Will the US’s new strategy for combatting illicit financing make a difference?

As outlined by the authorities, there are many reasons why this is a very pertinent time for such an update. Emblematic of the financial loopholes being exploited, there’s the Ukraine-Russia war, which has been “supported by decades of corruption by Russian elites”, as mentioned by Assistant Secretary of the Treasury for Terrorist Financing and Financial Crimes, Elizabeth Rosenberg.  

The risk assessment that preceded this strategy also cites “the complicity of 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 tackle this smorgasbord of threats, vulnerabilities and loopholes, the new strategy sets out four priorities and fourteen supporting actions. Here’s our take on how effective they stand to be. 

“Close legal and regulatory gaps in the U.S. AML/CFT framework that illicit actors exploit to anonymously access the U.S. financial system through the use of shell companies and all-cash real estate purchases” 

This was the most confusing priority. The first supporting action is implementing the Corporate Transparency Act and finalising the Beneficial Ownership Information database, but weren’t these supposed to be done by end-2021? 

The next point on the agenda is assessing whether action needs to be taken on sectors that aren’t subject to AML/CFT measures at present. This one is frustrating to see. Instead of taking action, this adds another layer of bureaucracy before anything actually gets done – the oligarchs’ and kleptocrats’ lawyers and accountants are sure to be super scared now, right? 

The final action point in this section explicitly outlines blockchain technology. Increased regulation and supervision for crypto was always going to be on the cards – especially considering this new strategy came in the wake of UST and LUNA collapsing the week prior. On a separate note, we’ll probably witness the fallout from this at events and conferences for the rest of this year, with one camp blaming bad crypto actors and calling for much stronger measures and the second camp blaming everyone but crypto actors and demanding government support to protect stablecoin reserves. 

“Continue to make the U.S. AML/CFT regulatory framework for financial institutions more efficient and effective” 

There was nothing worrying here – but then again, there was also nothing revolutionary either. It’s all the usual stuff you would expect, including meeting the US Anti-Money Laundering Act mandates, enhancing risk-focused supervision and supervising non-bank financial institutions. 

The strategy did, however, note that the current AML/CFT regulatory framework is outdated. To remedy this, the government and private sector are looking into modifications or updates to AML/CFT reporting, which could include routine and more targeted reports. 

“Enhance the operational effectiveness of law enforcement, other U.S. government agencies, and international partnerships in combating illicit finance so illicit actors can’t find safe havens for their operations” 

This section wasn’t exactly reinventing the wheel either. Saying that, it does recommend extending 314a to MSBs that provide virtual asset services. What does this mean you may ask? Well, 314a is a section of the USA Patriot Act that allows FinCEN to pinpoint the accounts and transactions of people that are potentially involved in terrorism or money laundering. 

Another of the action points looks to remove operational barriers to information sharing. As such, FinCEN’s SAR-sharing pilot for financial institutions with foreign branches, subsidiaries and affiliates should improve cross-border information flows. 

This is all good stuff, but it’d be even better if it wasn’t stuff that will move at a glacial pace. 

“Support Technological Innovation and Harness Technology to Mitigate Illicit Finance Risks” 

This priority highlights the fact that innovation in financial services can bring about all kinds of vital benefits, not least financial inclusion and equitable access to regulated products. 

This is where the strategy starts to get really exciting – and also where all the regtechs will rejoice at the prospect of earning hundreds of billions more. With the recommended actions including enhancing the use of technology (such as artificial intelligence and data analytics) to improve both private sector and government efforts with AML compliance and assessing how to update identity-based regulatory requirements, there are big opportunities on the horizon. 

What does this mean for RedCompass Labs? 

The strategy relates to RedCompass Labs’ solutions in several ways, but predominately via its focus on human trafficking. Annex 1 cites this as among the leading crimes that generate the most criminal or illicit proceeds that are laundered. 

In addition, specifically for human trafficking, the strategy’s supporting actions and benchmarks for progress for 2024 include:  

• Coordinate and leverage inter-agency financial intelligence in investigative and enforcement efforts. 
• Continue to disrupt the illicit proceeds of human traffickers and deny revenue sources to human traffickers and corrupt facilitators. 
• Enhance training on financial aspects of human trafficking investigations.   

To combat this heinous crime, our RedFlag Accelerator is designed to enable banks and other financial services firms to accelerate their search for modern slavery and human trafficking, backed by our payments and data science expertise.  

To understand more about how this technology works, and what it could mean for your organisation, do not hesitate to get in touch with our team of payments experts.