The United States and United Kingdom recently published detailed money laundering and terrorist financing risk assessments identifying both law enforcement and national security challenges.
Read together, both the U.S. and U.K. risk assessments provide a stronger understanding of how two leading economies approach myriad money laundering and terrorist financing risks to help stakeholders better identify, analyze, and mitigate the challenges that they face.
These reports support the broader legal and policy architecture around anti-money-laundering and combating the financing of terrorism of each country using the risk-based approach under the Financial Action Task Force, and comport with applicable FATF guidance. Although the reports cover the same general subjects, they suggest both similarities and differences in how the two nations view various threats.
What follows is a comparative analysis of the assessments' structure and scope, as well as how they treated the specific issues of beneficial ownership and digital currencies.
The U.K. and U.S. assessments both identified threats, vulnerabilities and consequences within industries impacted by money laundering and terrorist financing.
The U.K. took an empirical approach, attempting to quantify the levels of risk within each industry and giving each a "score" based on a range of factors. The attempt to measure and quantify risk by industry and payment method was creative, but the result does not appear sufficient to clarify stakeholders' obligations to combat laundering using a risk-based approach. The U.K. report also included an assessment of its government's capabilities. It recognized that some supervisory regimes were "inconsistent" and described the law enforcement response to money laundering until 2012 as "weak."
The U.S. assessments, by contrast, focused primarily on government and law enforcement efforts to combat terrorist financing and money laundering. The assessments were drafted by Treasury's Office of Terrorist Financing and Financial Crimes, in consultation with other government offices. The U.S. reports were exhaustively researched, examining over 5,000 money-laundering indictments and other charging documents, along with 229 terrorism-related cases.
Like the U.K. report, the U.S. assessments identified risks and vulnerabilities within impacted industries. However, the terrorist-financing assessment contained no explicit private sector input, while private sector participation in the money laundering assessment was indirect – through submission of suspicious activity and currency transaction reports reviewed and analyzed by the Financial Crimes Enforcement Network. One analysis suggested that the U.S. reports should be understood in the context of the current FATF peer review of the U.S. AML and CFT framework, scheduled for public release in January 2016, which may suggest another audience that the U.S. was attempting to engage through its assessment.
The most striking dissimilarity in the structure of the reviews is that the U.K. assessment combined its money laundering and terrorist financing risk assessments into one report, the National Risk Assessment, while the U.S. analysis split the two topics into separate assessments: the National Money Laundering Risk Assessment and the National Terrorist Financing Risk Assessment.
The U.K. report primarily focused on money laundering, with only the final chapter devoted to terrorist financing. However, it emphasized that terrorists often use the same methods to raise, store and move funds as those involved in laundering money, which partially explains why its terrorist financing assessment was so brief. In contrast, the U.S. terrorism financing report thoroughly explored many ways that terrorists obtain financing – including kidnapping for ransom, drug trafficking, and individual fundraising not affiliated with a charitable organization – none of which were in the U.K. report.
Both the U.S. and U.K. reports discussed the complex and politically charged issue of beneficial ownership. In the banking context, a beneficial owner is the individual who owns or controls a bank account. The use of nominees and shell companies, along with providing inaccurate beneficial owner information, were identified as vulnerabilities to banks.
The U.K. report dedicated an entire chapter to the money laundering threats and vulnerabilities posed by legal entities and arrangements such as companies, trusts, and partnerships with hidden owners. Importantly, the U.K. report described how corporate structures could be used to hide the natural individuals directing those structures. The report also identified information gaps in so-called "high-end" money laundering activities facilitated by professional enablers, particularly those in the legal and accounting fields, using financial institutions and real estate.
The U.S. money laundering report addressed beneficial ownership as one of five money laundering vulnerabilities to the financial system. Nominees and the misuse of legal entities were listed as risks as well.
As the U.S. money laundering report notes, the United States still does not have a federal beneficial ownership requirement for legal entities, although Fincen's proposal requiring stronger bank customer due diligence procedures is awaiting publication as a final rule. In July 2015, the International Money Fund published a particularly critical technical note that both described the AML and CFT risks posed by the lack of U.S. beneficial ownership legislation and suggested possible deficiencies in the pending Fincen rule.
These details are important because the White House recently published a statement mentioning the risk assessments as evidence of the United States fulfilling its pledges under the G-20 Beneficial Ownership Action Plan. In its statement, the White House renewed its commitment to advocate for comprehensive legislation to impose a beneficial owner requirement. But beneficial ownership reforms remain a contested political issue here. Some in the U.S. legal community contend that stronger requirements would undermine client confidentiality while state-level officials claim collecting the information would be burdensome.
Both the U.S. and U.K. reports evaluated the AML and CFT risks and vulnerabilities related to virtual currencies.
Virtual currencies are not currently regulated in the U.K. However, in August 2014, the U.K. government announced a "major programme of work" and published a call for information related to the risks and benefits of virtual currencies, and to whether government regulation was necessary. In March 2015, the U.K. government published its findings, concluding there is a "strong case" for introducing AML regulations.
The U.K. report, using its scoring system, nevertheless deemed the current money-laundering risk associated with virtual currencies "low." The report said misuse of virtual currencies was primarily related to cybercrime and there was "little evidence" that virtual currencies have been "incorporated into established money laundering techniques." The report also concluded that criminals involved in terrorist financing were not currently using virtual currencies to raise funds, pay for infrastructure or move money into and out of the country.
The U.S. is a step ahead of the U.K. in terms of regulating digital currencies. In March 2013, Fincen issued interpretive guidance clarifying that administrators and exchangers of digital currency are "money transmitters" under a July 2011 rule, thereby obligating them to comply with the AML and CFT regulations that apply to money transmitters. Fincen announced its first digital currency enforcement action in 2015. Also, in June 2015, the New York State Department of Financial Services released its regulatory framework for digital currency firms.
According to the U.S. money laundering report, although dealers in virtual currency are subject to the same U.S. regulations as other money transmitters and face the same risks of prosecution for misfeasance, money laundering vulnerabilities continue to mount. Risks tied to virtual currency include the rapid evolution of the market, spurred by more involvement from the technology sector, and the potential of some virtual currency dealers to operate without a domestic presence.
Alex Zerden is the founder and principal of Toccoa Strategies LLC, an international risk advisory company. Sarah Freuden is an attorney and adviser to Toccoa Strategies. Follow them on Twitter at @AlexZerden and @SarahFreuden.