This Week in AML

Lots of Activity in the US Congress

Both the US House and Senate have been very active ahead of leaving for their August recess. John and Elliot discuss the Senate proposal to apply the AML/CFT compliance requirements to all the players in the virtual assets space and the proposals that moved to the House floor on stablecoins, limiting public company disclosures on climate change impact, and many other issues. 



Lots of Activity in the US Congress - TRANSCRIPT

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

John Byrne: Hi, Elliot. Doing well, hitting August. Nice weather here in Northern Virginia. And we've had some hot spells, but it's pretty nice. Pretty exciting week going on. Obviously, Congress is out until September, we're gonna talk about some of the things they did prior to leaving.

But I would be remiss if we didn't mention the big news that's occurred this week. And that's obviously the criminal indictment against the former president. The violations - four aspects of Title 18 - conspiracy to defraud the US, to obstruct an official proceeding, attempt to obstruct a proceeding, which is a subsection of the same statute, and conspiracy against rights.

It is relevant to national security and obviously it'll play out going forward. But it's important. People should actually read the indictments 45 pages. Lays these things out in pretty clear way. Again, we would be remiss if we didn't mention that we obviously know this week that's what's happened.

So I just wanted to throw that out there in the beginning of our conversation.

Elliot Berman: Obviously much more to come as the existing indictments work their way through the system and the potential for at least one more set of indictments is imminent.

John Byrne: So a couple of things, on the Senate side late last week, a bill was introduced that was included in the National Defence Authorization Act, which, as we know, has been the vehicle in the past for legislation that our community cares about in the AML space.

But a bipartisan bill with a couple of Democrats, Joe Manchin, Elizabeth Warren, Republicans, Marshall from Kansas and Lindsey Graham from South Carolina. And they're calling it the Digital Asset Anti Money Laundering Act, and among other things they suggest in their description that it would mitigate the risks of digital assets posed to national security, closing loopholes, and forcing greater compliance with AML and CFT frameworks. So I think that's a pretty, both because it's bipartisan, but also it is, part of this larger bill.

The supporters of this is a who's who of groups that we are some familiar with, and some we knew of. That's the Bank Policy Institute, Transparency International, Global Financial Integrity, who we've had the pleasure of working with and interviewing, the National District Attorneys Association, and the National Consumer Law Center, so I think that's a pretty impressive group of folks that support this.

There's a lot in here. They asked FinCEN to issue guidance to FIs on mitigating the risk of transacting with digital assets. They are also extending BSA responsibilities, and they're saying including know your customer requirements, which is part of that, to digital asset wallet providers, miners, validators, and other network participants. And there's a whole host of other things in there, but pretty broad, pretty comprehensive, and it looks like it's going to have some traction.

Elliot Berman: Yes and if it's passed in the form that was adopted into the NDAA by the Senate, it's going to have a significant impact on lots of players in the digital asset space. There are a lot of intermediaries throughout the process that are not set up, in any real way to come into compliance.

So how all that would happen and would be very interesting. But I think it is important, and you and I have talked about this many times and we've each written about it, this kind of value transfer methodology needs to be brought into the, anti-money laundering, anti-terrorist financing regime.

Otherwise, it's leaving the doors open to a totally unregulated place and inviting the bad actors to go there. And I don't think that virtual assets are a bad thing per se. But if they're unregulated, they can be a very dangerous thing. Both for criminal activity, but also for national security activity, not just the for the US, but for all sovereign nations.

John Byrne: So there's a lot in there. People should take a look. There's a fact sheet off of several of the websites of the sponsors. But Elliot, there's also some activity, we referenced it last week, that House Financial Services was in the process of passing several pieces of legislation out of committee. So it's in the earlier stages, Dealing with stable coins and other aspects of the digital asset world. What struck you from some of those legislative proposals?

Elliot Berman: Let's start with the stable coin. So it's called Clarity for Payment Stable Coins Act of 2023. So one of the things to understand is what are other areas doing, and I'm going to come to what's in this act real quickly, but just a reminder that the European Union is in the process of implementing what they call Markets in Crypto Assets or MiCA. That's pretty far along that goes into full effect the beginning of 2024. I wrote a blog post about this almost exactly a year ago.

So the US is playing catch up. We don't have a clear regulatory framework in the US for this. Stablecoins are a virtual asset that are backed one for one with other non-virtual assets. The list of reserve assets that this act identifies are all denominated in US dollars. So that's one piece.

I don't think that this has focused as much on the consumer protection aspects of things as the European approach has. The European approach allows consumers who own stablecoins to exchange them on demand for reserve assets. It's not as clear in this act, at least in the markup that went to the floor that you have the same consumer protection.

It's a good start. I think it could have been a better start with a bipartisan approach. But the chairman of House Financial Services chose to take a here are our proposals and we're going to vote them up or down. And when the committee voted a long party lines there was no real modification to take into account ideas beyond what was in the original proposal.

John Byrne: Watching that markup, a lot of the Representatives from the Democratic side took the opportunity to comment on the lack of bipartisanship, but more importantly they were complaining about the lack of or the potential reduction of funding for FinCEN saying that was counterintuitive to say the least.

So I think that's an important issue to consider as well. We'll follow it. I think the Senate language is probably a much more imminent than the House language, but who knows. So a lot of activity in the fall when they come back in five or six weeks.

Elliot Berman: Yes. They also pushed out to the floor out of that same markup a number of other pieces of legislation, targeting a number of different things. One is there seems on the Republican side of the aisle to be a real distaste for ESG requirements. The SEC has required disclosures around ESG issues from reporting companies. In Europe and other large economies with similar markets styles to the US those kinds of disclosures have become a global standard.

There were different pieces trying to attack it in different ways. One piece of legislation is to exclude or to authorize companies to exclude all shareholder proposals related to environmental, social, or political topics. There was a proposal designed to have our bank regulators decouple from some of the international non-governmental organizations like Bank for International Settlements and some others.

The last one is a piece of legislation that moved to the floor called the GUARDRAIL Act, Guiding Uniform and Responsible Disclosure Requirements and Information Limits Act. The group in the back room that's naming these things to give them clever names, they're still gainfully employed.

And this is aimed directly at overturning ESG disclosures. The mechanism they use in the act is, They require only material information be disclosed, and they define climate related things, for example, is specifically excluded from the definition of material. And that just struck me as interesting because I think about an investor who wants to invest in a publicly traded energy company, and this would seem to say that don't have to disclose the potential impact of climate change on the grid. But in their business, that seems to me to be incredibly material but now it's going to be, the proposal will be defined it out. A lot of proposed changes strike me as being a significant move away from what has been a hallmark of US securities regulation and fair markets in securities. And that is disclosure.

John Byrne: Yeah, Elliot's got a great way of understating things, folks, as you appreciate listening to our conversation. So a couple quick things I want to mention. We've done a few interviews that will be posted throughout the month. We're planning a couple of couple more.

We did back in July, the FATF plenary outcome conversation. And I just wanted to add something very quickly because there's a deadline for August 18th for FATF as they're updating their best practices paper regarding NPOs. The best practice paper to combat the abuse of NPOs.

So they're still looking for comments from the public. You can go on their website and file those comments. Particular interest, they're looking for comments on mitigating terrorist financing risks at the NPO individual level, something that's important to our community and to the NPO community, NPOs and donors initiative to ensure access of legitimate NPOs to financial services. And examples of, this is really important, misapplication of Recommendation 8, to identify avoidable practices and to help countries FIs and NPOs correctly implement the risk based approach.

So I wanted to highlight that's out there. We hope people listening will file comments either through their associations or institutions, or if you want to send us your comments, we'll happily file them for you anonymously, of course, coming from us. Feel free to reach out to us as well.

Elliot Berman: Our August webinar is the 24th, starts at 1 p. m. Eastern time. And it's about AML best practices, and we're going to focus on what you need to know to keep your program at its best. Got a great panel lined up, and some great topics to talk with you about.

And you can register by going to our website, amlrightsource.com.

John Byrne: Great, Elliot. Have a great week, and we'll talk again next week. Take care.

Elliot Berman: You too. Bye bye.