This Week in AML

State-level Regulation of Crypto and Other News

The New York Attorney General has proposed legislation to regulate the cryptocurrency industry. The proposal includes provisions protecting investors, increasing transparency, and eliminating conflicts of interest. John and Elliot discuss key aspects of the proposal and its implications for federal regulation of the virtual currency space. They also touch on several other news items from this week.


State-level Regulation of Crypto and Other News- TRANSCRIPT

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

John Byrne: Good, Elliot. Just got back from West Coast. AML last week, and it was their 30th anniversary. I'm stepping down from their advisory board. So basically, it was the last time I'll participate. Great program. They acknowledged with a career award are our colleague, Dennis Lormel.

So Dennis received what they call the Patricia Wise Award. Pat was instrumental in creating West Coast AML. So that was great. A lot of sessions on crypto, elder abuse, some really excellent case studies from law enforcement. Obviously this was the program that we patterned our own AML Partnership Forum after. It's was a good time to catch up with a number of folks.

There were a number of bankers from Silicon Valley and some of the other institutions out there that obviously there's been so many regulatory challenges, so they are, still trying to stay on top of issues and everything. So got to connect with some of those folks that I've known for quite a while.

All in all very interesting program. Our colleague Chuck Taylor, who's head of the board there, participated as well. I just wanted to reference that, but a lot of things going on. There's enough that we could do 4 or 5 of these, but I thought maybe we just mentioned a couple. Maybe start with you. You flagged the the recent information on TD bank and, potential acquisition of First Horizon. It's got some AML related issues, right?

Elliot Berman: Yes. That transaction was announced some time ago and there's been several press releases or comments by the two organizations about not being able to have a clear timeline for when the regulators would approve the transaction.

It was announced earlier this week that the parties, TD and First Horizon have ended the transaction and walked away. It's being reported also that the reason that TD was unable to get an approval was ongoing conversations with its primary federal regulators about its problems in its anti-money laundering compliance program.

So the reason it caught my attention is over the years, you and I have certainly heard from people we worked with in various banks and just in the community in general, the uninformed saying, why is this compliance so important? The first reason I think is it's doing the right thing is the right thing.

But the other reason from a business strategy perspective is if you want to be in the acquisition business you have to have your basic banking operations in good stead and Bank Secrecy Act compliance is something the regulators look at very seriously when they're deciding whether to approve an acquisition. This is a case where it appears, there's been no statement from the regulators, but it appears that it ended up scuttling a significant acquisition transaction.

John Byrne: And, I can recall back in the early days of doing training in this space it was always emphasized that if you're going to acquire an institution you have to do your due diligence about their due diligence. So AML is obviously an important part of that. So this is a pretty clear example of what happens when there is issues.

Yeah, I think this does warrant a mention, I noticed too I haven't looked closely at it, but there is a recent study by my old organization's communication vehicle Money laundering. com that they released this week on enforcement actions. I haven't read it yet, so they said, I think that the numbers have ticked up a little bit in terms of the number of enforcement actions, but the dollar amounts are a little less.

Again, I'm paraphrasing. All I'll say about that, and I even said it when I was at ACAMS, that's all well and good to learn what the enforcement actions are, but let's face facts. The bottom line for institutions of all kinds is the response you have to any regulatory criticism. So it's not an enforcement action to get an MRA or MRIA.

You've got to spend time, energy and resources to address that. And that's not part of these surveys. So I wouldn't take anything away from a survey on enforcement actions, but recognize what it doesn't do. It doesn't tell you, you have to learn that through each agency's reports.

What they're focused on in terms of regulatory criticism that doesn't rise to the level of a major dramatic enforcement action. So I think everybody knows that, but it often surprises me when we focus only on that, because I've heard some non-AML people say, oh if the enforcement actions are down, that must mean that the regulators are less concerned about problems. And that's as we both know, it's not remotely the case.

Elliot Berman: Right. So surveys like the one you're referring to are only able to tap into what is public and to use the iceberg analogy, that's, that's the little bit that sticks up above the water. All the rest of the regulatory

examination reports are underwater because they're private between the regulator and the institution.

And those are not going to show up in any survey. It's not the problem of the surveyor. It's just the public data they have to use. So I agree with you. It's always interesting. To see if there's any trend, but I think going much beyond that in terms of what it means is difficult.

John Byrne: Late last week, we both flagged and many have talked about this. Attorney General Letitia James of New York has proposed regulations on cryptocurrency industry. Which according to the press statement, they say, would eliminate conflicts of interest, increase transparency and impose what they're calling common sense measures to protect investors. But it does a bunch of things.

I'll just reference a couple, then ask you to weigh in. They would require independent public audits of cryptocurrency exchanges. And prevent individuals from owning the same company, such as brokers and tokens that would address the conflict of interest. Crypto platforms would also have responsibility to customers similar to banks under the EFTA which I know you know very well, by requiring platforms to reimburse customers who are victims of fraud and according again to the statement would strengthen DFS in New York, their authority over digital assets. What are the things jumped out at you?

Elliot Berman: I guess I want to take it up to the policy level. It's a very comprehensive proposal. It struck me at the policy level two things. One, is this going to drive action in Congress where they haven't been able to work it out. I know that offline before we started the recording, you mentioned that House Financial Services is looking at elements of the virtual asset space today in a hearing.

But, will Congress come up with a national comprehensive approach to this? Or will states that have very fulsome regulation like New York be the leaders? So that's, for me, that's a policy question. The other thing is I noticed that there are some elemental similarities between this and the direction that the EU is going. i'm not saying that New York looked at the EU and just crossed out EU and wrote in New York. It's not like that. But these themes of consumer protection, transparency, conflicts of interest, these are becoming common themes globally where regulatory bodies are seeing the problems arise in this particular space.

And the bigger proposals that I'm seeing, again, both domestically and globally, are zeroing in on those places. And the consumer protection one is very interesting both domestically and abroad, because I think part of the early pitch for virtual currencies was without using these words, but was about the fact that it was safe. And now we're finding out that it Isn't perfectly safe.

So it's interesting now that regulators are saying we need to weigh into this space in a number of different ways. But consumer protection is now becoming a lead theme.

John Byrne: Exactly. So more to come on what the legislators are doing. Of course, I did notice from West Coast AML, there was a lot of conversations from people from the crypto world. And again, more to come on all of that.

The other thing we want to mention before we close this down is this morning, a grand jury has indicted George Santos. George Santos, as everybody knows, is the congressman who was elected just last session.

And they indicted him and he turned himself in this morning for what we understand to be a series of frauds, which include for unemployment benefit fraud, election fraud and money laundering. And also there's a section of the indictment, which runs 20 pages, that talks about the potential forfeiture of a lot of the funds that he was able to get through illicit means. There's so much in here. Like I said election fraud. I think we're well aware that he used funds that were designed to help his campaign for personal use to pay off bills to buy luxury goods. But also he created a or was involved in a 501(c)(3) that actually wasn't or (c)(4) social welfare organization.

But the money laundering charges under 18 U. S. C. 1957, dollar amounts over 10, 000 that are derived from illicit means those charges in there. So if you're looking for things that are relevant to our financial crime world, George Santos gives you a lot to chew on and in his various fraud schemes.

So obviously there'll be more to come here, but this was just released. So I wanted to mention this. This is certainly something that I'm gonna, I teach a class, at George Mason. We start in a couple of weeks using what's going on in real life, often brings home how these statutes work. And so this will certainly be something we'll be talking about as well.

Elliot Berman: An additional claim against him in the indictment is false statements in House disclosure reports. Which is interesting because when

some of his false statements that were made during the election process in his running for his house seat, were disclosed. There was the question of whether he would be seated, which he was, and then there was the question of whether he would be censured or dismissed from the House, which there is a mechanism for that.

And House leadership indicated that they were going to wait for the results of a House ethics committee. Investigation, which is ongoing. It'll be interesting to see how quickly this case moves. Also, three weeks ago, I think, maybe a little longer, Santos announced pretty early, I would say, that he was going to run for reelection.

That's got to be like quadrupling down. It can't be doubling down. Very interesting. Again, an indictment is just an indictment, but there's a lot in here. It appears that prosecutors and the FBI did a lot of work and had a lot of information. It's very detailed, which they often are, and it's hard to see what the good pathway out of this for the congressman is going to be.

John Byrne: That's exactly right. As we say, more to come on this one.

Elliot Berman: More to come on this one, for sure. So John, we've got a webinar coming up later in the month. You want to talk about that?

John Byrne: Yeah, on May 25th from 1 to 2 o'clock Eastern Time, we'll be doing one on private public partnerships. We're going to focus on a couple things. One is we have representatives from IRS plus Don Ford from our advisory board, who, as we know, used to be the IRS chief, and they're going to talk about a project that worked off the J5 that he's talked about before it. So it's an international private public partnership with an IRS representative who who's managing that.

And then some other examples of how the IRS works with the private sector. Marilu Jimenez, also from our advisory board, who runs her own firm, has done quite a bit of work with law enforcement in Puerto Rico, HSI and IRS. And she's going to talk about that and the importance of those relationships. And so we're gonna give you some very good practical advice on how to navigate and embrace private public partnership. That's something that obviously we feel very strongly about.

Elliot Berman: And you can register at our website AMLrightsource.com for the webinar. And we have other good things coming,

but we'll save talking about those for next week. John, you have a great weekend and I will talk to you next week.

John Byrne: Take care, Elliot. Stay safe.

Elliot Berman: You too. Bye. Bye.