The US Department of the Treasury (USDT) published its latest National Strategy for Combating Terrorist and Other Illicit Financing in May 2022.
In it, the USDT consolidated the findings of multiple reports published in early 2022- including the 2022 National Risk Assessments on money laundering and terrorist financing- and outlined its new strategy for combatting terrorist financing and other illicit funds.
The strategy focuses on four key priorities and set out its overall goal as “to encourage continued efforts to modernize the U.S. AML/CFT regime so that the public and private sectors can effectively focus resources against the most significant illicit finance risks.”
The strategy is focused on modernisation, which could indicate positive encouragement of embracing more innovation and technology, but we must still ask the hard questions: does the 2022 Strategy do enough? And what does this mean for AML practitioners?
But first, we took a look at the report’s summary of the current US AML/CFT regime.
Money laundering threats to the US AML/CFT regime
Money Laundering constitutes a continued threat both within and via the US banking system.
Of the Financial Crimes Enforcement Network’s (FinCEN) eight identified predicate offences, the USDT named corruption, cybercrime, drug trafficking, fraud (the worst offender), and human trafficking or human smuggling as the five which contribute most to money laundering in the US.
The use of professional money laundering syndicates is also believed to be increasing.
Vulnerabilities of the US AML/CFT regime
Vulnerabilities in the US financial system are exploited by rogue countries, terrorist organisations, organised crime groups (OCGs), and individual criminals.
The report identified the following as the most significant weaknesses that allow money laundering:
- It is too easy to form legal companies, and there are limited checks on the owners’ background.
- Insufficient information disclosure is required for the sale and/or purchasing of certain types of real estate.
- Some financial institutions in the US have weaknesses in their AML/CFT compliance frameworks.
- Some institutions, money service businesses (MSBs), and banks employ staff members that are colluding with money laundering perpetrators, whether the institution is aware or not.
- AML/CFT reporting obligation requirements are unevenly applied, with inconsistent expectations between sectors.
The report added that “the COVID-19 pandemic significantly affected financial services and financial crime, even if it did not fundamentally alter the illicit finance risks facing the United States.”
Progress made by the US AML/CFT regime since 2020
Progress has been made in revamping the US AML/CFT regime by both the public and private sectors.
Legislative and regulatory changes since 2020 have facilitated, among other improvements, the following:
- Entities at federal, federal-to-state, state-to-state, and within-state level must disclose beneficial ownership information at the outset of registering themselves, according to the 2020 Anti-Money Laundering Act.
- Individuals and companies will, as of 2022, be obligated to declare beneficial ownership information to FinCEN at inception and when beneficial ownership changes, as per the Corporate Transparency Act which was passed in 2021. Foreign companies seeking to do business in the USA will also have to disclose full beneficial ownership details when registering at state level.
What does the 2022 Strategy entail for AML practitioners?
It outlines four priorities divided into 14 action areas, which in turn are sub-divided into measurable outputs the USDT expects to see implemented by the time the 2022 Strategy is superseded in 2024.
Priority 1: The gaps in the current US AML/CFT framework must be filled
- Implement the Corporate Transparency Act as soon as possible and ensure fair access to beneficial ownership information for engaged Law Enforcement Agencies (LEAs). Measurable outputs include proactively working with the US Congress to iron out legislative gaps in the Corporate Transparency Act and establishing a beneficial ownership register.
- Mitigate the money laundering risks presented by certain types of real estate transactions by instituting a nationwide federal rule, which USDT is currently exploring. Measurable outputs include analysing FinCEN’s 2021 Advanced notice of proposed rulemaking, cultivating possible regulations from them, and establishing a set of rules governing non-financial real estate transactions by 2024.
- Determine whether or not certain sectors currently outside comprehensive AML/CFT compliance obligations require further monitoring and supervision. One measurable output includes an initiative to address the money laundering risk of the global art market.
- Update the AML/CFT regime obligations pertaining to regulation of virtual asset service providers and virtual asset activities. Measurable outputs include ensuring that virtual asset service providers engaged in business in the US are FinCEN-registered and honour AML/CFT regulations; and ongoing monitoring of non-fungible tokens (NFTs), decentralised finance platforms (DEFIs), peer-to-peer transactions, and anonymous digital wallets for signs of money laundering.
Priority 2: The current US AML/CFT framework must become more streamlined and effective
- Role-players in both the public and private sectors must continue to modernise the AML/CFT regulatory system, focusing on improved currency transaction (CTR) and suspicious activity reporting (SAR) requirements within the framework of developing a smoother risk-based approach. A measurable output is for all role-players to work together to both share expertise to combat illicit finance and hone the accuracy of CTRs and SARs by leveraging technology.
- The current AML/CFT regulatory practice needs to become more adapt at identifying high-risk activities and entities and streamlining the AML supervision process.
- Adequate provision must be made for the supervisory framework governing CTRs and SARs for non-financial institutions.
Priority 3: US AML/CFT operations need to be made more effective
- The public and private sector must embrace mutual communication within and about the constantly evolving AML/CFT environment to maximise the impact of the risk-based approach to illicit finance. A 2024 measurable output is to communicate advice and guidance on shifting trends in financial crime typologies.
- Strengthen its ‘whole-of-government’ approach to fighting illicit finance, including inter-agency co-operation between LEAs and targeted economic sanctions against financial bad actors.
- The AML/CFT regime should expand public-private partnerships which facilitate information sharing on financial crime both within and outside of US borders.
- Support and reinforce the goal of achieving the goal of global AML/CFT Standards by taking a leadership role within the Financial Action Task Force (FATF), its members and affiliates.
Priority 4: The US must maximise technology and embrace innovation to fight illicit finances
- Improve private sector AML/CFT compliance through the creative use of evolving technologies, such as those delivering enhanced transaction monitoring and SAR filing.
- Utilise and enhance the use of data analytics and Artificial Intelligence to strengthen the US AML/CFT regime.
- Build on and fortify its AML/CFT framework, including areas where the US system lags behind other countries, and re-assert its leadership role in the global economy.
The future of AML/CFT regulation in the US
The USDT concluded by noting that pursuing and achieving the goal set out by their priorities that “doing so will continue to make the United States attractive to licit and economically beneficial investment while keeping out illicit proceeds and other funds linked to continuing economic inequality and other social ills.”
Elsewhere, the 2022 Strategy acknowledged areas of its AML/CFT regime which lag behind those of other jurisdictions. Both the ambition and the honesty of the report are commendable, and the proposed performance indicators leading to the 2024 Strategy are encouraging.
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Photo by iStrfry , Marcus on Unsplash
