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The US Treasury Department has published National Risk Assessment reports outlining recent updates to the US anti-money laundering/counter-terrorism financing (AML/CTF) framework and the evolving ways that payment systems are used in illicit finance.
The updated risk assessments aim to help public and private sector organisations better understand the “continuing challenges as well as emerging vulnerabilities” in the current illicit finance environment and inform their risk mitigation strategies to protect the US and international financial systems from abuse.
The threats, vulnerabilities and risks include “the ongoing fentanyl crisis, foreign and domestic terrorist attacks and related financing, increased potency of ransomware attacks, the growth of professional money laundering, and continued digitization of payments and financial services”, according to the Treasury.
The assessments also address how geopolitical events, such as the Russian invasion of Ukraine, affect the illicit finance risk environment.
The report findings will inform the 2024 National Strategy for Combatting Terrorist and Other Illicit Finance to be released in the coming weeks, which is a strategic plan to address threats and vulnerabilities to strengthen the US financial system.
The Treasury has used previous versions of the strategy to support improvements to the AML/CTF regime, including the beneficial ownership reporting requirement that went into effect on January 1, 2024, and inform its proposed rules to address illicit finance vulnerabilities in the residential real-estate sector and for certain investment advisors.
Enabling illicit activity
The risk assessments point to digital peer-to-peer (P2P) payment systems, virtual assets and third-party payment processors (TPPPs) as increasingly enabling money laundering and terrorist financing over the past two years.
The analysis notes that the convenience and speed that make P2P platforms popular for legitimate payments also attract criminals. In 2021, the Federal Trade Commission (FTC) received nearly 70,000 complaints from consumers who transferred money to fraudsters via payment apps or similar services, totalling $130m in losses.
“P2P services have come to play a sizeable role in various types of fraud and scams. These include unauthorised electronic fund transfers, seller scams, buyer scams, and money mule scams, among others,” the money laundering risk assessment states, while “the use of TPPPs for money laundering and fraud is on the rise".
This vulnerability seems to be largely driven by TPPPs themselves, which can take advantage of the exemption from Bank Secrecy Act (BSA) requirements and the access they have to the financial system to facilitate money laundering.”
It added that Chinese money laundering organisations (CMLOs) are "no longer just emerging threats" but are "now dominant across the professional money laundering market”.
The US faces persistent and emerging money laundering risks related to the misuse of legal entities, a lack of transparency in certain real-estate transactions, and a lack of comprehensive AML/CTF coverage for certain sectors, particularly investment advisors.
It must also address complicit merchants and industry professionals that misuse their positions or businesses and weaknesses in compliance or supervision at some regulated US financial institutions, according to the report.
When it comes to terrorist financing, the most common risk is individuals using cash, registered money services businesses or, in some cases, virtual assets to solicit and send funds to foreign terrorist groups.
The terrorism threat has evolved significantly in recent years as terrorist organisations and violent extremist movements have shifted to less hierarchical structures in which individuals may self-radicalise online.
In the financing context, attacks by such individuals are smaller scale and require less outside financing, creating challenges for financial institutions, the risk assessment noted.
Additionally, the varying levels of AML/CTF and counter-proliferation financing (CPF) controls for the virtual asset sector globally and some compliance deficiencies with US virtual asset service providers (VASPs) have made the US vulnerable to weapons proliferation financing networks.
The Treasury is working with other government agencies to study the potential risks from new and alternative payment systems, as some countries seek to develop strategies to avoid US jurisdiction and evade sanctions.
These include local currency settlement to avoid dollar-clearing, alternatives to the Swift payment messaging system, or the development of central bank digital currencies (CBDCs).
It is also looking at ways to improve its AML/CTF/CPF regime, having made progress on closing loopholes in the collection of beneficial ownership information through implementing the Corporate Transparency Act, working domestically and through the Financial Action Task Force (FATF) to improve virtual asset sector compliance, and communicating risks through alerts and advisories.
