House Committee on Financial Services: Oversight of the Financial Crimes Enforcement Network (FinCEN) and the Office of Terrorism and Financial Intelligence (TFI)
House Committee on Financial Services
Oversight of the Financial Crimes Enforcement Network (FinCEN) and the Office of Terrorism and Financial Intelligence (TFI)
Wednesday, February 14, 2024
Topline
- Republicans questioned the impact of FinCEN’s beneficial ownership reporting requirements on small businesses.
- Members from both parties raised concerns relating to China, including China’s purchase of Iranian oil, sanctions evasion, cyber-attacks, and fentanyl.
Witnesses
- The Honorable Brian E. Nelson, Undersecretary for Terrorism and Financial Intelligence (TFI), U.S. Department of the Treasury
- Andrea Gacki, Director, Financial Crimes Enforcement Network (FinCEN)
Opening Statements
Financial Services Committee Chair Patrick McHenry (R-N.C.)
In his opening statement, McHenry explained that Republicans worked in good faith with their counterparts to pass the Corporate Transparency Act (CTA), which Congress intended to enhance our national security by preventing bad actors—like China, Russia, and Iran—from using the financial system for illicit purposes. He continued, saying that the reporting regime was intended to rid the financial system of bad actors by going after the shell companies often used by foreign adversaries to hide the proceeds of trafficking and terror financing. He added that Republicans fought for and secured key provisions to ensure that there are protections for small businesses. McHenry blasted the Biden Administration for transforming what was a simple program into Frankenstein’s monster of complexity, noting that the filing form now consists of 51 data points. He criticized the Biden Administration for creating an overly complex access regime for CTA and forcing every small business to comply with the regime, while many do not know they have any responsibilities. McHenry concluded that while the Beneficial Ownership Reporting Regime was supposed to be the silver bullet to stop illicit finance, it is instead being used to target Americans with different political beliefs.
Financial Services Committee Ranking Member Maxine Waters (D-Calif.)
In her opening statement, Waters warned that Russian aggression against Ukraine, fentanyl from China, and the rise of white nationalism are direct threats to America and emphasized the importance of discussing the Treasury’s role in countering these threats. She noted that Democrats have worked to address the aforementioned threats by trying to pass the Anti-Money Laundering Act of 2020. Waters criticized MAGA Republicans for politicizing critical national security decisions and trying to undercut those who protect the United States on the orders of Donald Trump. She concluded that Republicans don’t want the public to know that Treasury brought the crypto criminals in Binance down, used the Bank Secrecy Act to protect our financial system, and continues to counter Iran.
Representative Blaine Luetkemeyer (R-Mo.)
Luetkemeyer, the Chair of the National Security, Illicit Finance, and International Financial Institutions Subcommittee, said that it’s clear that FinCEN has turned its broad authority on Americans who have different opinions from President Biden.
Representative Joyce Beatty (D-Ohio)
Beatty, the Ranking Member of the National Security, Illicit Finance, and International Financial Institutions Subcommittee, noted that FinCEN has made great strides in going after bad actors through the Anti-Money Laundering Act and the Corporate Transparency Act.
Testimony
The Honorable Brian E. Nelson, Undersecretary for Terrorism and Financial Intelligence (TFI), U.S. Department of the Treasury
In his testimony, Nelson explained that Treasury’s Russian sanctions have two goals, limiting Russia’s ability to fund its war and restricting Russia’s access to items that it needs on the battlefield. He noted that Treasury has adopted a novel price-cap policy to maintain a ready supply of petroleum for the global market and to reduce Russia’s access to revenue in the market. Nelson also discussed Treasury’s new sanctions designations and public alerts to stop Hamas’ funding. He emphasized that the Biden Administration strongly supports the delivery of humanitarian aid to the Palestinians and will ensure that sanctions do not affect the flow of humanitarian aid. Nelson concluded that the U.S. continues to lead the world in mitigating illicit financial transactions, and said Treasury is working to implement the bipartisan Anti-Money Laundering Act.
Andrea Gacki, Director, Financial Crimes Enforcement Network (FinCEN)
In her testimony, Gacki explained how FinCEN has brought greater transparency to areas that are susceptible to illicit finance by using the Beneficial Ownership Registry. She noted that just last week, FinCEN brought greater transparency to the residential real estate sector through a new rule and prevented all cash purchases by illicit actors. Gacki added that this week FinCEN approved applying AML/CFT obligations to certain investment advisors. She discussed how FinCEN is working to implement new sanctions to ensure that financial institutions are preventing Hamas’ access to the financial system. Gacki concluded that FinCEN is taking steps to counter Russian sanctions evasion by identifying actionable reports and collaborating with partners to hold them accountable.
Question & Answer
China, Russia, Iran, and Sanctions
Rep. Frank Lucas (R-Okla.) asked how many Chinese financial institutions have been sanctioned for dealing with Russia and Iran. Nelson said he didn’t know.
Rep. Gregory Meeks (D-N.Y.) asked Nelson to explain the rationale behind President Biden’s Executive Order on outbound investment and illicit finance. Nelson explained that sanctions would not necessarily get at the core challenge in terms of investments in sensitive technologies that China is seeking to develop.
Luetkemeyer asked what Treasury is doing about human rights in China. Nelson noted that they have sanctioned many individuals tied to abuses against the Uyghurs in China. Luetkemeyer said that Temu, which uses slave labor, had a Super Bowl commercial, and asked if they are on their list or getting ready to be on their list of sanctions. Nelson explained they receive referrals for their human rights abuse list from civil society organizations and he will take on board that concern.
Rep. Brittany Pettersen (D-Colo.) asked what the U.S. is doing to influence China to stop the production of fentanyl. Nelson called for additional regulatory clarity on the issue but said Treasury would be updating its guidance for entities operating abroad.
Rep. Bryan Steil (R-Wisc.) asked which steps the TFI is taking to prevent the sale of Iranian oil to China.
Nelson said TFI is working with the State Department to identify the entities involved in the sale of Iranian oil. Steil asked how many Chinese institutions Treasury has sanctioned over this. Nelson noted that just last week, Treasury designated an IRGC front company in China that sold Iranian commodities. He added that in March, Treasury designated 39 entities in China for the same purpose.
Rep. Mike Lawler (R-N.Y.) asked why the U.S. is allowing Chinese banks to evade our sanctions and fund Iran and its proxies. Nelson explained that the dynamic with smaller teapot refineries that purchase Iranian oil is two-fold – the oil is used domestically, so there is no touchpoint to the international financial market, and the financial institutions where these transactions occur don’t have a touchpoint to the international financial system. He said that these dynamics limit Treasury’s ability to intervene and said that Treasury is focused on areas where there are touchpoints to the international financial system as well as ways to prohibit the transfer of oil.
Rep. Andrew Garbarino (R-N.Y.) asked what OFAC is doing to prevent further cyber-intrusions from the PRC. Nelson explained that the overall strategy is to identify and isolate malicious cyber-attacks.
Garbarino asked if additional sanctions were on the table. Nelson said Treasury is constantly coordinating with its interagency partners to determine if sanctions would be effective.
Lucas asked how Treasury tracks where Iranian money is being held and who holds the most. Nelson said that a lot of money from Iranian petroleum is going to terrorist activities, so Treasury has been working on identifying who Iran relies on to transfer these funds. Nelson said that what they have seen is a lot of these buyers are in China and they have designated a Chinese petroleum buyer.
Lucas asked which countries we believe hold the bulk of this money. Nelson said that the bulk of it is Iran but where they see funds being sent to other countries like Lebanon.
Rep. Ritchie Torres (D-N.Y.) asked if America is too aggressive in sanctions and if there is a worry that there is the unintended consequence of incentivizing de-dollarization which could lead to U.S. sanctions being less effective. Nelson said that he does not think that sanctions will lead to de-dollarization but noted that Treasury has a new economic analysis division that analyzes these questions as well.
Digital Assets & Non-Bank Money Service Businesses
Rep. Brad Sherman (D-Calif.) asked what’s being done to ensure sufficient supervision of non-bank Money Service Businesses (MSBs). Gacki said FinCEN agrees that there is a critical need to ensure that MSBs are regulated and examined and said that FinCEN works with examiners.
Rep. Sean Casten (D-Ill.) asked why the bad guys like crypto mixers. Nelson explained that mixers allow people to obfuscate the owners of a specific cryptocurrency through pooling multiple coins and then it disaggregates the pool. Gacki added that mixers are used to create anonymity which shields people engaged in illicit finance.
Casten asked if banks are already required to collect data on crypto mixers under existing AML rules. Gacki said yes. Casten asked if we have reason to believe that crypto is less likely to be used for illicit finance. Nelson explained that the technology will evolve, and said Treasury is working to ensure that its AML/CFT approach is consistent.
Rep. Tom Emmer (R-Minn.) asked if Hamas received more than $41 million in digital assets or if the number was smaller. Nelson said the $41 million number is correct based on what people had in their crypto wallets. Emmer asked how much of that got into the hands of Hamas. Nelson said he would be happy to have a classified conversation about the precise amount, but he does not expect that the number is very high for Hamas. Nelson said that terrorists prefer traditional money.
Emmer asked if Treasury has a responsibility to correct the record on digital asset usage by Hamas.
Nelson said Treasury put out a number of reports on illicit finance and crypto. He added that Treasury is aware that it’s an area of opportunity for terrorist organizations and will keep monitoring the situation.
Rep. Warren Davidson (R-Ohio) asked if it’s true that digital asset miners are not classified as money service businesses. Gacki confirmed that it was true.
Davidson asked how FinCEN works with blockchain analytics companies to trace things that are on-chain already. Gacki said FinCEN has been using tools to monitor the chain for illicit finance.
Steil asked how FinCEN works with its foreign counterparts on crypto. Gacki said FinCEN is working on sharing information on digital currency, specifically with India.
Beneficial Ownership
McHenry asked how many companies have filed beneficial ownership information. Nelson said half a million.
Luetkemeyer asked why there are 51 different data points for the beneficial ownership report. Gacki explained that the data points are designed to go after the core elements of the report. She added that FinCEN wants to ensure that the forms are simple for small business owners and can be completed in 15 to 20 minutes. Luetkemeyer asked if FinCEN was getting any information that they couldn’t get from a warrant. Gacki explained this provides them with a greater degree of transparency and allows them to go after shell companies.
Rep. French Hill (R-Ark.) asked how many small businesses will be required to comply with the Beneficial Ownership rule. Nelson estimated that about 32 million existing businesses would be affected. Hill asked what Treasury is doing to educate small business owners about these requirements. Nelson explained that they are posting on social media and engaging with associations and Chambers of Commerce to provide educational materials. Hill asked Nelson if they were putting a notice in people’s 1060 filing about the rule. Nelson noted they are engaging Secretaries of State about the rule.
Beatty asked which security protocols are in place to protect personally identifiable information in the beneficial ownership database. Gacki explained that the database was created with the highest level of security available for an unclassified system. She said FinCEN will also work with other regulators to ensure that this data is being used properly and will have regular audits of that access.
Rep. Andy Barr (R-Ky.) asked what actions FinCEN has taken to educate small business owners on the beneficial ownership requirements. Gacki explained how FinCEN has expanded into social media and is working with professional organizations. She noted they are also working with the IRS and have opened up new areas for people to answer questions through their chatbot.
Rep. Roger Williams (R-Texas) asked about the approval process for gaining access to the beneficial ownership database. Gacki assured him that access will only be granted to people operating under the statute.
Rep. William Timmons (R-S.C.) asked if it’s reasonable that small business owners have to pay a lawyer to go through their disclosure forms for the Beneficial Ownership Rule. Gacki said FinCEN is working to enhance their outreach and education on the Beneficial Ownership Rule. She added that no one has to pay a fee for these forms. Gacki noted FinCEN is partnering with other federal agencies and Secretaries of State to build packages for this.
Timmons asked if CPAs could fill out the beneficial ownership form. Gacki said she didn’t know if that was necessary.
Rep. Dan Meuser (R-Pa.) asked what is hoped to be gleaned from the beneficial ownership questions.
Nelson said Treasury wants to identify the shell companies that are operating in the US financial system and jeopardizing our national security. Meuser asked if the questions were going to work. Nelson explained that reporting entities are statutorily required to fill out these forms. Gacki added that one of the key objectives is to investigate the delta between companies that register with FinCEN, but don’t supply any information. She said this will allow FinCEN to better detect shell companies.
Rep. Ralph Norman (R-S.C.) asked Gacki what FinCEN is doing to spread awareness of the Beneficial Ownership Rule. Gacki said FinCEN is working hard to ensure that communities that have never heard of FinCEN before knowing about the rule and is collaborating with other agencies, like the Small Business Administration, for outreach and education.
Norman asked if FinCEN has a mechanism to find out who is not in compliance. Gacki said FinCEN can only take enforcement action against willful violations of the statute. Norman asked about the fines for non-compliance. Gacki said existing companies have a full calendar year to file with FinCEN, while companies that are created this year have 90 days to file with FinCEN. She added that the statute sets the level of enforcement.
CDD Rule
McHenry asked which agencies are part of the pilot program for the Customer Due Diligence (CDD) Rule. Nelson explained the first phase will include federal partners, like the FBI and DHS. McHenry asked if they would have access to the full registry. Gacki said yes, but with guardrails. She added that the pilot program will focus on high-volume users in its first phase.
McHenry asked when there will be a proposed rule to rescind the CDD requirement. Gacki said the statute envisions the rule being rescinded by 2025.
FinCEN’s Legal Authority
Rep. Ann Wagner questioned the legal authority FinCEN has to justify a search for customer records. Gacki explained that under Section 314A of the Bank Secrecy Act, FinCEN has the ability to detect suspicious activities.
Wagner asked if any legal opinions were issued on the circumstances in which banks would be required to supply customer records. Gacki replied that the overwhelming focus of this information was to detect potential violence.
Wagner asked if there are any limits to what the government can ask for from banks. Gacki agreed that there are. Wagner asked if the government could ask a bank for the customer records of all bank customers on the day of a crime. Gacki explained that FinCEN has not asked for this kind of information and is only seeking to share typologies and information on identifying violent actors.
Fraud & Money Laundering
Rep. Pete Sessions (R-Texas) asked Gacki about the causes behind recent increases in fraud. Gacki said FinCEN is working to identify the key causes.
Rep. Rashida Tlaib (D-Mich.) said that many real estate transactions are not financed and therefore do not receive the same amount of anti-money laundering oversight. She also said the real estate industry has become a very attractive industry for corrupt foreign actors seeking to hide their money by paying with cash or relying on shell companies. She asked how money laundering impacts the housing crisis and impacts communities. Gacki said that the flow of illicit money into the real estate sector raises costs in the sector all around and feels that stemming the flow of illicit finance into the sector will benefit homeowners.
Tlaib asked if the funding amount proposed by the House Republicans is sufficient for FinCEN. Gacki said that they are grateful for the funding that they have received but that the amount would fall short of what they need to successfully implement programs necessary to fulfill their duties.
Luetkemeyer asked if FinCEN is working with the SBA to identify fraud. Gacki said there is room for greater cooperation and partnerships in FinCEN’s work on fraud.
Rep. Bill Foster (D-Ill.) asked Gacki if the issue of identity fraud has gotten better or worse. Gacki said FinCEN is following up on the Financial Trend Analysis report but has determined that it’s not getting better.
Foster asked Gacki to summarize what the benefits would be from a robust digital ID system, and if FinCEN has engaged with other nations that have a secure digital ID for their residents. Gacki said FinCEN is committed to creating guardrails for a digital ID system and that it could be valuable as the financial system modernizes. She noted that identity is a key issue when trying to tackle fraud. Gacki said FinCEN remains committed to working with international law enforcement on this issue.
Foster asked how FinCEN is using AI to detect fraud. Gacki explained that under the Anti-Money Laundering Act, FinCEN is engaging in a dialogue with its regulated entities to figure out how to apply AI to its reporting structure.
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