Remarks by Assistant Secretary for Terrorist Financing and Financial Crimes Elizabeth

As Prepared for Delivery

Thank you for the opportunity to speak with all of you. This is a momentous time for anti-money laundering and countering the financing of terrorism, AML/CFT, policy. Sanctions are frequently on the front page of the major papers, and compliance is receiving unprecedented attention across a number of industries.

However, before I go into these topics, I want to acknowledge the untimely passing of the American Bankers’ Association’s Rob Rowe. Rob was a formidable foe at times, but he was an outstanding friend to our industry. His expertise and passionate commitment to anti-money laundering policy and rulemaking are unimpeachable—I consider myself lucky to have come to know him and only regret that I didn’t have more time to work alongside him on the AML issues so vital to the broader success of our financial system. He will be sorely missed and leaves us with the solemn responsibility to carry forth on his work and vision of creating a stronger and more transparent financial system.

We are all witnessing dramatic shifts in the global order: countries are still grappling with the COVID-19 pandemic, Russia is engaged in a shocking and unjustifiable war in Europe, and the proliferation of digital assets and payment services are pushing the boundaries of finance—and the risk of illicit financial flows—to places that would have been unfathomable a decade ago. These tectonic shifts matter a great deal to the health and functioning of the financial system and to our understanding of the risks encompassed within this system. That, after all, is what the field of AML/CFT is all about: how we identify and manage certain illicit finance risks within the context of the broader financial risks this system seeks to measure and efficiently address. We know that risk is not a one-way ratchet, where less is always better.

Today, I’d like to share our thinking on some of the key risks we all confront today and how we think about balancing them alongside our broader policy goals.

Russia

For many of you, the risk that is top of mind is the illicit finance threat posed by Russia. In February of this year, Russia launched an illegitimate and brutal invasion into Ukraine. This violence continues to this day—Russia is not only attacking on the battlefield, but also striking Ukraine’s power grids and metropolitan residential areas specifically to inflict pain on Ukraine’s civilian population.

Responsible nations of the world were quick to respond. Almost immediately after Russia’s first strikes, the United States was one of over 30 countries to implement sanctions or other economic measures against Russia in response to the invasion. Since then, we have created an effective, expansive, and multilateral web of restrictions targeting Russia’s ability to fund and wage its terrible war of choice. 

Most recently, in the last few weeks, the U.S. Treasury designated Russian national Dmitry Kudryakov alongside a Belarusian national for their roles in exploiting the Guatemalan mining sector. Also, Treasury designated entities facilitating the transfer of Iranian drones into Russia.

The evidence is clear that these actions are effectively denying Russia the financial means to wage their horrifying war. The Russian economy will be in a fiscal deficit by the end of this year. The IMF expects Russia’s economy to continue contracting for the next two years, Russia’s stock market remains depressed below pre-war levels, and Russia’s inflation rate remains in the double digits. Moreover, the U.S. intelligence community assesses that these actions have led to critical shortages of inputs needed for tanks, helicopters, and other critical military supplies.

And while governments can create the policies that lead to these outcomes, you all have played the essential role of implementing these policies by reassessing your understanding of Russian illicit finance risks and adapting your businesses in response.

So long as Russia continues to wage its war in Europe, we will continue to work in concert with our international partners and take more and novel economic and financial actions targeting Russia’s ability to fund and execute its reprehensible war.

This is the root of a policy coming into effect today—a price cap on Russian oil. This policy is a way for the international community to apply economic pressure on Russia’s main source of revenue, energy earnings, while also ensuring the global energy market remains well supplied.

As the risks Russia poses have evolved, so too has our need to assess those risks. The reports, analysis, and typologies you develop identify and enable us to better understand the evolving risks associated with Russian illicit finance and are paramount in keeping the pressure on Russia to cease their violence. In fact, in terms of understanding risk and risk exposure, financial institutions are on the front lines and serve as our eyes and ears on providing critical insight on emerging illicit finance threats.

In turn, the information you report to us helps to influence, shape and inform our actions, whether it is new policy guidance, enforcement actions, or advisories, to help both the public and private sectors better understand the risks in front of us and craft the appropriate responses.

Risk-Based Policy

As Secretary Yellen has stated before, the size and stability of our economy and financial sector make the United States, almost paradoxically, one of the most desired destinations for money laundering and illicit finance. While this creates numerous challenges, our resources are unfortunately not unlimited.

This means that we at the U.S. Treasury must also take a risk-based approach in crafting our policy responses, focusing our resources where they are needed and balancing the many risks we must manage.

Beneficial Ownership

Take beneficial ownership transparency as an example. On September 29, 2022, the U.S. Treasury moved forward with our implementation of the monumental Corporate Transparency Act by announcing a new rule on beneficial ownership reporting. This rule will aid law enforcement, national security agencies, and other partners by giving them the information they need to identify and crack down on criminals, corrupt individuals, and others seeking to take advantage of our financial system for illicit purposes. Our approach seeks to balance the risk that opaque financial structures are abused to obscure illicit financial flows against the compliance burden placed on industry by the rule and the resources needed to collect this information. We believe our approach strikes the right balance by focusing on the areas of greatest risk and giving our government tools to address them.

Investment Advisers

Investment advisers and the funds they manage offer another instance in which a risk-based approach is needed. According to the Investment Advisers Association, there are approximately 15,000 SEC-registered investment advisers who manage approximately $130 trillion in assets. While this includes tens of trillions managed by mutual funds, exchange-traded funds, or other financial institutions that are subject to comprehensive AML/CFT obligations, there are significant parts of this sector subject to less stringent rules. The complexity of this population varies greatly: there are roughly 3,700 advisers to more than 40,000 private funds that have more than $20 trillion in total assets, whereas there are 17,000 state-registered advisers who manage smaller amounts of funds and have only one or two employees.

Our preliminary research has identified several ways that investment advisers can be misused by illicit actors. We have seen investment advisers who facilitate the movement of illicit proceeds, such as those derived from foreign corruption, fraud, and tax evasion, into the U.S. financial system. In one instance, a Miami-based financial adviser used an investment fund scheme to launder 12 million dollars’ worth of bribes into the U.S. financial system. Surrounding and supporting this false-investment scheme were complicit money managers, brokerage firms, banks, and real estate investment firms in the United States and elsewhere, that were operating as a network of professional money launderers.

Another example of abuse in the investment adviser sector is Heritage Trust, a Delaware-based trust formed in July 2017, for the purpose of holding and managing Russian oligarch Suleiman Kerimov’s assets. Treasury’s investigation into Kerimov, spurred by his first designation in 2018, revealed a complex web of legal structures and front persons to obscure his interest in the trust. Funds in the trust were subsequently invested in large public and private companies and managed by a series of U.S. investment firms and facilitators. Treasury blocked these funds in September of this year, but the magnitude and breadth of this scheme is indicative of the broader risk these vehicles can pose.

We are also concerned about how investment advisers and the funds they manage may offer foreign governments opportunities to invest in and gain access to firms involved in emerging and critical technologies such as microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, and advanced clean energy. According to our colleagues at the Department of Justice, the Chinese government routinely conceals its ownership or control of investment funds to disguise efforts to steal technology or expertise while attempting to avoid the scrutiny of the Committee on Foreign Investment in the United States, more commonly referred to by its acronym, CFIUS.

The systemic mismatch between AML obligations and the information available to those holding these obligations creates a real risk for our system. For instance, qualified custodians and prime brokers have AML obligations but do not have regular access to information about the clients of investment advisers they serve and may not see all investment activity by the investment adviser when conducted in omnibus accounts by the advisers. This structure limits the ability of custodians and brokers in identifying suspicious activity tied to the clients of the investment advisers.

Additionally, business activities in the investment adviser space are segmented, bloating the number of intermediaries, crossing international borders, and increasing the distance between the actual investor and those who move the assets around. These business practices promote obfuscation of the client or investor identity and outsource compliance responsibilities to those who are operating with an incomplete picture.

Lastly, on private funds—these businesses routinely invest funds on behalf of foreign legal entities, through arrangements that do not require them to disclose the ultimate beneficial owner. According to the most recent data we have, private funds held $305…