The New Counter-Illicit Finance Regime

Increased Focus on Sanctions Evasion by U.S, UK, EU AML Regulators

This came into stark view when the U.S. Treasury Department’s lead AML agency—the Financial Crimes Enforcement Network (FinCEN)—issued an alert in 2022 requesting increased vigilance for potential Russian sanctions evasion attempts, and when Treasury’s lead sanctions agency—the Office of Foreign Assets Control (OFAC)—published an advisory in 2023 stressing to financial institutions the importance of implementing customer due diligence (CDD) procedures and other AML controls to mitigate risks associated with Russia sanctions.

Meanwhile, the United Kingdom’s primary AML regulator—the Financial Conduct Authority (FCA)—has increased its focus on the sanctions systems and controls adopted by the firms it regulates in response to the sanctions imposed since Russia’s invasion of Ukraine and has issued guidance to help firms deliver greater compliance with sanctions. Moreover, the European Union’s new AML/CFT Authority (AMLA) has been charged with checking compliance with sanctions-related measures by the riskiest groups in the financial sector, contributing to a common supervisory approach to verification of compliance with sanctions-related requirements, and “providing critical input to the understanding and mitigation of risk of sanctions evasion/non-implementation at the Union level.”

Financial Institutions Breaking Down AML/CFT and Sanctions Silos

A senior U.S. Treasury official speaking at an anti-money laundering conference in late 2023 discussed this convergence and its implications for financial institutions: “the two areas of highest priority for my office—sanctions to advance the foreign policy goals of the U.S., and the strengthening of the U.S.’s own AML/CFT regime—are deeply linked … the continued siloing of AML/CFT and sanctions departments at some financial institutions can lead to financial institutions unwittingly, or inadvertently, processing payments involving designated entities.”

Indeed, financial crimes and sanctions compliance teams in many banks have significantly increased coordination, collaboration, and information sharing, particularly related to detecting and investigating potential sanctions evasion activities by Russian, Iranian, and North Korean actors. As it turns out, the methodologies used by sanctioned actors to access the financial system and by individuals and entities involved in financial crimes are often similar. And therefore, many of the red flags for sanctions evasion are the same or similar to longstanding AML-related red flags, like the use of shell companies and third-party intermediaries.

Paradigm Shift to a Counter-Illicit Finance Regime

Despite the growing convergence of AML/CFT and sanctions regimes and overlap between financial crimes and sanctions risk management and compliance, AML/CFT programs, rules, and requirements are very different from sanctions programs, rules, and requirements. Too often, too many institutions and regulators incorrectly view sanctions through the prism of AML or “Anti-Financial Crime (AFC).” Sanctions violations are not financial crimes violations (most sanctions violations are in fact civil law, not criminal law, violations) and sanctions risk management and compliance should not be viewed as a sub-set of financial crimes risk management and compliance.

Instead, these disciplines are better viewed as overlapping parts of a broader counter-illicit finance paradigm. The global counter-illicit finance mission represents the collective commitments and efforts of all global stakeholders to combat both financial crimes though the development and implementation of AML/CFT regimes and threats to national, regional, and collective security through the development and implementation of financial and economic sanctions regimes.

Viewing AML/CFT and sanctions as part of a broader counter-illicit finance paradigm enables key global, jurisdictional, and private-sector stakeholders to develop and implement more effective, efficient, and holistic strategies, standards, policies, and risk management and compliance programs—ultimately leading to better outcomes in protecting and advancing the integrity of the global financial system.