This Week in AML

Trafficking in Persons, EU Sanctions, a FATF Rethink, Iran Shadow Banking System, and More

This week, the US State Department issued its 2024 Trafficking Persons Report, the EU imposed additional sanctions against Russia, the OCCRP shared the content of an interview with the outgoing FATF president about the impact of Dubai Unlocked on the FATF’s assessment of Dubai, and OFAC announced sanctions on the elements of an Iranian shadow banking system. John and Elliot discuss these reports and other items and their meaning for the financial crime compliance community.


Trafficking in Persons, EU Sanctions, a FATF Rethink, Iran Shadow Banking System, and More  - TRANSCRIPT

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

John Byrne: Great, Elliot. My wife, Sue, and I appreciated the opportunity to spend some time with you and your family on your celebration last week. That was a great time. So thanks again for the invite for your 39th birthday. It was wonderful.

Elliot Berman: Karen and I both appreciated your coming all this way and joining us. It really was a wonderful party with a lot of friends and family and nice to have good things to celebrate. And next year when I turn 39 again, maybe we'll do it again.

John Byrne: There you go. A very active week as we are recording the FATF June plenary is underway. And those of you that follow and understand the process there, at the end of the week there'll be a press conference in which this year it's the outgoing President Kumar, he's the president Singapore his two year term is up, we'll have a press conference where they will talk about the the plenary outcomes, what sort of reports are still in the pipeline and those types of things.

So we will definitely cover those issues next week, but I did want to mention that. And since we're talking about FATF, one of the things that we've seen in terms of the mutual evaluation process, which is key to making FATF both relevant and efficient, right? So when they make decisions on formal critiques after the evaluation process, in some cases, countries get put on what they call the gray list. Which means there's a series of deficiencies, obviously, that need improvement.

And so that's clearly, outside of getting suspended like the Russians have been before their attacks in Ukraine, that's the worst possible outcome is to be on the gray list. So earlier this year, I believe, at the February plenary, it was announced, or at least at some point between then and now, that UAE was going to get off the gray list.

Interestingly enough, we talked about this, and I actually did a podcast with several of the reporters from the OCCRP the Organized Crime and Corruption Reporting Project. They did their major project on Dubai Unlocked, and showed a whole series of gaps there. So they just posted an interview that they did with the outgoing FATF president. And based on, in part, based on OCCRP's great work, they announced the following, they said that when FATF took UAE off the gray list, they now will review the findings from their recent investigation by the project and their media partners, which we've talked about, which revealed convicted criminals, fugitives, and sanctioned individuals own property in Dubai.

So those things will all be reconsidered according to the interview that they did with the outgoing president. So I think a great point here is investigative journalism is always impactful, but in this case, a direct result whether they put them back on the gray list, obviously remains to be seen.

But some of the quotes from others were the removal of UAE from the gray list appears perplexing given the reported evidence. So it'll be interesting to see how this turns out, but I did want to mention that, and more of the discussion that I just referenced is on the OCCRP website, and these were posted on June 25th of this week.

Elliot Berman: I'm not surprised and I fully agree with your comment, which is the importance of investigative journalism, and this is a great example of where you see a direct impact. I think we all need to continue to pay attention to investigative journalism and support its availability.

John Byrne: A couple other things, and then I'll hand it off to you. The Treasury Department this week through OFAC is sanctioning 50 entities and individuals that, according to the note, constitute multiple branches of a sprawling, quote, shadow banking, unquote, network used by both the Iran's Ministry of Defense and Armed Forces Logistics, and the Islamic Revolutionary Guard Corps. And that, that was utilized by them to gain illicit access to the international financial system and process billions of dollars since 2020.

So these were Iranian exchange houses and foreign cover companies under the control of the Ministry of Defense. And according to the Treasury, the US is taking action against this vast shadow banking system because they've laundered billions of dollars of oil proceeds and illicit revenue. So that's also available, the information there. The names, the description, how they characterize shadow banking on both the Treasury and OFAC's website.

Elliot Berman: I saw that it's an extensive issuance, including a diagram to show the flow of dummy invoices and payments about the dummy invoices and then the movement of the funds from the payments through the cover companies and the bank accounts that they hold.

John Byrne: And, based on what we just talked about before, these cover companies registered in Hong Kong and UAE. Some more gaps there.

Elliot Berman: Yeah, exactly. One thing that I saw this week, John, was the EU has adopted its 14th sanctions package against Russia related to the its invasion of Ukraine. And this one heavily focuses on liquefied natural gas which is a product that before the beginning of the war, Western Europe imported a lot of LNG from Russia.

They have been weaning themselves away from it. But now in an effort to be sure that Russia is not gaining hard currency revenue, there are other things in it, but there's a lot of focus on the LNG, both on the materiel itself, but also on the projects related to moving the LNG from where it's produced to where it gets used. So gas pipelines and the like.

Worth paying attention to and again, while this is an EU focused sanctions regime, to the extent that any of our listeners are banking companies that might be involved in these projects or supplying equipment or components they should be paying attention to that too. Because they're, these are quite extensive.

John Byrne: In the human trafficking space, I know you want to talk a bit and I'll add some points to the Trafficking in Persons report that was just issued by the State Department, but relevant to this as well, as we go to record today, there's been some interviews this morning on cable from DHS Director Mayorkas.

DHS has identified over 400 migrants brought to the US by ISIS affiliated human smuggling networks. They've arrested 150, but the whereabouts of a number including a little bit over 50 remain unknown. So I don't have more Information than that right now, but I know Mayorkas has been on a variety of the media outlets today talking about this and what DHS is doing, being as transparent as possible, but this is clearly yet another problem in the human smuggling space, but in the trafficking in persons report, again, just issued yesterday as we go to record this what were some of the key things that jumped out at you on that, in that report?

Elliot Berman: This is an annual report issued by the US State Department. It's a global view. It includes, and I know you're going to talk about this in a minute, a four tier ranking process about how countries around the globe are doing in terms of complying with the US laws related to trafficking in persons. As with each of these reports, and you and I talked about the 2003 report, as well, they're] identifying some key areas and issues and one is the continued expansion of digital technology.

How governments, law enforcement, the financial sector, NGOs, and technology companies all need to work in their lanes, but also look across their lanes to pay attention to what's happening in the trafficking space. And they talk about all the different types of trafficking, of course. One that caught my attention is there's a piece in the report about the continued expansion of trafficking for organ removal. So these are people who are trafficked for the purpose of removing vital organs, which are very valuable on the secondary market. In some countries, that's the only market. in which you can get an organ for transplant. In other countries, people who have sat on waiting lists in registries for many months or years, sometimes resort to the secondary market.

So that was one that I'm not quite sure how we all identify those transactions, but to be aware of. They also talked about the fact that there are now 13 countries that they identify as having government involvement in labor trafficking. And I'll read the list, Afghanistan, Belarus, Burma or Myanmar, the People's Republic of China, Cuba, Eritrea, Iran North Korea, Russia, South Sudan, Sudan, Syria, and Turkmenistan.

They also do a somewhat extended component of the report that talks about how the Cuban government is involved in labor trafficking through a series of bilateral international arrangements where they supply labor to the counterparty countries. And it results in the largest volume or largest percentage of the Cuban governmental budget that comes from International sources. So many countries, it's trade, but in this case, it's providing labor and the report certainly questions whether these people are all doing it voluntarily.

John Byrne: And just real quick, in terms of how they do the rankings, they look at a series of assessments, and that's the laws that have been enacted that prohibit trafficking in person, criminal punishments, penalties, a maximum of at least four years. I don't know why they came up with that particular number.

Human trafficking laws through a vigorous prosecution of trafficking in countries and sentencing of the traffickers and being proactive in terms of victim identification measures to guide law enforcement. And then finally government funding and partnerships with NGOs to ensure and provide victims with access to primary health care, counseling, shelter, allowing them to explain their experiences, to train counselors to help further deal with prevention methods.

So there's a pretty, it's not nuanced, but it's a pretty broad assessment list. And that just gives you an understanding of how these rankings, and obviously the countries that Elliot mentioned, are woefully lacking in those spaces, and in the cases of why they're being named, the government is actually promoting trafficking and smuggling. That report is out it's a good training tool for those of you that need to look and focus, in some part, on trafficking financial footprints. And so we urge you to take a look at that. It's on the State Department website.

Elliot Berman: Yes. And I, if I can just go back to Homeland Security for a moment, they also issued some guidance in the form of a memorandum, called strategic guidance and national priorities for US Critical Infrastructure Security and Resilience. And this is worth a look. It talks about, of course, cyber, evolving risks of AI the use of it, identifying and mitigating supply chain vulnerabilities, incorporating climate risks into sector resiliency efforts, and addressing growing dependency of critical infrastructure on space systems and assets. One of the things they're talking about is, hardening the GPS system.

There's a lot in here. And it's important to be aware of it because some of it certainly will touch our community. It's not directly about financial crime, but many of the things they talk about in here end up being part of financial crime.

John Byrne: All right, and the time we have left, we could spend another 15 minutes on this topic, and I think this will probably be the basis if not a webinar, a focused podcast. The FDIC late last week were the first of all the banking agencies to issue their proposed amendments to the BSA compliance rule.

What's interesting is the other agencies haven't done that yet. As of our recording, the Fed is supposed to do it this week, and I assume the OCC and NCUA will do it as well. But the rule is designed to revise the compliance program with new anti-money laundering countering the financing of terrorism, compliance program rules. So understand they've changed language, it's now not just BSA, it's AML CFT. But also it's designed to align with the rule to be proposed by FinCEN on the priorities.

This document, it's a 10 page memorandum, is what I was referring to. Obviously, the proposal is in the Register. But the reg proposal from FinCEN is not out yet. So this is really interesting timing. But the FDIC being the first one, in there, issued the proposal.

I'll just highlight a couple of quick things in there. One is the amendments, besides changing the list from BSA to AML CFT, which doesn't seem to be that big a deal, but, obviously we'll see how that works. But there's a section in here on risk assessment. So as many of our peers and colleagues in the AML community have said rightly that while risk assessments are important, they're not legally required.

But now they will be. So reading from the proposal, establish a risk assessment process that will serve the basis for the agency's AML CFT program, including identifying and documenting terrorist financing and other illicit finance risks, including the AML CFT priorities. Remember, they're not out yet.

And there'll be a periodic updating of risk assessment. So that'll also be a requirement. There's other things in here, but I just want to reference something, Elliot, just real quick. One of our colleagues, who former agency official and now working in the private sector, I asked, about this and what that person's initial thoughts were after looking at it.

And I'll just quote a couple things here because I think it's clearly relevant. It's something that we should consider as we file comments. The rule would formalize the requirement for a risk assessment. including the national priorities, as I just said, emphasizing the risk based nature of the program requirement. But again, quoting from the comment, we, as we've discussed many times, this person doesn't see how this could be interpreted as anything but additive to existing requirements. So the risk assessment has become a legal requirement, but also it must cover products, services, distribution channels, customers, intermediaries, and geographic locations.

And then it must address a national priority, but the rule proposed, at least by the FDIC, doesn't say anything about what banks are supposed to do with them, other than address them in their risk assessment. They also expand what the program is required to be, from reasonably designed, to now effective, risk based, and reasonably designed.

So all this is in a proposal. So the other agencies will have the same language, we'll have to see what FinCEN says regarding their priorities, but obviously this is very important on a number of levels. And I think the whole community should be, as hopefully they always are, transparent about what are operational issues, what works, what perhaps doesn't work, as you would do with any notice or comment process.

But this is going to be interesting, and I agree with this particular individual, this clearly to me seems additive not simply an administrative change.

Elliot Berman: Having read the proposal I agree with both of you. As you always say, it'll be important for us in the community to review the proposals and send in thoughtful comment letters that hopefully will be taken into account by the regulators in getting to the final rules, and will provide practical comments that, are actionable by the regulators in getting to the final rule.

John Byrne: Okay. We've gone a little long today, but again, a lot going on. We probably avoided some, not avoided, but there's probably some things we also could have mentioned. Very active week. Plenary this week. We'll obviously see the outcomes next week. I heard it on pretty good source that the priorities that I just mentioned will be out sometime in July. July's next week, so possibly we might see it next week, so that'll be something to comment on as well.

Elliot Berman: Indeed it will be. John, you have a great rest of the week, and I will talk to you next week.

John Byrne: All right, Elliot. Take care. Stay safe.

Elliot Berman: You too. Bye bye.