John Byrne and Elliot Berman discuss a busy week in the AML, sanctions, and compliance landscape. Topics include AUSTRAC's enforcement push under Australia's new AML laws and its investigation into Western Union, fresh guidance on politically exposed persons from the Hong Kong Monetary Authority, and the FBI's Art Crime Team's recovery of Egyptian cultural artifacts.
They also examine growing concerns surrounding prediction markets, conflicting federal court rulings involving Kalshi and Polymarket, new Treasury sanctions and proposed Section 311 action against a UAE-based bank, and the OCC and FDIC's significant changes to bank examination standards.
Global Enforcement Actions, Prediction Market Battles, and a New Era of Bank Supervision - Transcript
Elliot Berman: Hey, John. How are you today?
John Byrne: I'm good, Elliot. Spent a week down in Hilton Head, South Carolina, and our grandkids were with us, so it was a fun time to just relax and interact with them. So I'm glad I was given that opportunity to get out of town for a little bit.
Elliot Berman: Good weather?
John Byrne: Yeah. It pretty much rains every day, but not for very long. It's what happens in August in South Carolina.
Elliot Berman: Got it. For August things have been pretty busy. Where would you like to start?
John Byrne: We're still at war. Who would've guessed that starting our seventh month of something that was gonna take three to four weeks? But that's a separate podcast for people that have military and national security backgrounds.
Let's start overseas. Couple things with our friends in Australia. This is a report from the Dow Jones Risk Journal. This is a Wall Street Journal newsletter. AUSTRAC, I've had the pleasure of interacting with AUSTRAC in several trips to Australia. Obviously, they are the FinCEN equivalent in Australia.
They have a law on the books that started July 1st, and they have now begun issuing requests to businesses to determine whether they're complying with that country's new AML laws. They said late last week there, on Friday, that with sending notices to businesses that haven't registered with AUSTRAC despite appearing to be providing services that are covered by these requirements.
And according to AUSTRAC CEO Brendan Thomas, the time for preparation has passed, and they expect the regs to cover tens of thousands of new businesses. They're also required to maintain an AML compliance program and have a compliance officer dedicated to the issue as well as staff training. So that was one item.
I know you you you noticed another action in Australia that we talked about before we started to record.
Elliot Berman: AUSTRAC has announced that they've launched a probe into Western Union's activities in Australia over concerns about the effectiveness of its anti-money laundering and terrorist financing controls.
They said the probe is going focus on how Western Union manages high-risk payment channels. And they identified three particular areas. One is the AML/CTF program, including whether it effectively enables the company to identify, assess, and mitigate money laundering and terrorist financing risks.
They're going to look at their transaction monitoring program to determine whether it can identify known money laundering topologies, particularly those associated with child sexual exploitation and terrorism financing. And the third is government arrangements, and they're going to take a look at its global head office decisions affecting the Australian entity's compliance.
Western Union is, I believe, the largest worldwide payment company. This will continue to unfold. I'm sure we'll see additional reporting, but it's a reminder that even well-established either traditional banks or other financial service providers like MSBs, still have to devote resources and get it right. And it appears that AUSTRAC thinks that's not what's happening in Australia.
John Byrne: The Hong Kong Monetary Authority has issued guidance, they're calling them smart tips, on how to treat PEPs, politically exposed persons.
The paper is a 10-page paper, and it walks you through why PEPs are subject to special treatment. How to interpret the concept, this is interesting, 'cause we've had this debate in the US. How to interpret the concept of once a PEP, always a PEP. So they go into that.
Prominent public function, this is interesting. And again, just take a look at this, but I'll just reference this one. Examples of factors to consider for what is considered a prominent public function is powers and responsibilities associated with the public function. So can you control or divert public assets?
That sort of thing. Level of corruption risk associated with the jurisdiction. So what's the perceived level of public sector corruption, and how effective are the jurisdiction's anti-bribery and corruption efforts? And then the size and organizational framework of the government or international organization concerned.
So the number of government officials, the size, the budget, that sort of thing. In any event, it's a chart with some narratives. Again, a short 10-page paper. I think it would be a great add-on if you need to be trained if the Hong Kong Monetary Authority oversees any of your client's activities
Elliot Berman: When you pointed this out to me I immediately thought of what you just said and say oftentimes when we talk about these reports, that this is a great training tool.
And while it's clearly specific to the views of the Hong Kong regulator, I think that there are some great tidbits in here for people around the globe who have to deal with PEPs. You just have to be careful to understand how to use some of their examples and fit them into the regime that you're required to deal with depending on where you are globally.
John Byrne: Yeah, that makes sense. Our friends at the Antiquities Coalition noted that the FBI's Art Crime Squad, which I was first exposed to probably, 15 years ago, didn't realize that was a thing and a very active part of the FBI. A small group, but they've been working on these issues for a long period of time.
But the Antiquities Coalition commended the FBI's squad there for the recovery of 48 Egyptian cultural artifacts that now have been returned to Egypt. And according to the AC, the case demonstrates the value of the US Egypt Cultural Property Agreement. It was signed in 2016, and the agreement provides a framework, obviously, to identify and return archeological and other materials illicitly removed from Egypt.
If you're not already following the Antiquities Coalition on LinkedIn or just in general, you should 'cause they have really good information if that's an area that is of interest to you or your clients.
Elliot Berman: I was on the AC website and noticed that they have a fresh blog post talking about the risk to Syrian antiquities, and of them being stolen laundered, that kind of thing.
I commend people to take a look at that. Part of why it caught my eye is last week we talked about the fact that Syria had been taken off the US list and therefore with the integration of Syria back into the global economy is what's what's facing them.
And just if you're following this whole area I would tell you that it's worth a read.
John Byrne: You're gonna cover a couple items with the prediction markets, but I'll just reference one item. The Anti-Corruption Data Collective issued a report late last week. They've done an earlier report on analyzing insider trading risks on Polymarket, and this particular report expands on that and they say that this one defines a profile of a Polymarket user that they believe most precisely indicates true insider traders.
So there's some information there. They say that their report demonstrates, I'm quoting from their release, "The national security and political integrity risks of insider trading on military and political prediction markets." And they end by saying, "If financial speculators can quickly observe insider bets and act on them in real time, then so can militaries and intelligence agencies around the world."
So an important add-on to the debate regarding prediction markets. But I know you picked up on a couple of court cases that I don't know that the decisions clarified, but actually shows that there is continued focus in this area.
Elliot Berman: In the last few business days the US Court of Appeals for the Ninth Circuit and the US Court of Appeals for the Third Circuit each issued opinions.
Now, we need to take a big step back just for a moment. There's a lot of litigation going on where states are suing or some of these prediction market platforms, Polymarket and Kalshi being the most well known, I think, in the US, or the platforms are suing for injunctive relief because some states are attempting to regulate these platforms under their state gambling laws.
At the federal level, the CFTC, the Commodities Futures Trading Commission, has exclusive jurisdiction. The argument by the platforms is that these are financial contracts and it's not betting. The Ninth Circuit determined that these contracts on the platforms do not fit the definition of a swap.
Don't get too wound up in all of that. But that's the thing they were looking at, and therefore they're not within the exclusive jurisdiction of the CFTC, and the states have a jurisdictional argument to make and an enforcement argument to make if it fits their definition of gambling. The Third Circuit reached the exact opposite conclusion.
Why is this important? Oftentimes the Supreme Court will take a case that it might not otherwise take where there's a conflict in the circuits. Because a conflict in the circuits means that the states that feed into the Ninth Circuit through their district federal courts are going to follow that decision if they have cases in front of them, and the same with the Third Circuit.
But you're going to get a different set of results, and the idea, not always the case, but the idea is to get consistency across the entire US. So we'll see where this goes. I'm sure someone's going to appeal with the conflict in the circuits. We'll see.
John Byrne: The Treasury Department has issued a few notices in the past week one through OFAC. That was one that sanctioned a number of organizations that they claim are violent far-left terrorist networks.
One is Palestine Action, which is a UK-based organization. Another, Masar Badil, which they say operates as a front for the Popular Front for the Liberation of Palestine. So this is going to be the beginning salvo, if you will, against what this administration is calling far-left networks.
Our friends at the Charity and Security Network among others, disagree strongly with the characterizations and are attempting to see ways to mitigate whatever is going to happen regarding these sanctions. The press release also mentions that they last November targeted Antifa.
I will just tell you that our good friend Dennis Lorimel, who knows more about terrorism than anyone at the current Treasury Department, believes based on his analysis, Antifa is not an organization, it's a cause. So you can't sanction it as a group as you could the Proud Boys or some of these other far-right organizations.
But anyway more debate's going to happen on this, but that's one thing that the Treasury Department did last week. In addition, and I'll throw it to you after I mention the highlight here. FinCEN proposed a rule that would revoke Banque Misr UAE's correspondent banking access to US financial institutions.
They're based in the UAE and they are being characterized as an institution operating outside of the US of a primary money laundering concern. So this is based on a 311 that came from the Patriot Act, as we both know, 25 years ago. The rule would also require, if it becomes final, financial institutions to take what they call reasonable steps not to process a transaction for a correspondent account in the US of a foreign banking institution if that transaction involves that bank and to apply to their foreign correspondent accounts special due diligence requirements, which is based from the 311 requirements.
So that, again, it's a proposed rule, Elliot, so it's not final, but it's certainly open for comment.
Elliot Berman: Yes, and after that proposal the UAE immediately launched a probe into the bank branches to determine whether there is a real problem. I would expect there was some information sharing between the UAE and the US, but I don't know that.
I haven't seen that announced anywhere, but I would expect that there was some back channel information sharing. So we'll see. Yeah. TBD while the the proposed rule quickly works its way through the regulatory process and while UAE's probe continues.
John Byrne: Did you wanna talk about what the OCC and the agencies have done?
Elliot Berman: The OCC and the FDIC together , I think it was in April, they proposed a rule related to bank examinations. And they've now finalized the rule. I think the big question mark that people had about whether there'd be any meaningful change between the proposal and the final was how they were gonna define unsafe or unsound banking practices, and how that would then move on to matters requiring attention.
And then they've also filed a notice for a proposed rulemaking, so that'll take a little while to go through the comment period and get to the final form. And this relates, to particularly matters requiring attention, so a different set of MRAs for violations of law and regulations. So John, I'll let you talk about the final rule if you want. I have one comment about it, but I'll reserve it till you're done.
John Byrne: As I look at this and another quote from the Comptroller Gould, I gotta say that in all the years of covering the OCC this Comptroller clearly has the most public-facing comments that I've ever seen from a person in that role.
He says that this is historic, this is a return to risk-based. And then, this is the key here, he says the following, "It's critical that examiners and institutions prioritize material financial risks and substantive violation of law over concerns related to policies, process, documentation, and other non-financial risks, and that the agency's supervision and enforcement standards further that prioritization."
I was always taught that strong policies and how you follow those policies and what the processes are, including documentation, tells you how strong the particular institution is. So the fact that's being deprioritized, if that's a word it's going to be interesting to watch how this all plays out going forward.
So there's no question that all of us in the AML community have asked for better clarity, less focus on check-the-box sort of requirements. But the question for all of us is this doing that, or does this go way beyond that? And I guess we'll wait and see.
Elliot Berman: I said before I have one comment, I actually have two.
So one is I find it interesting that the OCC and the FDIC have come out jointly. The Fed has not even issued a proposal.
John Byrne: I know. That is fascinating. That's not the way this normally works.
Elliot Berman: No. Normally, the way this works is that it comes out oftentimes through the FFIEC, so you pick up all the members, including-
John Byrne: Right
Elliot Berman: even NCUA. Yeah. But for whatever reason and again, I have not seen anything, any statements from the Fed there's probably conjecture by pundits, but I tend not to pay a lot of attention to them. So we'll see what happens.
The other thing is, and I've said this about a number of other regulatory changes, I feel like this is one where the pendulum is moving, and like pendulums often do, when they start moving, they move to the extreme ends, and over time, when they wind down, they end up in the middle. That's the, how the physics of it works.
But right now, we're getting probably a swing from pretty far to the restrictive side to pretty far to the have a good time side. And I think that this may, coupled with economic impact and other things like that, have two effects. One, I think in the near term, our colleagues who are in compliance are likely to have overall, poor tone from the top, a bigger struggle creating a culture of compliance, and definitely downward pressure on resources and budgets.
This comes at a really interesting time because most organizations that are on a calendar fiscal, they're going into budget. I can picture conversations between executive level folks and top level compliance people saying, "Hey, with those new changes you told us about, take a good look at your budget."
And then, will this seed part of another banking crisis down the road, coupled with other activity, not just these changes. So we'll have to see.
John Byrne: And by the way, the proposed rule, 30-day comment period. Really? Not 60, not 90. But that tells you a little bit about what they think they're gonna end up with in terms of the rule-making process.
Elliot Berman: And the goal is clearly to have this be in effect by year-end.
John Byrne: You got it. Yep.
Elliot Berman: Let's all remember what the impact of the the entrepreneurial move fast and break things. That hasn't generally gone all that well. In the regulatory world, I think it goes really poorly. But I admit it, I'm old, I'm an old school guy. I lived through all kinds of regulation changes, some that actually made a lot of sense. Some, Garn-St. Germain , not so good. We let an entire part of the financial services industry immediately get into business lines they knew nothing about, and it created a major crisis.
I'm probably crisis sensitive, but we'll see. You and I won't be doing this podcast probably when it happens, but- No ... if somebody following us will be able to say, this came from, or at least in part, from that." We'll see.
John Byrne: We had mentioned a few weeks ago, actually, not in response to the passing of Senator Graham, but because right after that, the Senate took up a sanctions-against-Russia bill that he had been promoting, and it did pass overwhelmingly.
It's stuck. This is from Punchbowl News and they say the Russian sanctions bill is hanging by a thread. And one of the reasons for this little bit of a Washington insider, is a lot of Democrats oppose it because in the bill they've added additional authority for Trump to put out more tariffs.
Many Democrats who support Ukraine and want to punish Russia for what it's done do not wanna do it in this vehicle, and have actually said in public that Russia must be held accountable, I'm quoting here from Representative Sanchez from California, for invading Ukraine. But the bill's not the way to do it.
She said, "There's authority to do this without legislation." In any event, we had reported on that bill moving quickly through the Senate, but clearly it has hit a roadblock. This same Punchbowl News, by the way, one of their other headlines is, "Should the House just go out for the year?" 'Cause they're not doing anything.
That's again a insider Washington comment. But I thought that was that was their headline. Should the House even stick around? So anyway, so not much getting done legislatively in Washington. All the things we've been reporting on are being done either by proposed rules or policies or executive orders.
Wanted to mention that. One other thing from me and then I'll throw it back to you to finish this up. One of the Fed governors, Michael Barr, Governor Barr, gave a speech- actually today as we record this. So this is the written portion of the speech that he gave at a conference in Washington called the Second Chance Lending Forum.
And that group tries to figure out ways to help with creditworthiness for those that have criminal records but have paid their price either through jail time or other methods. And so he talks at length about financial inclusion. It's interesting speech that he gives with some statistics that he talks about in terms of people being able to, turn their lives around once they've served their time.
But it's difficult for them to get jobs. Difficult for them to even apply. But he concludes this way, he said, "One of the great promises of technology and innovation is that they help us tackle long-standing challenges and unlock opportunities."
Goes on to say that, "Unlocking is a good word 'cause it extends opportunity to individuals whose challenges do not end when their imprisonment or other engagement with the legal system is over." Then he says, "Financial inclusion could help them succeed as workers, consumers, and entrepreneurs."
So he both mentions the use of AI in this space but also giving folks the opportunity that perhaps they don't get necessarily today in the private or public sectors. In any event, this is a speech by Michael Barr, and it's entitled Unlocking Opportunities for Workers and Entrepreneurs with a Criminal Record
Elliot Berman: For those of you who did not log into the live stream, our August webinar on the risks related to virtual assets should be on the website by the time you hear this podcast.
And our September webinar will be September 24th, live stream at 1:00 PM that day. You can register for that, and that's on AML Compliance Best Practices: Navigating the Evolving Global Compliance Landscape, and I've got a great panel lined up. I urge you to register for that. John, anything else?
John Byrne: We have the interview that I did with the investigative journalist is gonna get posted soon, so look for that. Also, we are efforting some additional conversations, and one that we're definitely going to do, just a question of scheduling it is, as we, I think all know, and we'll mention this again next week in our conversation next Friday is 25 years since 9/11.
And Dennis Lormel, who was the first head of TFOS, has agreed to sit down with me for a conversation, both about that horrific day, but also what it led to and where we are today, Patriot Act, and those sorts of things. Our hope is to do that in the next several days and try to get that up, so you can hear that before the 11th.
So we're working on that as well. And the last thing I'll say is to our friends in Canada I hope you enjoy traveling and fishing and boating continuing on Lake Ontario.
Elliot Berman: All right, John. You have a good rest of the week, and I will talk to you next week.
John Byrne: Elbows up. All right.
Elliot Berman: All right. Stay safe. Bye-bye.