Strategy Touts Regulations on Beneficial Ownership, Real Estate and Investment Advisers, but Bemoans Lack of Supervisory Resources for Non-Bank Financial Institutions

The U.S. Department of the Treasury has issued its 2024 National Strategy for Combatting Terrorist and Other Illicit Financing (“Strategy”).  It is a 55-page document which, according to the government’s press release, “addresses the key risks from the 2024 National Money Laundering, Terrorist Financing, and Proliferation Financing Risk Assessments. . . and details how the United States will build on recent historic efforts to modernize the U.S. anti-money laundering/countering the financing of terrorism (AML/CFT) regime, enhance operational effectiveness in combating illicit actors, and embrace technological innovation to mitigate risks.”

The Strategy discusses an enormous list of topics.  Given the breadth of its scope, the Strategy generally makes only very high-level comments regarding any particular topic.  This post accordingly is extremely high level as well, and offers only a few select comments. 

The Strategy identifies four “Priorities” and 15 “Supporting Actions” to support the Priorities.  The most efficient way to describe them is to simply set forth this graphic from the Strategy:

Focusing on Priority 1, the Strategy stresses the (evolving) roll-out of the Corporate Transparency Act, as well as AML regulations proposed by the Financial Crimes Enforcement Network (“FinCEN”) for the residential real estate industry and investment advisers. 

More generally, the Strategy states that, in regards to the AML risks associated with so-called “gatekeepers” not currently subject to “comprehensive” AML/CFT measures, “Treasury . . . continues to conduct risk assessments on several professions, sectors, and arrangements . . . , including accountants, attorneys, investment advisers, and trusts. Further, Treasury continues to monitor illicit finance risks related to art and antiquities markets and has analyzed risks related to certain payment processors; precious metals, stones, and jewels . . . dealers; and other entities[.]”

Not surprisingly, the Strategy also states that Treasury is focused on virtual asset service providers, or VASPs, and is “considering potential updates to the U.S. AML/CFT regulatory framework for virtual assets to effectively mitigate illicit finance risks.”  As we have blogged, these potential “updates” include a notice of proposed rulemaking by FinCEN that identified international convertible virtual currency mixing as a class of transactions of “primary money laundering concern” pursuant to authority under Section 311 of the USA PATRIOT Act.

Finally – and much more could be said regarding the Strategy – Treasury frankly acknowledges the lack of government resources in regards to supervising non-bank financial institutions, particularly given their increasing importance in light of quickly evolving technology:

Resource constraints at FinCEN, the IRS, and state and territorial financial regulators can affect the supervision and examination of certain classes of non-bank financial institutions (NBFIs). Supervisory resources must keep pace with the growth and innovation of new products and services to mitigate ML/TF risks to the U.S. financial system.

For example, . . . Treasury recently assessed that the recent growth of online gaming activity has raised the risk profile for U.S. casinos and gaming activity in the United States, especially as an increasing number of state, tribal, and territorial jurisdictions have legalized and operationalized gaming activity. The resourcing and level of training and expertise of regulatory and supervisory regimes for casinos and card clubs varies considerably across federal, state, tribal, and territorial levels and may not have kept pace with the growth of these sectors. For example, the IRS’s Small Business/Self-Employed Division (SB/SE), whose staff is responsible for conducting BSA examinations under delegated examination authority from FinCEN, continues to lack sufficient resourcing to carry out its mission of examining a variety of NBFIs, including casinos and money service businesses (MSBs)—a growing category that includes VASPs. Therefore, Treasury, in partnership with the relevant Federal functional regulators, should seek increased resources for FinCEN and the IRS to enhance AML/CFT supervision and examination of higher-risk non-bank financial institutions.

Addressing these challenges will require FinCEN, IRS, and certain other federal, state, and territorial regulators to be appropriately resourced for supervision and enforcement. Additionally, the explosion of new payment channels and financial service providers, including VASPs, over the last decade, have stretched thin the limited supervisory resources historically applied to more traditional MSBs. The existing system of MSB supervision must continue to derive efficiencies from initiatives such as the Nationwide Multistate Licensing System & Registry (NMLS) data reporting system and multistate and state-federal supervision cooperation in the face of resource demands and the complexity of transactions in the rapidly growing virtual asset sector. However, marshaling additional resources at the federal level is necessary to supervise NBFIs such as MSBs, including VASPs; casinos; dealers in precious metals, stones, and jewels; and financial technology companies.

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