In the past month, the Government Accountability Office (“GAO”), a non-partisan legislative agency that monitors and audits government spending and operations, has issued a series of reports urging banking regulators and certain executive branch agencies to adopt recommendations related to trade-based money laundering (“TBML”) and derisking. These reports underscore (1) the importance of TBML as a key, although still inadequately measured, component of money laundering worldwide, and (2) that the GAO remains interested in assessing how banks’ regulatory concerns may be influencing their willingness to provide services.

Taken together, the GAO’s recent activity signals that even in the face of unprecedented public health and regulatory challenges posed by COVID-19, the GAO still expects banking regulators and agencies alike to fulfill its prior commitments on other, unrelated topics.

 The GAO Reports that More Can Be Done to Address Trade-Based Money Laundering

On May 1, the GAO publicly released a report on the practice of exploiting international trade transactions to obscure the origins of illicit funds, known as TBML. This report, a follow up to a GAO study released in January entitled Countering Illicit Finance and Trade: U.S. Efforts to Combat Trade-Based Money Laundering (a topic about which we previously blogged), examines three main topics: what the available evidence indicates about the types and extent of international TBML activities; the practices that international bodies, selected countries, and knowledgeable sources have recommended for detecting and combating TBML; and the extent to which Immigration and Customs Enforcement (“ICE”) has effectively implemented the Trade Transparency Unit (“TTU”) program and steps the U.S. government has taken to collaborate with international partners to combat TBML.

The report first states that the sort of criminal enterprise that relies on TBML takes many shapes. These include drug trafficking organizations through Latin America, which “have used TBML schemes for decades to launder the proceeds from illegal drug sales;” other criminal organizations that “launder proceeds from a range of other crimes, including illegal mining, human trafficking, and the sale of counterfeit goods;” corrupt government officials; and terrorist organizations. In doing so, these organizations use a range of TBML schemes involving myriad goods and services, including, but not limited to, black market peso exchanges, import-export businesses, the purchase and export of gold using drug proceeds, and the purchase and export of higher-quality foreign goods.

To be sure, the U.S. is not alone in dealing with TBML risks; the U.S. State Department has identified TBML risks in 26 countries or territories in multiple regions of the world, and free trade zones have been identified as particular areas of risk for TBML. According to the GAO’s report, TBML may account for hundreds of billions globally every year and is now a primary method of laundering illicit funds.

The GAO took note of recommendations from officials and other sources for governments to strengthen their efforts to detect and combat TBML, including partnerships between governments and the private sector, sharing information through interagency collaboration, and international cooperation through information and knowledge sharing. But according to the report, U.S. officials expressed “several challenges to international cooperation related to technology and data uniformity,” such as changes in government administration and technological limitations that “affect the continuity and the commitment to information sharing with foreign partners,” and a lack of trust among countries, which complicates “arrangements for sharing trade data between multiple countries as a possible means of improving detection of TBML-related activities.”

Given the national security threat posed by TBML, the report states, it is crucial that the U.S. develop an effective response to combat it. The federal government’s key effort to do so is the TTU program. The report notes that the TTU, which it termed “[t]he U.S. government’s primary partnership effort focused specifically on combating TBML,” “has faced challenges that limited its results in disrupting TBML schemes.” These challenges include insufficient resources or support for partner TTUs; slow expansion of the TTU program and limited geographic range; delays in launching partner TTUs and lapses in their operation; differences in objectives between the U.S. and partner TTUs (i.e., placing higher priority on revenue collection than TBML scheme disruption); limited authorities and lack of interagency coordination in TTU partner countries; and data-sharing and connectivity problems.

The report cites the Department of Homeland Security’s component agencies for not taking “key management steps to address those challenges and to strengthen the TTU program.” More specifically, ICE has not developed a strategy for the program and thus lacks guidance for its efforts to maximize the effectiveness of its existing TTU partnerships and prioritize efforts to expand the program to other countries. Additionally, ICE does not have a performance monitoring framework that tracks the results of its work with partner TTUs.

The report thus recommends that ICE develop a strategy and a performance monitoring framework for the TTU program. ICE responded that it has a strategic plan for fiscal years 2016 through 2020 that addresses the TTU program and plans to develop a presentation that outlines emerging threats and challenges as well as existing data points used to track program results. However, ICE did not concur with the recommendation to develop a performance monitoring framework, stating that the TTU program already collects a number of statistics related to its program results each fiscal year. The GAO said that while ICE has identified a few metrics it uses in assessing performance, it has not established any benchmarks that it can measure results against.

The GAO Again Urges Banking Regulators to Conduct Joint Reviews to Address Derisking Concerns

On April 20, the GAO wrote to the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the Federal Deposit Insurance Corporation (“FDIC”) to follow up on a series of “high priority” recommendations it had previously issued on topics related to, among other things, derisking. The GAO’s letters to the Federal Reserve and FDIC are available here and here, respectively.

By way of background, derisking is the practice of limiting certain services or ending relationships with customers to avoid perceived regulatory concerns about facilitating money laundering or other criminal activity. In 2018, the GAO issued a series of reports on access to banking services along the Southwest border (GAO-18-263) and the effects of derisking on remittance flows to “fragile” countries (GAO-18-313). In these reports, the GAO set out to explain the extent to which banks are terminating accounts and closing branches in the Southwest border region; the extent to which money transmitters serving selected fragile countries are facing banking access challenges; and actions certain U.S. agencies have taken to respond to these challenges.

With respect to apparent derisking at the Southwest border, the GAO found that the money laundering risk is high because of the high volume of cash transactions, the number of cross-border transactions, and foreign account holders. According to a survey it conducted, about 80% of Southwest border banks limited or did not offer accounts to customers that are considered high risk for money laundering because the customers drew heightened Bank Security Act (“BSA”) or anti-money laundering (“AML”) oversight. To address concerns about apparent derisking, the GAO recommended that banking regulators conduct a review of the BSA and its implementation, with an eye toward assessing “how banks’ regulatory concerns may be influencing their willingness to provide services” and that these agencies should take steps, as appropriate, to revise the BSA regulations or the way they are being implemented to help ensure that regulatory objectives are being met in the most effective and least burdensome way.

The letters note that, in response to the GAO’s recommendations on the topic of derisking, the Federal Reserve, FDIC and other U.S. agencies convened a working group to identify ways to improve the regulations, and that the working group sought to address the GAO’s concerns by amending the BSA/AML Examination Manual to now emphasize that examiners should take a “risk-focused” approach to tailor the review of a regulated institution’s BSA/AML compliance program (see here for our detailed write-up on these updates).  Nonetheless, according to the GAO, work remains to be done. That is, “to fully implement our recommendation, the working group needs to consider and evaluate the full range of other supervisory concerns, such as conducting a retrospective review of BSA/AML regulations focusing on how banks’ regulatory concerns may be influencing their willingness to provide services.”

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