In a series of reports released Tuesday, the Treasury Department outlined key areas where criminals, terrorist groups, and rogue nations are using the U.S. banking system to launder funds to finance their illicit activities.
The agency issued risk assessments on anti-money laundering (AML); countering the financing of terrorism (CFT); and proliferation financing, which is rogue nations raising and moving revenue and procuring goods for their weapons of mass destruction programs. The reports noted new risks emerging because of “the Covid-19 pandemic, ransomware, domestic violent extremism, corruption; (and) the increased digitization of payments and financial services,” the Treasury said in a press release.
The reports also highlighted how bad actors might be changing their illicit financing tactics in response to anti-corruption initiatives being launched by the Biden administration, most notably the beneficial ownership registry Congress has ordered the Treasury’s Financial Crimes Enforcement Network (FinCEN) to devise and launch.
The Treasury has been producing risk assessments on AML and CFT since 2015; it added proliferation financing in 2018. The proliferation financing report primarily focuses on the activities of North Korea; Iran; and to a lesser extent, China and Russia.
In its AML risk assessment, the Treasury identified the types of crimes most commonly laundering money through the U.S. banking system, including fraud, drug trafficking; cybercrime; human trafficking and smuggling; and corruption. Fraud represented the largest money laundering sector, the agency said.
Persistent and emerging money laundering risks identified included:
- The continuing misuse of legal entities;
- The lack of transparency in certain real estate transactions;
- Complicit merchants and professionals that misuse their positions or businesses; and
- Weaknesses in compliance or supervision at some regulated U.S. financial institutions.
“[T]he misuse of legal entities, both within the United States and abroad, remains a major money laundering vulnerability in the U.S. financial system,” the report said. “These entities can facilitate money laundering involving domestic and foreign bribery and corruption schemes, sanctions evasion, tax evasion, drug trafficking, and fraud, among other types of offenses. Recent cases indicate that money laundering activity involving the misuse of legal entities remains complex and significant.”
Money launderers “can still take advantage of foreign legal structures lacking beneficial ownership disclosure requirements to obscure their illicit activity,” the report said. The use of foreign-based shell companies, as well as trusts not covered by the beneficial ownership registry, might increase as a result, the report said.
Another emerging tool for money laundering is digital assets, which include cryptocurrencies but also can be securities, commodities, derivatives, or something else. These transactions are often made by virtual asset service providers (VASPs) without the involvement of a financial institution with AML/CFT obligations under the Bank Secrecy Act (BSA). Such transactions can be conducted anonymously and across jurisdictions without regulatory oversight by U.S. authorities, the report noted.
Although VASPs are supposed to register with U.S. banking regulators if they serve U.S. citizens, many do not and therefore conduct business outside the compliance rules for U.S. financial institutions.
Complicit merchants and professionals are often used by money launderers to create shell companies and other vehicles to move the profits of their illicit activities. Although Congress has proposed a bill that would employ new methods to hold such players—namely, merchants, attorneys, real estate professionals, and financial services employees—accountable for abetting money laundering, the bill has not yet received a hearing in committee.
Compliance deficiencies identified by U.S. banking regulators in 2021 enforcement actions included a $390 million fine against Capital One for failing to implement and maintain an effective AML program by not filing thousands of suspicious activity reports (SARs) and currency transaction reports as required by the BSA. An $8 million fine against CommunityBank of Texas regarding its insufficient AML controls and failure to file SARs was also highlighted in the report. Other examples included fines against banks that failed to comply with previous consent orders related to BSA requirements.
The CFT risk assessment said the most common form of financial support for foreign-based terrorist groups like ISIS, Al-Qaida, and Hizballah continues to be small wire transfers of thousands of dollars. In response, FinCEN and the Federal Reserve Board have proposed lowering the threshold at which financial institutions must collect, retain, and transmit information on overseas transfers. The regulators proposed requiring banks and financial institutions to provide such information on all overseas transactions worth more than $250, down from the current threshold of $3,000.
The report also examined how domestic violent extremism groups launder money. Many such individuals and groups have low-risk financial profiles, and their activities are often self-funded, which comingles their legitimate banking activities with illegal fundraising connected to their extremist activity or group. Some of the fundraising includes soliciting donations through crowdsourcing on social media and internet platforms, private donations and membership fees, and the sale of merchandise or entertainment events. Other groups raise money through illegal means, like theft, fraud, and drug trafficking.