Senate Banking Housing and Urban Affairs Committee: An Update from the Treasury Department: Countering Illicit Finance, Terrorism and Sanctions Evasion, April 9, 2024
Senate Committee on Banking, Housing, & Urban Affairs
Topline
- Democrats discussed the need to expand power to address the role of cryptocurrency in illicit finance.
- Republican Sen. Thom Tillis (N.C.) discussed his legislation, the ENFORCE Act, and cautioned against creating overly burdensome regulatory regime for digital assets.
- Members from both parties questioned the efficacy of U.S. sanctions.
Witnesses
- The Honorable Adewale Adeyemo, Deputy Secretary, Department of the Treasury
Opening Statements
Banking Chair Sherrod Brown (D-Ohio)
In his opening statement, Brown discussed how autocrats, terrorists, and drug traffickers are working to undermine American values and our way of life. He explained that China supplies the precursor chemicals and materials that are fueling our fentanyl crisis, Russia is looking for more ways to finance its war in Ukraine, and Iran finances terrorist proxies that have wreaked havoc from Hamas. Brown said that since these malign actors need money to operate, the U.S. must use all available economic tools to defend American interests and deny bad actors access to our financial system.
He urged the U.S. to undertake a relentless pursuit of sanctions, while noting that international security leaders need more resources to combat bad actors. Brown called on Congress to enact the FEND Off Fentanyl Act and discussed the Justice Department’s recent bust of a fentanyl ring operating across the US using Bitcoin. He warned that malign actors are using cryptocurrencies and digital assets because they know it’s easier to get around our sanctions and regulations without the safeguards already in the traditional financial system. Brown emphasized the need to close loopholes and ensure equal protection across traditional and non-traditional financial systems. He concluded that the U.S. needs to do more to push back against Iran, Russia, and China.
Banking Ranking Member Tim Scott (R-S.C.)
In his opening statement, Scott noted that Treasury already has robust tools available to them to combat illicit finance. He discussed his work to provide additional resources and direction for Treasury to address illicit finance, citing the FEND Off Fentanyl Act and the Revoke Iranian Funding Act. Scott warned that every dollar that the Biden Administration sends to Iran will be used to put American service members in danger. He highlighted that Treasury has the ability to stop the dollars moving around the global economy that bolsters the Iranian regime. Scott attacked the Administration’s electricity waivers to Iran, which he said expands Iran’s currency access to euros and leads to further billion-dollar payouts.
Scott criticized the decision to give a lifeline to Venezuela, describing Venezuela as a known ally of Iran, China, Russia, and Cuba through broad oil sanctions relief. He noted that money to the Venezuelan regime hasn’t helped American interests or the Venezuelan people. Scott discussed the fentanyl crisis’ impact on Americans, and explained how the crisis is fueled by Mexican cartels and China. He emphasized that Iran and the fentanyl crisis should be top of mind for the Biden Administration and criticized Secretary Yellen for focusing on green technology during her recent meeting with the Chinese. Scott concluded that fentanyl and terrorism are leading threats and need to be treated as such.
Testimony
The Honorable Adewale Adeyemo, Deputy Secretary, Department of the Treasury
In his testimony, Adeyemo discussed Treasury’s work to cut terrorist groups and other malign actors off from the traditional financial system and explained how these groups have adopted innovative methods to move resources. He noted that five years ago, al-Qaeda and affiliated terrorist groups, largely based in Syria, operated a Bitcoin money laundering network using social media platforms to solicit cryptocurrency donations. Adeyemo explained how after receiving virtual currency, the groups laundered the proceeds through various online gift card exchanges. He said that over the past year, the Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF) has transferred cryptocurrency to Hamas and the Palestinian Islamic Jihad (PIJ) in Gaza. Adeyemo discussed Hamas’ use of virtual currencies to solicit small dollar donations, and noted that Treasury has been able to take action against these networks.
Adeyemo said that bad actors are constantly finding new ways to move money and hide their identities. He said that while illicit and anonymous financial systems were traditionally slower than traditional finance means, that is no longer the case. Adeyemo said Treasury continues to use its authorities to aggressively to cut off the illicit finance networks used by malign actors worldwide, including Hamas and other Iran-backed proxies, Russian oligarchs, and ISIS.
Adeyemo explained that as Treasury responds more effectively to illicit finance, illicit actors focus more intensely on digital assets. He clarified that this is an issue not only with terrorist groups, but also for state actors like the DPRK and Russia. Adeyemo discussed DPRK’s reliance on anonymity-enhancing technologies like mixers to hide the sources of its funds, and explained how they leverage over-the-counter digital assets traders to acquire fiat currency. He noted that Treasury’s observed Russia increasingly turns to alternative payment mechanisms—including the stablecoin tether—to try to circumvent U.S. sanctions and continue to finance its war machine.
Adeyemo noted that due to lacking authority in the digital space, malign actors will increasingly rely on cryptocurrency and digital assets. He called for the creation of an enforcement regime able to prevent illicit digital finance as more terrorists, transnational criminals, and rogue states turn to digital assets.
Adeyemo proposed introducing a secondary sanctions tool targeted at foreign digital asset providers that facilitate illicit finance. He also highlighted Treasury’s proposal to modernize and close gaps in existing authorities by expanding their reach to explicitly cover the key players and core activities of the digital assets ecosystem, including virtual asset service providers (VASPs) and cryptocurrency exchanges. Adeyemo discussed the need to reform existing authorities to clarify that Treasury can reach extraterritorially when digital asset entities impact national security while using the US financial system. He noted a clear overlap between these proposals and the bills coming out of the Senate Banking Committee. Adeyemo concluded that without Congressional action to provide Treasury with the necessary tools, the use of virtual assets by bad actors will only grow.
Question & Answer
Digital Assets
Brown asked Adeyemo to briefly describe the gaps in US illicit finance framework around digital assets and asked what would happen if Congress failed to act to prevent drug traffickers and terrorists from using digital assets and illicit finance. Adeyemo noted that Treasury took action to sanction Hamas and explained that as we limit access to the formal financial system, more malign actors will move to the informal crypto and digital world. He urged Congress to expand Treasury’s tools and authorities in the digital asset world.
Scott said it feels like digital assets are the scapegoat of the Biden Administration. He blasted the focus on digital assets while the Administration is making it easier for the Iranian regime to access US dollars through electricity waivers. Adeyemo noted that on the electricity waivers, the State Department has authority. He explained that it is important to remember that the money Scott is referring to is held by financial institutions and can only be used to purchase things outside of Iran and explained that while the US can control those funds it can’t control the flow of digital assets into Iran.
Sen. Bob Menendez (D-N.J.) noted that while more work needs to be done to improve our digital asset policy regime, that shouldn’t exempt service providers from complying with existing law. He asked what the Treasury is doing to step up enforcement of existing law while Congress works on new digital asset legislation. He also asked if Treasury needed additional resources. Adeyemo said Treasury has been exercising its authority to the extent it can, while continuing to use its existing tools to sanction Hamas. He also said that he appreciated Congressional efforts to give Treasury additional authority to crack down on digital asset illicit finance.
Sen. Mark Warner (D-Va.) explained secondary sanctions would allow the U.S. to go after Hamas and any secondary actors using any form of currency, and asked how Treasury could limit Hamas’ access to funds using those secondary tools. Adeyemo explained that Hamas is using untraditional financial means to move money into Gaza, as the shutdown border in that region has made the physical transferring of funds extremely difficult. He said if Treasury had secondary authority, they could stop the flow of money through the digital assets space.
Sen. Thom Tillis (R-N.C.) discussed his legislation, the ENFORCE Act, which he said was created in response to Treasury’s list of requested tools to handle illicit finance. He explained how his legislation is guided by the reality of distributed ledgers, noting that other legislative and regulatory proposals would not work in a distributed ledger environment. He said that his proposal is a viable tool that won’t prevent the US from being a viable player in the digital asset space.
Tillis cautioned against enacting regulations and reporting requirements for digital assets and crypto that are too burdensome, warning that it would make the US less attractive to businesses. He called for a light regulatory framework on crypto to prevent another FTX situation.
Tillis asked Adeyemo to acknowledge the inherent problems with trying to apply old banking concepts including BSA, AML, and Know Your Customer, to a distributed ledger and digital assets. Adeyemo agreed on the need to use a differentiated approach. He said that to Tillis’ point, the US should take a differentiated approach depending on the type of tool and noted that that is why Treasury has proposed using a risk-based approach.
Tillis questioned Adeyemo on the time frame Treasury expects between notice and comment and promulgating a rule. Adeyemo said it could be as quickly as a year. Tillis warned that if there is a change in administration after the next election, the policy goals in the digital asset area would change significantly. He concluded that he wants to get legislation passed on the points where there is consensus during this Congress, so the U.S. doesn’t fall behind.
Sen. Elizabeth Warren (D-Mass.) explained that after the world learned that Hamas had received millions of dollars in cryptocurrency before the October 7th attack, Treasury wrote Congress a letter requesting help closing the regulatory gaps that allow illicit finance to continue in the digital space. She asked Adeyemo why he sent that letter. Adeyemo explained that once Treasury went after Hamas’ traditional financial assets, Hamas turned more to crypto and digital systems. He added that money can move faster and is harder to track through those systems and emphasized that Treasury needs additional authority to combat that.
Warren asked about Hamas’ access to money. Adeyemo said Hamas is increasingly turning to alternative means of financing, including cryptocurrency. He said that while Treasury is using every tool that they have, they need additional tools.
Warren said North Korea, ransomware gangs, drug traffickers, child pornographers, and other bad guys use crypto. She noted that while validators process cryptocurrency transactions like middlemen, they aren’t subject to anti-money laundering rules. Warren asked if there are validators that are processing transactions for North Korea, Hamas, drug traffickers, and child traffickers and receiving a fee. Adeyemo said yes.
Warren noted that Iran makes millions of dollars validating transactions for groups with no connection to its proxies, and asked if it’s possible that Iran could be the validator and profit from a transaction between two American citizens without either of them knowing it. Adeyemo said it’s possible. Warren asked if more money would end up in Iran’s pockets as the crypto market grows and the number of transactions increases. Adeyemo said yes.
Warren noted that the House is currently working on a bill that would create a framework for stablecoins. She explained that Stablecoins make it easier to convert dollars into crypto and vice versa, describing stablecoins as an onramp into the crypto world. Warren concluded that if we are going to create new onramps, which is what the House bill does, the U.S. needs a regulatory framework that puts anti-money laundry rules in place so that we don’t allow more bad actors the chance to make more money.
Sen. Katie Britt (R-Ala.) asked what else can be done to address Iranian steel exports, and what tools Treasury needs. Adeyemo said that Treasury works with the intelligence community to find out how Iran is illicitly selling steel and to then go after those that are helping them do that. He then discussed his concerns that Iran would begin to use cryptocurrency more, and said Treasury needs authority in that space.
Sen. Catherine Cortez Masto (D-Nev.) asked if Treasury had sufficient tools to combat the use of cryptocurrency in financing drug trafficking rings. Adeyemo said Treasury needs additional tools, including power over cryptocurrencies and digital assets that claim to be dollar-backed but are attempting to escape US jurisdiction. He also discussed the need to update the definitions in Treasury’s rules to include cryptocurrencies, and the need for a secondary sanctions regime that makes it clear to financial institutions that they should not engage with the parts of the cryptosystem that engage in illicit financial transactions.
Cortez Masto asked if the FEND Off Fentanyl Act would support Treasury’s enforcement actions. Adeyemo said yes but emphasized that Treasury needs powers explicitly in the crypto realm.
Cortez Masto noted that in 2022, nearly 10 percent of crypto transactions connected to illicit activity were laundered through crypto mixers. She asked Adeyemo to explain the risks associated with bad actors using mixers. Adeyemo explained that mixers help bad actors hide their identity and protect their assets. He noted Treasury has taken some action against mixers but needs more tools to effectively act.
Cortez Masto concluded that she supported expanding powers to address cryptocurrency and illicit finance.
Sanctions & Confiscation of Assets
Brown noted that while American sanctions froze hundreds of millions of dollars, Russia continues to find ways to fund its war in Ukraine. He asked how Treasury plans to strengthen and enforce sanctions against Russia. Adeyemo said there needs to be more international cooperation. He discussed the need to cut off Russian assets and access to military weapon components, and said Treasury is thankful for the Senate’s approval of the President’s supplemental funding request to provide support for Ukraine.
Sen. J.D. Vance (R-Ohio) asked how the Russian economy did in 2023 and how effective American sanctions were at preventing Russian economic growth. Adeyemo explained that the Russian economy has largely transitioned to a war economy with a short-term and singular focus on supporting the war. Vance asked about Russia’s GDP growth in the last year. Adeyemo said Russia has transitioned their economy onto war footing and that Russia’s GDP grew about 1 to 2 percent in the past year. Vance noted that level of growth is at or above the growth of some of our European allies.
Vance said he is concerned that if Russia’s economy only works during war, Russia will be more likely to go to war. He asked if Adeyemo was familiar with the REPO Act, and Adeyemo said he was. Vance said one of the REPO Act’s worrying provisions would freeze the sanctions that we currently have on Russia in place legally as an act of Congress.
Vance asked if REPO Act would require an act of Congress if the Biden Administration or the next administration wanted to change sanctions on Russia. Adeyemo said he wasn’t sure if the REPO Act freezes the current sanctions regime into place. Vance said the next Administration needs diplomatic flexibility to negotiate a settlement of the war and asked if the U.S. had ever previously seized the assets of a country that we were not directly at war with. Adeyemo explained that the Senate version of the REPO Act would give the President the authority to freeze assets but would not require it. Adeyemo added that he wasn’t sure if the U.S. ever seized the assets of another country that we weren’t at war with before.
Sen. Raphael Warnock (D-Ga.) discussed his concerns that untargeted sanctions will only harm the poorest of the poor across the world, rather than the governing class. He noted Adeyemo led a review of U.S. sanctions after taking office and asked what the review found about ensuring that sanctions have the intended effects and deter bad behavior. Adeyemo said the U.S. needs to do all that it can to limit the harm of its sanctions on the innocent, and explained that’s why our sanctions have humanitarian carveouts. He also noted that we have to make sure that our sanctions are tied to a clear foreign policy objective and that they are narrowly targeted to have an impact on the threat actor rather than the population.
China
Brown asked what the Administration is doing to hold China to any commitments and to take action if they fail to crack down on fentanyl precursor suppliers. Adeyemo said that Treasury has made it clear to China that it is not in their interest for precursor drugs to be sold in the US, but that if they don’t act then the US will.
Brown followed up asking how he shows the fentanyl trade is not in their interest. Adeyemo said that fundamentally the Chinese want to control the drug trade within China and that they do not want to be exposed to US sanctions as a result of their inaction.
Menendez noted that despite US sanctions, Iran’s oil exports grew by 50 percent in 2023 with most of that oil going to China. He asked what that says about the effectiveness of our sanctions, and what Treasury is doing to put pressure on Chinese businesses that import Iranian oil despite our sanctions. Adeyemo said Treasury is putting pressure on middlemen who enable Iranian oil sales, while making it difficult for Iran to get the money from its oil sales returned to the country using the traditional financial system. Menendez said it’s clearly possible to convert dollars into crypto and digital assets to get access to those funds.
Menendez said part of the issue is that the U.S. is resistant to impose sanctions against China and Chinese businesses right now in this new détente. Adeyemo replied that Treasury needs new authorities to go after cryptocurrency transactions and would continue their work to sanction middlemen.
Finance Litigation Industry
Menendez asked if the lack of transparency in the finance litigation industry could create a gap in sanctions enforcement. Adeyemo agreed that was an issue, noting it’s one of the ways Russian oligarchs are trying to evade U.S. sanctions.
Menendez said sovereign wealth funds could be investing in third-party legal financing market to further their foreign policy and military goals. He added that foreign companies can use this kind of investing to fund lawsuits against their US competitors which is something we are seeing in patent litigation. Menendez asked how to shore-up regulations for litigation financing to ensure it doesn’t serve as a pathway for bad actors to exploit the U.S. legal system. Adeyemo called for more transparency and said the American people should know who is funding these lawsuits.
Menendez asked if Treasury needed a new law or new executive authority on this issue. Adeyemo said he have to discuss with his team and pledged to work with Menendez on the issue.
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