US Treasury Promotes Expanding AML Measures in New National Illicit Finance Strategy

The US Treasury has published its 2022 National Illicit Finance Strategy, addressing the threats, vulnerabilities, and risks to the United States’ financial system identified in March’s National Risk Assessment (NRA). The 32-page document outlines the Treasury’s recommendations on closing regulatory gaps that are being exploited by criminals and illicit actors, citing Russia’s invasion of Ukraine as evidence of how the loopholes are being taken advantage of. 

“Illicit finance is a major national security threat, and nowhere is that more apparent than in Russia’s war against Ukraine, supported by decades of corruption by Russian elites,” said Elizabeth Rosenberg, Assistant Secretary of the Treasury for Terrorist Financing.

The report aligns with  Financial Action Task Force (FATF) guidance on the importance of a risk-based approach to combating money laundering (ML) and terrorist financing (TF). The recommendations, or “Priorities”, set out in the report include increased transparency across financial services, a more efficient and effective regulatory framework, enhanced operational effectiveness, and initiatives to support technological innovation. 

Along with the 2022 NRAs, the 4 recommendations and 14 supporting actions will help financial institutions assess the illicit finance risk exposure of their businesses and further protect the US financial system from the national security threats enabled by corrupt financial activity.

Priority #1 and #2: Increased transparency and expanding AML measures

Senators Sheldon Whitehouse and Elizabeth Warren addressed the need to close legal and regulatory gaps that currently allow criminals and sanctioned entities like Russian oligarchs to hide and grow their wealth in a letter to Secretary of the Treasury Janet Yellen and Chair of the Securities and Exchange Commission Gary Gensler in March 2022. The letter focused on the private investment sector and its exemption from “needing to know basic information about their investors or clients”. 

To combat the exploitation of these loopholes, the US Treasury advocates for increased transparency and the expansion of anti-money laundering (AML) measures across the private investment industry and other sectors – including payment processors, dealers in precious metals, stones, and jewels (PMSJ), non-bank financial institutions, and virtual asset service providers (VASPs).  

Crypto firms should take particular note of the “action plan” due to be published within 120 days of the strategy being submitted to Congress. This plan will include measures to counter the illicit finance risks of digital assets based on the report and additional views offered by interagency annexes.

A “Future of Money” report is also due to be published within 180 days of the Executive Order (EO) on Ensuring Responsible Development of Digital Assets issued on March 9. This report will highlight the implications of Central Bank Digital Currencies (CBDCs) and the EO’s AML/ combating the financing of terrorism (CFT) considerations, including the use of blockchain analytical tools and the competence levels needed to undertake effective AML/CTF/sanctions risk assessments.

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Priority #3: Boosting operational effectiveness of law enforcement

Three NRAs published by the Treasury on money laundering, terrorist financing, and weapons of mass destruction proliferation financing informed the need for enhanced operational effectiveness of law enforcement so illicit actors cannot find safe havens for their activities. 

The report notes that a shared understanding between the public and private sectors on what the most significant illicit finance risks are nationally, regionally, and within certain sectors is fundamental to applying a risk-based approach to AML/CFT. To do this, the Treasury proposes regular public-private sector engagements on key illicit finance risks, including regional meetings on the NRAs and increased outreach to key AML/CFT thought leaders and experts. 

To this end, the strategy categorizes its “2024 Benchmarks for Progress” by the seven most prevalent threats currently facing the US financial system, including drug trafficking, corruption, domestic violence extremists (DVEs), illicit wealth supporting Russia’s aggression, ransomware and related money laundering, human trafficking, and trade-based money laundering (TBML). A modernized approach to sanctions is set out within these benchmarks, with investments in personnel and technological infrastructure taking precedence to “promote transparency, accountability, and democratic values”.

Priority #4: Harnessing technology

The report highlights that technological innovation will likely be seen in areas of digital identity and artificial intelligence (AI) innovation due to the crucial role these technologies play in informing policymakers of illicit finance threats. By investing in these innovations, the Treasury aims to improve private sector AML/CFT compliance by helping banks and other financial institutions identify and report illicit financial activity more effectively and efficiently.

The strategy identifies innovative transaction monitoring systems, suspicious activity identification, and reporting tools that leverage big data as key areas of focus. It also argues that more training is necessary to help investigators, analysts, and regulators better interpret virtual asset-related data to combat illicit activity.

According to the 2024 Benchmarks for Progress associated with this Priority, firms can expect incentivization from the Treasury regarding the testing and use of AI for transaction monitoring within the next two years.