pathway that gets used by money launderers by, staying off the books . So it'll be interesting.

John Byrne: Yeah. So definitely gotta watch that closely. A report from the Tax Justice Network was just posted and it's on financial secrecy and the the movement toward autocracy, which is a little scary. But basically they have an index and they look at the index and they do updates and they said, of the top 10 biggest suppliers of financial secrecy eight saw worsening autocracy from 2018 to 2024.

And then in addition to those eight they mentioned. The other is the United States, which has seen a small improvement from the first Trump administration to the Biden administration, but is now seeing a dramatic collapse in governance that is not captured by the 2024 edition of what they're calling the Liberal Democracy Index.

The Polity Project which is part of the announcement here, which updated its evaluation of the US after Trump took office, downgraded the US from a democracy to an autocracy which I thought was fascinating. But this was, the Tax Justice Network announcement was posted by the Fact Coalition, a group that we follow pretty closely.

And the Fact Coalition actually late last week had another announcement and that had to do with a number of organizations that a part of the Fact Coalition bemoaning the announcement from a couple of months ago about the Corporate Transparency Act no longer being relevant to domestic entities.

So I thought that was interesting. So the whole series of experts talked about what might happen with this Treasury change and that it will aid criminal shell firms. This discussion occurred in the Organized Crime and Corruption Reporting Project of late last week. But again from the FACT Coalition.

Elliot Berman: The reason that the US turns out to be number one, it's not that we have the most secrecy, although we have a lot of secrecy based on their scale. But it's also because of the impact we have on the global financial system. Our weighting factor is very high, and when you multiply it against a high secrecy score, which is a bad thing in this index, you get a whopping large number, which drives us to number one. I'm not sure that's an award I wanna show up to accept, but, maybe they'll ask me.

John Byrne: Going back to the OCCRP article from May 29th. Interesting discussion, besides groups like Transparency International that obviously talked about the exemptions allow a complete evasion of the landmark law. They noticed that law enforcement groups, including the National District Attorney's Association and the National Narcotics Officers Association Coalition have indicated that the rule will curtail their ability to investigate money laundering and other crimes and I think that's important.

So it wasn't simply advocacy groups that we typically talk about. It is law enforcement organizations that also expressed concern. And then they also mentioned that a two Senators Whitehouse, a Democrat from Rhode Island and Grassley, a Republican from Iowa did attack the change too, and said that contravene Congress's intent.

So it's gonna be interesting to see how this again, continues to shake out throughout the year. And going back to what I said a few minutes ago and how it impacts the mutual evaluation of the US.

Elliot Berman: Yes. The last thing I have is that the FCA in the UK, a lot of letters there, has published proposals for issuing stable coins, crypto custody and financial resilience of crypto asset firms. So that's out for comment. Comments are due the 31st of July and the focus here is on ensuring that stable coins are, done efficiently, but also that they're truly backed and there's clear information about the assets that back them.

And then as it relates to crypto custody services it's to ensure that they're effectively secured and can easily be accessed at any time. Our listeners will recall we talked on several different episodes about the fact that the EU was bringing online a comprehensive, regime, and this is the UK I don't wanna say playing catch up, but going down their own path to ensure that it happens. And as we've already discussed there are crypto proposals in Congress here in the US and discussions about stablecoins.

So it'll be interesting to see how different they end up being as opposed to doing some unified and consistent process rather than viewing it as an economic race, viewing it as a financial system stability issue. What else do you have, John?

John Byrne: So Elliot, what do we have for this month's webinar?

Elliot Berman: On June 26th, we're gonna be talking about the latest on effective risk assessments. I've got a great panel of experts lined up and we're gonna be talking about effectiveness, look a little bit into the future in terms of what we might be adding to risk assessments or considering adding to risk assessments.

And I think it'll be a really useful session. And what do you have in the pipeline?

John Byrne: Next week we will post the interview I did with Sarah Beth Felix, a well-known AML sanction, CTF expert about her thoughts on a number of things. So that'll be out next week. And then I'm doing an interview this week, so we'll post it in a week or two with Adam Hirsch, he's with the Economic Policy Institute. We'll talk about trade tariffs, trade fraud, evasion issues for financial institutions, those sorts of things. And we are still efforting conversations with folks in the antiquity space and hopefully some others later on in the month.

Elliot Berman: That sounds good. John, you have a great rest of the week and I will talk to you next week.

John Byrne: Take care. You too.

Elliot Berman: Bye-bye.