By Ashleigh Subramanian-Montgomery

Background

On May 13, 2022, the Treasury Department published their 2022 National Strategy for Combatting Terrorist and Other Illicit Financing (2022 Strategy) and accompanying Press Release. The 2022 Strategy aims to enhance the United States (U.S.) framework on anti-money laundering/countering the financing of terrorism (AML/CFT) and provides a roadmap for enhancing transparency within the U.S. financial system. The 2022 Strategy’s overarching aim “is 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.” To meet this aim, it introduces four priorities, 14 supporting actions, and 79 Benchmarks for Progress.

The 2022 Strategy provides recommendations to address the key risks and challenges raised in Treasury’s 2022 National Proliferation Financing, National Money Laundering, and National Terrorist Financing Risk Assessment (NTFRA), known together as the National Risk Assessments (NRAs). The latter NRA “identifies the TF [terrorist financing] threats, vulnerabilities, and risks that the United States currently faces.” The Press Release announcing the Treasury’s publication of the NTFRA stated that the 2022 Strategy would be “a plan directly informed by the analysis contained in the risks assessments.”

Unfortunately, Treasury did not conduct nonprofit (NPO) outreach, solicit input to ensure NPO engagement and inclusion in the development of the 2022 Strategy, or provide NPOs the opportunity to comment on a draft ahead of publication. Despite this, the Charity & Security (C&SN) facilitated stakeholder input for the 2022 Strategy by submitting comments and suggestions to Treasury on March 3, 2022. This included three measures that could serve to enhance the proportionality of CFT measures and avoid the kind of operational disruptions that result from the current framework. C&SN also developed five recommendations ahead of the release of the 2022 Strategy. The 2022 Strategy notwithstanding, C&SN remains encouraged by, and appreciative of, Treasury’s overall engagement with NPOs, and encourages building off this momentum to continue said engagement in an impactful and meaningful way.

Participants and Methodology

The 2022 Strategy serves as a guide for the U.S. government (USG) in protecting the U.S. financial system from the greatest illicit finance risks and threats it faces. It analyzes where the U.S. AML/CFT regime needs improvement and where and how “the illicit finance risk environment” has changed. It was developed “in consultation with” the following USG agencies, in addition to the Department of the Treasury, whose Office of Terrorist Financing and Financial Crimes (TFFC) authored the 2022 Strategy:

  • Department of State (DOS)
  • Department of Justice (DOJ)
  • Department of Homeland Security (DHS)
  • Office of Management and Budget (OMB)
  • Office of the Director of National Intelligence (ODNI)
  • Federal functional regulators staff.

Key Vulnerabilities and Risks

The 2022 Strategy identifies the role of the U.S. AML/CFT regime, including its operational and legal framework, in combating illicit finance vulnerabilities and risks. The U.S. AML/CFT regime is tasked with addressing an illicit finance landscape that is impacted by: the U.S. currency being heavily used in cross-border payments, the U.S.’ role in tackling wide-ranging international security concerns, the U.S.’ strong positioning in foreign and domestic investment, and the U.S.’ leadership in economic activity internationally. The key risks determined by the aforementioned NRAs include:

  • “(1) weak or non-existent reporting and disclosure requirements for company formation and non-financed real estate transactions;
  • (2) the lack of comprehensive AML/CFT requirements or under-resourced supervision of certain financial entities and intermediaries;
  • (3) weaknesses in foreign AML/CFT regulatory frameworks for virtual assets and other risk areas and supervision of foreign financial institutions more broadly;
  • (4) occasional AML/CFT compliance deficiencies at U.S. financial institutions; and
  • (5) challenges in detecting and seizing illicit proceeds transferred in cash and identifying complicit merchants and professionals facilitating illicit finance.”

The 2022 Strategy calls on the U.S. to address these issues both domestically and internationally.

Goals and Priorities of the 2022 Strategy

To achieve the overarching aim of equipping the private and public sectors to utilize resources to combat the most pressing illicit finance vulnerabilities and risks through modernization of the U.S. AML/CFT regime, the 2022 Strategy lays out the following four priorities:

  • “I. Increase transparency and close legal and regulatory gaps in the U.S. AML/CFT framework.
  • II. Continue to make the U.S. AML/CFT regulatory framework for financial institutions more efficient and effective.
  • III. Enhance the operational effectiveness of law enforcement and other U.S. government agencies in combating illicit finance.
  • IV. Enable the benefits of technological innovation while mitigating risks.”

Priorities, Supporting Actions, and Benchmarks for Progress

Priority II

Under Priority II, the 2022 Strategy states there will be “an update to the AML program rules for different types of financial institutions” which “will strengthen [Treasury’s] supervisory regime and assist examiners and institutions in prioritizing their resources.” Likewise, “The federal banking agencies, in consultation with Treasury, are simultaneously considering new and updated AML/CFT guidance, for example, updating the Federal Financial Institutions Examination Council (FFIEC) [Bank Secrecy Act] BSA/AML examination manual.”

The forthcoming updates to AML/CFT guidance and program rules laid out in the 2022 Strategy, including the FFIEC BSA/AML examination manual, present an opportunity for NPOs to provide input and expertise. C&SN encourages these updates to foster a conducive operational environment for NPOs that avoids causing unintended harm and impeding NPO activities, especially in “high-risk” areas facing stringent AML/CFT regulations. As the 2022 Strategy highlights, the FFIEC BSA/AML examination manual is “the primary resource for field examiners in assessing AML/CFT compliance for banks”; thus, C&SN recommends engagement between Treasury, financial institutions, field examiners, and NPOs to work in tandem to ensure the AML/CFT regime upholds Priority II’s Supporting Action 6: Enhance Risk-Focused Supervision. Collaboration across stakeholders can ensure proposed changes do not lead to increases in either de-risking or restrictive regulatory environments.

Priority III

Under Priority III, Supporting Action 8: Regularly Update and Communicate Illicit Financial Risks and AML/CFT National Priorities, the 2022 Strategy states that “Fundamental to applying a risk-based approach to AML/CFT is a shared understanding between the public and private sectors on what the most significant illicit finance risks are.” It also emphasizes that the AML/CFT National Priorities should be updated regularly and highlights the importance of reporting institutions integrating these National Priorities within their AML/CFT programming. Accordingly, a key Benchmark for Progress under Priority III is to “Hold regular public-private sector engagements on key illicit finance risks, to include regional meetings on the NRAs and outreach to key AML/CFT thought leaders and experts.” C&SN suggests NPOs be engaged in partnership to advance these efforts, as NPOs constitute a wealth of AML/CFT thought leadership and expertise, and are highly qualified and experienced in implementing due diligence and risk mitigation measures to ensure compliance with AML/CFT regimes.

Financial Sanctions

In regards to financial sanctions, Priority III lays out that the U.S. “require[s] an updated approach to ensure sanctions are deployed more strategically and efficiently”, and “will continue to modernize the policy approach and operational architecture for sanctions use”. The USG and Congress will do this by, amongst others:

  • “Adopting a structured policy framework that links sanctions to a clear policy objective;
  • Calibrating sanctions to mitigate unintended economic, political, and humanitarian effects; and
  • Ensuring sanctions are easily understood, enforceable, and, where possible, reversible.”

The key Benchmarks for Progress towards this aim include:

  • “Implement recommendations from the 2021 Treasury Sanctions Review.
  • Hold regular meetings with non-governmental organizations (NGOs) to discuss humanitarian assistance, financial access, and sanctions obligations.
  • Harmonize general licenses (GLs) for humanitarian assistance, as appropriate.”

C&SN applauds these commitments and looks forward to collaborating with agencies throughout the USG on timely, effective, and strategic implementation of these Benchmarks in service of higher-level goals. In addition to regular and meaningful engagement with NGOs, the latter benchmark aligns with C&SN’s policy recommendation to issue a Global General License, which would ensure humanitarian aid and peacebuilding activities are able to be carried out unfettered the moment a crisis breaks out. This would avoid undue delay in response to humanitarian crises and the impact of conflict on civilians. C&SN stands ready to support Treasury in the development of this aim.

Financial Action Task Force (FATF)

The 2022 Strategy also highlights the importance of the FATF and its role in “strengthening the international AML/CFT framework.” It stresses the significance of the FATF maintaining its position as “a technical body, driven by expert consensus that can maintain political neutrality while actively addressing jurisdictions with weak AML/ CFT frameworks.” In addition to remaining a technical body, another Benchmark for Progress includes:

  • “Increased funding and support to FATF-style regional bodies (FSRBs), including from G7 and other key partners.”

C&SN encourages FATF’s continued collaboration and engagement with the NPO community through the Global NPO Coalition on FATF, which is well-equipped to provide ongoing technical expertise on changes in the international AML/CFT framework.

Financial Inclusion and Access

The 2022 Strategy promotes NGOs’ modus operandi on financial inclusion: “A more transparent and efficient international financial system and AML/CFT framework should not be a barrier to increased financial access for legitimate uses.” It discusses how “’de-risking’, is not only economically inefficient, but also has negative implications for AML/CFT”, such as how “the lack of financial access for charities providing humanitarian assistance to conflict zones can make their critical work even more challenging.” The Benchmarks for Progress presented on financial inclusion and access are, amongst others:

  • “Work both domestically and internationally to strengthen the risk-based approach to AML/CFT compliance, particularly with regards to financial institutions that service organizations providing humanitarian assistance and remittances.
  • Establish a working group of policymakers, NGOs, and financial institutions to discuss banking access and humanitarian-assistance -related issues.
  • Prepare the [Anti-Money Laundering Act of 2020] AMLA-mandated strategy on de-risking that aims to promote responsible financial inclusion as a complement to financial transparency, not a competitor.”

This is a welcome addition to the 2022 Strategy, as NPOs have been expressing these sustained and enhanced financial access issues with Treasury for some time, and their recognition and inclusion is appreciated. C&SN applauds Treasury’s commitment to strengthening the RBA and increasing financial access for those most at risk of exclusion. Treasury’s repeated commitment to engaging NPOs and soliciting input on the forthcoming ‘De-risking Strategy’ is laudable; to meaningfully engage NPOs in this effort, NPOs should be afforded the opportunity to review and comment on a draft prior to publication.

In regards to the second benchmark on establishing a working group, it is worth noting that a multistakeholder Working Group on Financial Access for NPOs’ is currently underway, building on the previous [Association of Certified Anti-Money Laundering Specialists] ACAMS/World Bank Multi-stakeholder Dialogue in 2016-2018. As the 2022 Strategy suggests, the Working Group, convened by the Center for Strategic and International Studies (CSIS), brings together “policymakers, NGOs, and financial institutions to discuss banking access and humanitarian-assistance -related issues.” The Working Group dialogue will develop actionable policy recommendations in the coming months. Given the value of bringing these stakeholders together, opportunity to build on the momentum and progress of the current initiative exists; sustained engagement to address financial access challenges should be continued on an ongoing basis.

De-risking: Unpacking Root Causes

The 2022 Strategy cited that “profitability concerns are usually the main reason for de-risking”, however, there is some debate regarding the root causes of bank de-risking. For instance, AML/CFT experts at the AML RightSource event, The US Treasury’s National Illicit Finance Strategy: A Closer Look, held on May 18, 2022, shared a differing perspective to the 2022 Strategy:

“It’s a false narrative to say lack of access due to profitability is the major cause of de-risking. It is mainly due to supervisory overreach and inconsistent direction on risk identification and mitigation.” – John J. Byrne, Esq., CAMS, Executive Vice President, Chairman, AMLRS Advisory Board

“It’s not profitability that drives de-risking, it’s risk that drives de-risking. And it’s compliance risk and scrutiny if banks don’t get it just right. It’s not profitability, it’s risk.” – Terry Pesce, President and CEO at Terry Pesce & Co LLC, Financial Crimes Legal and Regulatory Consulting

While profitability concerns are often an outcome of the expensive measures banks have to undertake to address compliance risk and overregulation, these concerns are often secondary to the compliance risks themselves, in addition to the constant regulatory reviews and scrutiny, and the strict liability standards, thus leading the latter three to comprise the most fundamental causes of de-risking.

Progress on Priorities and Supporting Actions from the 2020 Strategy

The 2022 Strategy concludes by presenting the progress made in the modernization of the U.S. AML/CFT regime by the private sector and the USG. For instance, “The passage of the AMLA addresses the single most important gap in the U.S. AML/CFT regime” in addition to “The AML/CFT regulatory and supervisory regime for financial institutions…becom[ing] more risk-focused and effective through a combination of updated guidance and supervisory tools and rulemaking activity.” C&SN applauds this risk-focused progress and the steps Treasury is taking to address the key risks and challenges identified in the NTFRA. Likewise, Treasury is encouraged to include NPOs in all stages of the forthcoming updates to AML program rules and to AML/CFT guidance, including the FFIEC BSA/AML examination manual; to enhance the proportionality of CFT measures and avoid the kind of operational disruptions that result from the current framework; to support NPOs in the development of a Global General License; and to provide NPOs the opportunity to comment on a draft of the upcoming ‘Derisking Strategy’.

C&SN appreciates Treasury’s ongoing commitments to engaging NPOs; to continued application of a RBA to AML/CFT compliance; to modernizing the policy approach and operational architecture for sanctions use; and to addressing de-risking.

The full report is available here.