FINRA Annual 2023: Current trends and threats in financial crime

Omer Meisel (OM), Senior VP at FINRA spoke to Paul M Abbate, Deputy Director of the FBI, and Brian Nelson, Under Secretary for Terrorism and Financial Intelligence at the US Treasury at FINRA 2023.

The events around 9/11 had driven Brian Nelson to his calling to focus on national security, and to assist with preventing the plans and conduct of terrorist acts in the homeland by cutting off finance capability. This was close to his role in stopping criminals in the AML sphere when he was in the Attorney General’s office. It is all about following the money.

There are a number of institutions designed to do this, comprising Terrorism and Finance Intelligence, FinCEN (enforcing the Bank Secrecy Act and AML), and OFAC (Sanctions), as well as the Office of International Affairs, and the Office of Intelligence and Analysis. These all work together to detect and disrupt criminals and terrorists and make the US economy and homeland resilient. Economic security is closely aligned with national security.

Paul Abbate has been in the FBI for 27 years and started in NY where his SWAT assignment was in white collar crime. The wide remit of the FBI takes in (among other things) cyber, counter intelligence, terrorism, corruption, civil rights, financial and white collar crime. It has legal attaches in 90 countries and eight core priorities.

The Treasury has an interesting role combining intelligence with criminal prevention.

Nelson described FinCEN and the Bank Secrecy Act as designed to deter terrorists and proliferators as well as rogue nation states from using the finance system (Russia’s war with the Ukraine is a good example of this). Targeted sanctions can go after malign activity by bad actors such as those stated above. Cutting them off from the US finance system also partially cuts them off from the global finance system. The Treasury has an interesting role combining intelligence with criminal prevention.

Abbate said there are a multitude of adversaries to account for. These could be foreign nation states such as China, Iran, North Korea and Russia, as well as terrorist groups like Al Qaeda and ISIS. Not to forget organized crime groups.

Meisel asked about the threat that China brings to the economy. Abbate said that it is multi-faceted but is originated by the government in China and not its people. It spans both the private and public sectors and takes in IP theft, trans-national repression, as well as employing proxies to threaten and intimidate those based on US soil. The cyber vector involves those within the intelligence and military infiltrating systems, causing harm and influence, and positioning in the event of a future conflict.

AML and financial fraud

Nelson referred to the key illicit financial risks in the Treasury’s 2022 report and stressed that risk-based compliance programs are essential to addressing these. He ran through the risk assessment: use of legal entities to hide funds derived from crime; lack of transparency around real estate transactions; enablers – complicity using a position to help a malign actor; weak supervision at some US finance institutions; lack of compliance with AML at certain investment adviser and gatekeeper type firms; foreign financial institutions with weak AML and CFT that affects correspondent banking relationships.

FinCEN fined a trust for the first time under the BSA for $1.5m – Nelson recommended reading the court order as the violations were very clear and there had been no due diligence.

Risk assessments focus on three key areas: money laundering; terrorist finance; proliferation finance. The potential for misuse of virtual assets is an emerging risk that is being watched carefully. In terrorist finance, some individuals and smaller groups take inspiration from other organizations (ISIS is still supporting its branches and arranging fund raises). Domestic examples include those conducting racist activity.

The top financial crimes and ones that are emerging include large-scale complex schemes, virtual assets and crypto schemes.

Proliferation finance is generally originated by Syria, Pakistan, North Korea, Russia, Iran and China. There has been extensive use of maritime finance to enable weapons proliferation, where crypto is usually the payment type.

For the FBI the top financial crimes and ones that are emerging include: large-scale complex schemes (corporate fraud; insider trading; elder or senior fraud which is on the rise); virtual assets and crypto schemes.

Nelson moved onto the in-progress national AML and CFT guidance from FinCEN. He thanked the compliance profession for its patience as it awaits this. With no confirmed date for the program rule, there are no immediate expectations for incorporation of undecided regulation. The priorities will be: to require AML and CFT programs to be effective and risk-based; firms will have to conduct risk assessments; these will have to be incorporated into risk-based programs; there needs to be a de-risking strategy by each institution that enables inclusivity.

Cyber sector

This is a US predicament that affects the public and private sectors as well as privacy. The FBI scans a very wide field in this respect as there are so many actors and a very complex ecosystem. Foreign nation states can be highly disruptive, for example in the case of North Korea and Sony Pictures. Wannacry is another good example where the objectives span theft of government and private information, valuable R&D content, trade secrets and other IP. A classic example of data theft was when China targeted Equifax.

The other piece involves criminal activity. Ransomware is a prime example here. Increasingly rogue nation states are working alongside organized and sophisticated criminal groups eg ISIS used criminal hackers to extract personal information on armed forces personnel.