December 14, 2022

FinCEN looks to develop guidance on DeFI and the digital asset ecosystem

In late November, 2022, Himamauli Das, Acting Director of the Financial Crimes Enforcement Network of the US Department of the Treasury presented remarks to a conference held by the American Bar Association in Maryland.   Notably, Acting Director Das presented virtual currency and the broader digital asset ecosystem as a key priority of FinCEN.  Das stressed in particular the impact of decentralized finance or DeFi and the potential elimination of financial intermediaries and the role they play in anti-money laundering and anti-terrorism financing efforts.  He anticipated that additional regulations or guidance may be necessary in this arena, and noted that FinCEN is examining that possibility.  Likewise, the popularity of virtual payment methods and FinTech and RegTech companies, and the risks posed by these companies, were a focal point in Acting Director Das’ speech.

Another important topic addressed by the Acting Director was the ongoing implementation of the Corporate Transparency Act, which requires three rulemakings by FinCEN.  The first, the beneficial ownership rule, is complete.  It specifies who has to report, what they must report, and when.  The second rule will establish the procedures and requirements for access to the beneficial ownership database by both law enforcement and financial institutions.  Eventually, FinCEN will propose revised rules for performing customer due diligence consistent with the requirements of the CTA.

FinCEN is also examining the measures that need to be taken in order to prevent corrupt individuals from using the U.S. real estate market to launder ill-gotten gains, particularly in connection with efforts to isolate sanctioned Russians from the international financial system.

The Acting Director also described FinCEN’s progress in the use of machine learning and artificial intelligence to analyze suspicious activity reports.  Thus far, FinCEN has found that a large percentage of SARs are identity-related, and that these fall into three categories: (1) cases of impersonation, (2) cases of insufficient verification connected with forged documents or inconsistent personal information, and (3) cases involving identity compromise such as unauthorized access to accounts, stolen credentials, and ransomware.

Efforts in each of these fields are aimed at making the AML/CFT program effective, more efficient, and appropriately risk-based — by rulemaking, by improving IT solutions, by applying innovative thinking to developments in the financial sector, and by developing avenues for confidential communications between FinCEN and financial institutions with the goal of establishing a more risk-based and streamlined AML/CFT regime.

FinCEN press release