This Week in AML

International Corruption, FATF Upgrade, AI Cyber Risks, and More

This week, the US Department of Justice filed a forfeiture action to seize New York apartments allegedly purchased with funds from a corruption scheme in Mongolia. FATF upgraded its assessment of the US’s response to Recommendation 24 on beneficial ownership. The Wolfsberg Group issued new guidance on internal audit programs for financial crime compliance programs. The US Treasury released a report on managing AI-specific cybersecurity risks in the financial sector. John and Elliot discuss these items and their meaning for the financial crime compliance community.


International Corruption, FATF Upgrade, AI Cyber Risks, and More - TRANSCRIPT

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

John Byrne: Good, Elliot. A lot going on this week. Rainy day in Washington, DC and outside. A lot of things happening. I wanna dive right into it. The Treasury Department has posted quite a bit of information on, on a number of related items related to our community. One I just saw as we're going to record and that's a report released on managing artificial intelligence specific cybersecurity risks in the financial sector.

AI, obviously, something that everybody's paying attention to. Just came out, so I haven't gone through it in any depth, of course. But in the report, Treasury is identifying opportunities and challenges for AI to security and resiliency of the financial services sector, and there's a series of steps that they're recommending dealing with operational risk, cybersecurity, and fraud challenges.

So I ask folks to just take a look at that. Two I'll call out. One is regulatory coordination. They said FIs and regulators are collaborating on how best to resolve oversight concerns, but there's concerns about what they're calling regulatory fragmentation, as different financial sector regulators in state and federal level consider regulation.

That's a, that's an obvious statement, but I think relevant. And another one that's really interesting, gaps in human capital, says the rapid pace of AI development has exposed a substantial AI workforce talent gap for those that are skilled in both creating and maintaining AI models and AI users. And they're recommending a set of best practices for what they're calling less skilled practitioners, how to use AI systems.

So there's a lot in there, again, on training, on security, on digital identity. So again, just came out a report on quote, managing artificial intelligence, specific cybersecurity risks in the financial sector. The other thing I saw was late last week after our conversation last week posted, and that was remarks by the Deputy Secretary on the ongoing problem with fentanyl.

And so there was a meeting on Friday of last week with Phoenix DEA, local enforcement, the police department, and the private sector which included the IRS's Counter Fentanyl Strike Force, and and members of the financial sector, and they talked about how to coordinate and deal with the issue of fentanyl at Phoenix. And they also announced at the same time new sanctions against a major Sinaloa Cartel network, which is 21 targets responsible for trafficking fentanyl into Arizona and the U. S. So again, it was a meeting, a roundtable, but it was building on the Biden administration's focus on this issue and also a lot of the work being done by not just state. and federal law enforcement, but private sector working on this as well.

Elliot Berman: Yes. A critical issue, obviously with lot of complexity because of its international nature as well as the the kind of the danger of the problem. One of the things that you and I both saw since we recorded last is that the Wolfsberg Group issued updated principles for auditing a financial crime risk management program for effectiveness under the Wolfsberg factors. This update is looking at how internal audit should be looking at financial crime programs against the three Wolfsberg factors, which are complying with financial crime laws and regulations, establishing a reasonable and risk based set of controls to mitigate the risks of an FI being used to facilitate illicit activity and providing highly useful information to relevant government agencies in defined priority areas.

So the group's paper comes at it using those three factors and things that internal audit can and should do. I have to say it's a good thing for them to publish this and maybe put a common set of ideas out there, but I didn't find anything exciting or new in here. My experience in working with internal audit, both when I was inside and also advising clients when I was outside in a law firm, is that at least based on the expectation of an independent review of a program under the Bank Secrecy Act regulations in the US those organizations that feel that their internal audit group has the sophistication to do it, this is what they're doing.

Worth a look to understand where Wolfsberg is, and again, to have ideally a global common set of goals, but I don't think this is a call to action for organizations that have already had their internal audit doing a good job of doing the independent program review.

John Byrne: Last week when we recorded, we were in the middle of our AML Partnership Forum, the third annual. One of the topics covered, of course, was what's going on in the regulatory legislative standpoint which included beneficial ownership in that issue and the lawsuit that we've talked about before in Alabama suggesting that businesses will be harmed by Treasury's or FinCEN's approach to that regulation. But given all of that, something came out early this week that's relevant to the beneficial ownership debate, and that's FATF announced that the U. S. has been graded to, quote, largely compliant, unquote, with FATF Recommendation 24 which relates to the beneficial ownership issue.

And so this is in the FATF seventh enhanced follow up report of the US, the updated rating is there. And according to the Secretary of Treasury Yellen, she is quoted in a press statement on the website that the US's upgraded rating is a result of nearly a decade of hard work by the Treasury Department along with our interagency partners to stop the flow of dirty money through anonymous companies, unquote. And she adds, quote, we're fully committed to strengthening the implementation of the FATF's global standards as we work to advance transparency and fairness across the U. S. financial system unquote. So even though there's some issues related to implementation there certainly has been progress and that's what FATF has indicated by their upgraded rating.

Elliot Berman: Yes, I saw that and what I was struck with was first the fact that it was likely the earlier rating in this, regarding Recommendation 24 that helped provide leverage for Treasury to get the Corporate Transparency Act passed and now implemented or at least partially implemented. I think this is a space where we will see FATF in its Recommendation 24, continue to review what that ought to look like globally.

And I think there'll be more work to be done. The US has implemented something that you and I have talked about many times. It has some significant positives it has some interesting quirks in its implementation. Those quirks may ultimately cause us to fall behind again, unless we're proactive in keeping up with whatever FATF comes up with. But Recommendation 24 is only going to get more attention because of the importance of tracking who's the owner and where's the money coming from and going.

John Byrne: We talked about this offline, is an OCC consent order against a Former President, COO, and CFO of Sterling Bank Trust in Southfield, Michigan. What are some of the issues in that consent order?

Elliot Berman: Yeah, it was interesting. One of the things that's happening in here is that Comptroller's findings have to do with both something that the bank offered called the Advantage Loan Program, which is described as a low document residential loan program, of which there have been many over the years.

But in addition to that, it ties it to money laundering. And so there's both the challenges of how this program was implemented, but also the failure of the compliance culture in the organization and their Bank Secrecy Act program. The fine for this person totals $150,000 payable in installments, which made me smile since there was a loan program component here. But I thought that was interesting because while there have not been a lot of consent orders from individual officers related to Bank Secrecy Act programs there have been some, as you and I have followed over the years.

And this fine seemed a little low. There was reference to the fact that the respondent received annual bonuses over a three year period, totaling over $400,000. So that was a lot of money to end up with that fine. Again, I'm not a big fines person, but I just thought those kind of didn't fit together in the same way as usual. So interesting where that was going.

I think the other phrase that caught my eye, by reason of the foregoing where they go through all the findings, respondent that's the person who's the target, recklessly engaged in unsafe and unsound practices. And you and I have talked for many years about the fact that in the end in the US, the real club that regulators have is unsafe and unsound banking practices, because their mandate is to maintain the safety and soundness of the banking system. So that is really the foundational purpose of most bank regulations here in our country. And it came out right here in these findings.

John Byrne: Last thing. There is a Justice Department announcement on a corruption scheme in New York. No, not the one you're thinking of. This is they seek forfeiture of $14 million from Manhattan apartments purchased with proceeds of, this is the description, Mongolian corruption scheme.

This forfeiture complaint was based on the allegations that these purchases were done from an international corruption scheme based on violations of the federal money laundering statutes. In the complaint, the former Prime Minister of Mongolia, according to the complaint, abused his position as Prime Minister to profit from the sale of his country's natural resources.

He and his family used the proceeds of their corrupt scheme to buy this high end real estate. For And again, according to the Justice Department, those properties are subject to forfeiture. Kleptocrats should take note. The Criminal Division is unwavering in its resolve to recover proceeds of official corruption and take the profits out of crime.

A lengthy description here. FBI's New York International Corruption Squad is investigating the case. The Justice Department's Office of International Affairs provided assistance, and this is related to the Kleptocracy Asset Recovery Initiative that was started by the Justice Department a few years ago. And as always at the bottom, they say civil complaint is merely an allegation. The government has the burden of establishing the assets that are subject to forfeiture by, of course, the preponderance of the evidence. But again, another example of folks taking advantage of illicit funds to purchase real estate.

Elliot Berman: Yes. So real estate a big deal here again. Also former Prime Minister Batbold is still serving as a member of Mongolia's parliament.

John Byrne: Of course he is.

Elliot Berman: I know you recorded an interesting edition of AML Conversations that we have not posted because you did the interview this morning. You just want to give that a little bit of a plug and so people can watch for it when we do post it.

John Byrne: Sure. Interesting report done jointly by FATF and OECD in November of last year, and that's on citizenship and residency by investment programs. Something that I was only very generally aware of. A very interesting conversation with two authors of the report, one from the Treasury Department and one that works with the UK authorities and is assigned to FATF, and they both walk through what these issues are. RBI, CBI is the acronyms that are used, how it occurs, and what are the challenges in terms of illicit movement of illicit funds.

Something, again, we were generally aware of, and they give recommendations on what financial institutions can do and what governments can do. Certainly some governments are benefiting from these investment programs from foreign investors. In some jurisdictions, as much as one third of all their funds come from these foreign investors, which is amazing. So we'll, we had a really good drill down on this. The report, like I said, is already available on FATF and OECD's website, and we will post that shortly.

Elliot Berman: And then our webinar will be April 25th, and it will be on how to use consent orders and and other orders issued by the regulators identifying problems in existing programs to tune up your own AML compliance program, as well as do training and other ways to get lessons learned from those documents.

John Byrne: Sounds good. Elliot, have yourself a good week. And those of you that are still paying attention to the NCAAs, Marquette is in the Sweet 16, plays NC State Friday night. We're hoping we make it to Sunday.

Elliot Berman: Yes, that would be really exciting. But getting to the Sweet 16 was a big step. More to come, we hope.

John Byrne: Take care. Stay safe.

Elliot Berman: You too. Bye bye.