This Week in AML

Investment Advisors BSA Proposal and More

FinCEN issued a Notice of Proposed Rulemaking on giving investment advisors reporting and recordkeeping obligations under the BSA this week. FinCEN also posted a Financial Trend Analysis reviewing the use of convertible virtual currency and online child sexual exploitation and human trafficking. John and Elliot discuss these and other happenings this week and their meaning for the financial crime compliance community.


Investment Advisors BSA Proposal and More - TRANSCRIPT

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

John Byrne: I'm good, Elliot. A lot going on this week. When we do these recordings we do them mid week and, as things are happening, sometimes we have a chance to see them in real time. So this morning, there's actually testimony going on before the House Financial Services Committee from Brian Nelson from Treasury, and then Andrea Gacki, the FinCEN director. And folks should take a look at the testimony, but I just wanted to highlight two things very quickly.

One is, there's a whole section in there updating the committee on the work that FinCEN has done. And in an area that we've covered quite a bit human trafficking and smuggling, in the testimony she mentions specifically that FinCEN has received over 6,000 SARs referencing suspected human trafficking and related activities.

So that's in there. And she also, as she talks about the enforcement actions that they've been involved in, which I think they've done four in the past year, but just going to the conclusion, which I thought was relevant. She's only been there since September, but she, again, highlighting things have been going on throughout 2023.

She said there's been FinCEN exchange events on topics ranging from Hamas financing to wildlife trafficking, multiple public advisories, alerts. We've covered a lot of that as well. Two Section 311 actions. Those are the first since 2019. Four civil monetary penalties for violations of BSA. And she mentions all this going on while that they're working on the beneficial ownership implementation and all the challenges there. I think a lot of times FinCEN gets criticized. It's a small agency and resources are a challenge, but they have definitely produced a lot. I know we're going to talk about a couple of other things, but I thought I'd just mention that folks should take a look at the testimony.

The written statements are already posted on the Committee of Financial Services on the House side website, but you'll also get a sense of the scope of the hearing from the memorandum that gets posted by the House committee. So take a look at that when you get a chance.

Elliot Berman: Yes, and as you mentioned, couple things came out from FinCEN. We spoke last week about the notice of proposed rulemaking related to residential real estate transactions and SAR reporting. This week there is a notice of proposed rulemaking on anti money laundering program and suspicious report filing requirements for registered investment advisors and exempt reporting advisors.

So trying to bring the investment advisory world under a BSA regime. And then the other thing that came out this week is another one of FinCEN's financial trend analyses. And this one is related to use of convertible virtual currency for suspected online child sexual exploitation and human trafficking.

John Byrne: Yeah. So going back to investment advisors, it's just real quick. The rule covers the definition, meaning the definition, if you're registered with the SEC. Those are registered investment advisors and investment advisors that report to the SEC as exempt reporting advisors, what they call ERAs

The rule requires an implementation of a program, so that has to be overseen. The filing of certain reports, plus SAR reports, and then keeping records on transmittal of funds 'cause of the record keeping and travel rule. And then other obligations. I know I've mentioned this before when I was at the ABA over 20 years ago when the Patriot Act was being passed, we urged Congress to cover everybody, and sadly they never did. They made some attempts but investment advices was always on the table, and now we're actually got a notice of proposed rulemaking.

So it's going to be really interesting to watch the comments filed. I would imagine there's going to be a lot of effort to push back on this proposal, but we'll see what happens.

Elliot Berman: Yes, and there is history there. This proposal actually supersedes a proposal that was issued by FinCEN in 2015, attempting to do some of the same things. The proposals are not identical. I guess if I was going to be honest, I would say that the industry battled FinCEN to a standstill and that nine year old proposal is now being replaced with this one, but it was never implemented.

There's a fair amount of good intelligence that tells us that there's a lot of undisclosed money that flows through the Registered Investment Advisor process. This gets a lot more technical, and this is beyond what you and I are going to talk about, but there are registered investment advisors who are owned by bank holding companies in the United States, and so how they've been involved already.

The Investment Advisors Act of 1940 is a complicated animal. And there'll be lots of places to nitpick, if you will. And also to propose changes and refinement, but it's a pretty broad rule as proposed and would generally align RIAs and ERAs with the responsibilities that other financial services companies who have been brought under the BSA regulatory regime are expected to do.

I feel like the big driver, and John, correct me if I'm wrong here, of this coming out now first was AMLA, but more importantly, it has to do with the national security view that terrorist financing is very much at the top of the list. Any place that potentially terrorist related funds flow we need more insight into what's going on.

John Byrne: Contrary to public opinion, you and I were not around for the 1940 Act when that was created.

Elliot Berman: That's true. But I do remember reading about it in law school, and I think the ink was still wet. I'm not sure.

John Byrne: But that's probably true. Now, I cut you off when you were talking about the financial trend analysis. So going back to that this was, one of a series of FTAs, as they call it, that FinCEN has been issuing. And on this particular one, this has to do with convertible virtual currency and online child sexual exploitation, as you mentioned, and human trafficking.

So while it only covers, I say only, but this is the data points all of 2020 and 2021, I think the numbers are pretty dramatic. So the total number of online child sexual exploitation and human trafficking reporting increased from 336 in 2020 to 1,975 in 2021. And 95% of the filings involve convertible virtual currency, which I think is important.

And they identified four typologies. For example, the use of dark net marketplaces that distribute what they call the another version of this, CSAMs, peer to peer exchanges, CVC mixers and kiosks. And that described common trends within the BSA report. Again, they also give you a tip line in the analysis, and obviously there'll be updates to this, but this is important as we try to continue to get our arms around virtual currency and the use of that for potential movement of illicit funds for a variety of purposes.

Elliot Berman: One of the things that caught my eye in the FTA, was a discussion about the number of unique Bitcoin wallet addresses that had been reported. And it was a big number, relatively speaking, it was 1,800. But why it caught my eye is I know when we've done our webinars and other activities around human trafficking and there's been discussion with some of our experts about, what to report and how to report it.

Things like this kind of data, Bitcoin or other virtual currency wallet addresses and that kind of data is really valuable for being able to see the whole landscape and then feed information back to the community to know what to watch for. It was interesting to see that was called out as part of the analysis.

John Byrne: Another thing we wanted to highlight a good friend of our webinars and podcasts Jim Lee, the current IRS:CI chief has announced his retirement. So he's going to retire from federal service effective April the 6th. And Jim has been in roll since October, 2020, and just did a recent podcast with him that I reposted on LinkedIn just the other day when we got word of his retirement.

So people, folks should. Take a listen to that because Jim talks about some of the highlights from 2023. Again, we've been fortunate to work with the past two chiefs Don Fort, who's a member of our advisory board, and Jim, and they've also been very active with the AML Partnership Forum. Jim will also be acknowledged at the Forum this year, and he's been just a great partner.

So there's no replacement yet, as far as we know. Long career, he started back in 1995, been in a variety of roles within the IRS, but again a true partner, which is key to not just our Forum, but key to our community working across the private and public sectors. So we're happy for him and really appreciate the work that he's done.

Elliot Berman: Indeed we are. Last item before we go to all our commercials at the end. The Organized Crime and Corruption Reporting Project OCCRP, which we've talked about many times, and I know you've done a couple of interviews with folks from there. They do a lot with tracking corruption. They announced this week that they're entering into a partnership with two prominent universities in the UK, University of Exeter and the University of Oxford, to create and analyze new sources of data on enablers.

Another topic that you and I have talked about quite regularly. And the project is being called Global Finance and the Enablers of Corruption: Identifying Enabler Networks and Their Vulnerabilities. Combining both the research capabilities of universities, as well as the research and information gathering capabilities of OCCRP.

I'm sure we will see some very interesting things coming out of that partnership that we will talk about in the future, but just wanted to call that out. John let's see, we've got a webinar coming next week on banking as a service, and then you're working on one for March.

John Byrne: Yeah, March will be on, related to virtual assets. I just want to mention that we did, and it's been posted, Ari Redbord from TRM Labs sat down with me late last week and we talked about a bunch of things, including what he's focused on in his role at TRM. He's a former prosecutor, been at the Treasury Department and the changes in focus to now cryptocurrency and blockchain and all of that. So that's already up and running.

Did an interview that we'll post in the next couple of weeks with an academic who has just produced a paper that's related to de risking of Muslim charities because of misinformation, intentional misinformation, really interesting conversation. And I'm going to Puerto Rico next week for the Puerto Rican Bankers 20th Annual Anti Money Laundering Conference.

I was told yesterday on a pre call, I've been to 19 of the 20, so happy to be going back. But I'll be moderating a panel with federal regulators and the state banking commissioner. A lot of interesting things going on in Puerto Rico that are relevant, not just to what's happening in the Commonwealth there, but also internationally.

And so I'll bring back some information as well. So I'm looking forward to that. That's always a great opportunity to both catch up with various regulators and law enforcement folks, but also to hear what are the challenges that they're going on there? Because one of the big challenges is their international banking entities, IBEs .

We'll be talking a bit about that down there as well. And I'll give you some feedback from that when we talk next.

Elliot Berman: And lastly you mentioned it in passing about the AML Partnership Forum. That's coming up pretty quickly, March 18th through the 20th at the Mayflower Hotel in Washington, DC. We encourage you to register. There are still slots available. You can go to AMLPF. com and register. And there's still room at the hotel in our room block if you're coming from outside of the Washington area. But we encourage you to do it. It'll be a great public private partnership event.

Lots of people from the main federal law enforcement agencies and the industry. Really sitting down and talking about how key issues of today and how working together can help all of us resolve them.

John Byrne: That's great, Elliot. Thanks. For those keeping score, Marquette is fourth in the country. They have a big game this weekend against UConn, who's number one at UConn. Always a tough one, but we are very proud of our Golden Eagles. And last week they were seventh, pushed up to fourth and we're getting closer and closer to tournament time. For those of you that are interested in college basketball, and who isn't, frankly, best time of year.

All right, Elliot good stuff. We will catch up again next week and take care.

Elliot Berman: You too. Have a good rest of the week. Bye bye.