US Launches National Strategy To Close AML Loopholes

May 17, 2022
The new US national illicit finance strategy sets out four priorities to address existing loopholes in the country's regulatory framework, including those related to cryptocurrencies, beneficial ownership and gatekeeper professions.

The new US national illicit finance strategy sets out four priorities to address existing loopholes in the country's regulatory framework, including those related to cryptocurrencies, beneficial ownership and gatekeeper professions.

The new 2022 National Strategy for Combatting Terrorist and Other Illicit Financing touches on many of the most important topics that have shaken the US public in recent years.

Building on the findings of the 2022 risk assessments, the Treasury’s strategy focuses on closing the loopholes in the current anti-money laundering/counter-terrorism financing (AML/CTF) framework.

It aims to address illicit finance risk posed by the abuse of legal entities, the complicity of gatekeeper professionals that misuse their positions or businesses, small-sum funding of domestic violent extremism networks, the effective use of front and shell companies in proliferation finance, and the exploitation of the digital economy.

To accomplish this, the Treasury lays down four priorities and 14 supporting actions around which US government efforts will centre until 2024 when the next national strategy is due.

The four priorities are:

  1. Close legal and regulatory gaps in the US AML/CTF framework.
  2. Continue to make the US AML/CTF regulatory framework for financial institutions more efficient and effective.
  3. Enhance the operational effectiveness of law enforcement and other US government agencies in combating illicit finance.
  4. Enable the benefits of technological innovation while mitigating risks.

“We need to close loopholes, work efficiently with international partners and leverage new technologies to tackle the risks posed by corruption, an increase in domestic violent extremism, and the abuse of virtual assets,” said Elizabeth Rosenberg, assistant secretary of the Treasury for financial crimes.

Revealing beneficial owners

In recent years, continuous efforts by investigative journalists have shed light on how corrupt officials and criminals are using anonymous shell companies to channel their money offshore.

The Panama Papers, FinCEN Files and later the Pandora Papers have highlighted significant deficiencies in the fight against corruption and money laundering. In the US, these challenges largely result from the fact that many states allow for a company formation without requiring the disclosure of beneficial ownership information (BOI).

The Corporate Transparency Act (CTA), passed in early 2021 as part of the US’ big overhaul of its AML framework, aimed to close this gap by requiring companies to submit their BOI to the Financial Crime Enforcement Network (FinCEN) at the time of new entity formation.

The CTA entrusted FinCEN with issuing implementing regulations for the BOI register by the end of last year, a very tight deadline the agency has failed to meet and which is still outstanding.

Although the agency has had difficulties in meeting some of its deadlines under the CTA, experts believe FinCEN made an incredible effort to meet its obligations.

FinCEN published a proposal for implementing the BOI reporting rules last December.

It set out a broad and flexible approach that covers as many entities as possible, but the agency could set the net only as wide as the CTA allows it to do.

To cover any potential gaps in the CTA, the Treasury says in the strategy that it will work with Congress to pass legislation.

Greater scrutiny for gatekeeper professions

The national strategy also addresses growing concerns around the so-called key gatekeeper professionals to the financial system. These include lawyers, accountants and trust or company service providers (TCSPs) who are not covered by the same comprehensive and uniform AML/CTF obligations as other financial intermediaries but face certain levels of illicit finance risk exposure.

“This uneven AML/CTF coverage can create opportunities for regulatory arbitrage,” Treasury says.

The strategy says the Treasury will now assess whether there is a need for additional action on sectors that are not subject to comprehensive AML/CTF measures and will work with Congress to expand authorities to make sure that key gatekeepers to the financial system cannot evade scrutiny.

On the other hand, the document notes that the Treasury does not see state trusts being widely used for money laundering. The concern of certain state trusts functioning as popular vehicles for financial secrecy has been raised by the Pandora Papers.

The Treasury said these vehicles are not typically used for money laundering, or if used, it is more for “inappropriate asset sheltering” or tax avoidance.

“Nonetheless, the use of trusts, as well as TCSPs, to hide illicit proceeds is of concern, and the US government continues to assess the potential risk for this use as well as measures to address that risk.”

Embracing innovation and mitigating crypto risks

The strategy’s approach to virtual currencies largely aligns with the wider government’s approach as seen in recent months. This means the government is supporting responsible innovation, while also intending to mitigate potential risks.

In its first priority, the Treasury notes that some features of virtual asset technologies may create law enforcement and intelligence gaps, but adds that the frequent use of transparent blockchains can provide investigators and compliance personnel “with significant visibility into financial activity involving virtual assets”.

“Innovations in blockchain technology also hold promise for progress on other important policy goals, which could include financial inclusion.”

“The United States continues to invest in technology and training to help investigators, analysts, and regulators benefit from this transparency for AML/CTF purposes.”

As set out in the fourth priority, Treasury says the government will provide regulatory and policy support for “trustworthy” technological innovation, such as digital identity solutions, artificial intelligence (AI) or innovative digital financial services.

Innovations in digital identity and AI “can strengthen AML/CTF compliance and help banks and other financial institutions more effectively and efficiently identify and report illicit financial activity,” the document says.

“Innovative technologies can also be a ladder to greater access and reduced costs for those traditionally unable to participate in the regulated financial system.”

In that regard, the Treasury will assess whether FinCEN should adopt a safe harbour or regulatory sandbox to help new AI-driven AML/CTF products grow.

“In particular, the US government must invest in technology and training to help investigators, analysts, and regulators better use virtual asset-related data to combat illicit activity,” the document says.

While investing in technology and training, the government will also monitor the sector and its risks to determine whether it is necessary to make any changes to the regulatory and supervisory system.

This also includes plans to explore the potential development of a US central bank digital currency (CBDC) in line with President Joe Biden’s executive order on digital assets, pursue the recommendations from the President’s Working Group on stablecoins and enforce any AML or sanctions violations by financial institutions related to virtual asset products.

More funding for supervision and enforcement

FinCEN and the Internal Revenue Service (IRS) have faced significant resource constraints for years, which “materially affected their ability to effectively supervise and examine certain non-bank financial institutions”, the Treasury says.

Meanwhile, they are facing new challenges as certain states have adopted laws embracing crypto-asset firms or company service providers “that may become a conduit for illicit finance activity occurring far from that state or territory”.

“This makes effective AML/CTF supervision a challenge, especially where supervisory resources have not increased as rapidly as the market has grown,” the document reads.

Therefore, the Treasury is looking to increase the funding to hire more IRS examiners and strengthen FinCEN’s existing supervisory enforcement function, either through increased resources or prioritising certain higher-risk industries lacking sufficient federal oversight.

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