Challenges and Opportunities in Treasury’s War: Future Financial Measures for Policy Innovation and Implementation

Challenges and Opportunities in Treasury’s War: Future Financial Measures for Policy Innovation and Implementation

December 1, 2020
1:00 pm - 2:00 pm

Event video

Jennifer Shasky Calvery, Former Director, Financial Crimes Enforcement Network
Hagar Chemali, Former Spokesperson for Terrorism and Financial Intelligence
Chip Poncy, Former Director, Office of Strategic Policy for Terrorist Financing and Financial Crimes; Senior Advisor, FDD’s Center on Economic and Financial Power
Adam Szubin, Former Acting Under Secretary for Terrorism and Financial Intelligence
Speaker biographies included below.


The panel explored the key challenges the Treasury Department and TFI—as well as its components—face as the U.S. increasingly relies upon such financial measures to help achieve core foreign policy and national security goals.


Jennifer Shasky Calvery

Jennifer Shasky Calvery was the director of the Financial Crimes Enforcement Network of the United States Department of the Treasury from September 22, 2012 until May 27, 2016. Her prior experience included 15 years at the Department of Justice.

Chip Poncy

Chip Poncy serves as senior advisor of FDD’s Center on Economic and Financial Power (CEFP). He is global co-head of the K2 Integrity Financial Crimes Risk Management practice and a board member at K2 Integrity. From 2002 to 2013, he served as the inaugural director of the Office of Strategic Policy for Terrorist Financing and Financial Crimes (OSP) and a senior advisor at the U.S. Department of the Treasury. As the director of OSP from 2006 to 2013, he led an office of strategic policy advisors in creating policies and initiatives to combat the full spectrum of illicit finance, including money laundering, terrorist financing, WMD proliferation financing, and kleptocracy flows. As a senior advisor from 2002 to 2006, he assisted Treasury leadership in developing the U.S. Government’s post-9/11 strategy to combat terrorist financing. He also assisted senior leadership in creating and developing the Office of Terrorism and Financial Intelligence in the post-9/11 government reorganization.

Adam Szubin

Adam Szubin previously served as the Acting Under Secretary for Terrorism and Financial Intelligence at the Treasury Department. In this role, he led the policy, enforcement, regulatory, and intelligence functions of the Treasury Department aimed at identifying and disrupting the lines of financial support to international terrorist organizations, proliferators of weapons of mass destruction, narcotics traffickers, and other actors posing a threat to our national security or foreign policy.  During the transition in administrations in 2017, He served as the Acting Secretary of the Treasury.  Earlier in his tenure at the Treasury, he served as the Director of Treasury’s Office of Foreign Assets Control (OFAC) from 2006–2015 and, earlier, as the Senior Advisor to the Under Secretary for Terrorism and Financial Intelligence.  Prior to joining Treasury, he served as Counsel to the Deputy Attorney General at the Department of Justice and worked as a trial attorney in the Civil Division, serving as a member of the Terrorism Litigation Task Force.

Hagar Hajjar Chemali

Hagar Hajjar Chemali is a nonresident senior fellow at the Atlantic Council and founder and chief executive officer of Greenwich Media Strategies, LLC. She previously was Director of Communications and Spokesperson for the U.S. Mission to the United Nations and for Ambassador Samantha Power. She was also Spokesperson for Terrorism and Financial Intelligence at the U.S. Department of the Treasury where she handled all communications and public affairs related to sanctions policy, illicit finance, and enforcement actions. From 2010-2012, she was Director for Syria and Lebanon at the National Security Council, where she advised on and coordinated the implementation of U.S. policy toward Syria and Lebanon. She also worked at the Treasury Department in the Office of Terrorist Financing and Financial Crimes as a Senior Policy Advisor on Asia and as a Middle East Policy Advisor.


CHEMALI: I’m so excited that we’re doing this panel at this time, and obviously that you guys asked me to moderate. Mostly because first, I’ll take any opportunity to hang out with these guys. We are TFI buddies, we have our TFI mafia. We love each other.

So, I’m really excited about that. But as I’m sure that many of you in the audience, I know are out there, I can’t see you, but hello out there in TV land, I love you all. And this conversation comes at such an amazing time, because obviously the national security challenges that we’re facing and also on the heels of our election. So, I don’t want to take up more time, we have a group of talkers here, so let me introduce them and then let’s dive right in. Obviously, first we have Jennifer Shasky Calvery. She is former Director of FinCEN, Financial Crimes Enforcement Network at the U.S. Department of the Treasury. And she is group head of financial crime for HSBC. We have Chip Poncy, who is former director, Office of Strategic Policy, for the Office of Terrorist Financing and Financial Crimes at the U.S. Department of the Treasury, and global co-head financial crimes, risk management for K2 Integrity.

And we have Adam Szubin, who is former Acting Under Secretary for the Office of Terrorism and Financial Intelligence at Treasury. And he’s also distinguished practitioner in residence at Johns Hopkins School of Advanced International Studies, SAIS. So, these are all our former colleagues. I’m so happy to have them all together. So, I want to start off, following in light of our recent elections, I thought maybe we could start talking about sanctions. By the way, we’re not going to focus the whole conversation on sanctions – all of us nerds know that is not the only thing that the Treasury does when it comes to these issues – but figured we’d start with it? Now, given that we’re nearing the end of one administration about to go into a new one, I thought we might start with general thoughts on the future of sanctions and how the Biden administration might use this tool.

How may they deploy them? Regarding, in particular Iran, Russia, and China. So, Adam, why don’t we start with you? Can you talk about these, talk about your expectations for each of these sanctions regimes, and maybe you could talk quickly on your views, offer your views on overuse? Do you think that sanctions have been overused? And do we need a course correction?

SZUBIN: Thank you so much, Hagar, and I’m delighted to be here. As you say, reunited with old Treasury friends. Delighted to be here with you and with Jennifer, and with Chip, as well. It’s a huge question you’re asking, and I’ve lived through a couple of administration changes in my time at Treasury. Obviously, now I’m outside of government, as you said. But typically, some of it is consistency, and some of it is going to be pivoting.

And where I expect to see consistency is you saw a big focus in the Trump administration on the use of sanctions. In some cases, in multilateral formats, often in a unilateral, U.S. only fashion, but there was a lot of rigor brought to that by our former colleagues. Especially the good people at OFAC in terms of building out regulations, guidance, very strict enforcement. And I think you’ll continue to see that in a new administration.

And that of course goes beyond OFAC. Also includes the Justice Department, the banking regulators. But, sanctions implementation and enforcement has been kind of a major plank of the sanctions tool over the last 20 years. When it comes to individual countries, as you asked, in some cases, I think we’ll see a continued press. China, for example, as you mentioned.

Well, there are a number of issues that China presents on the global stage unto U.S. interests. Among them, human rights concerns around Xinjiang, civil rights concerns in Hong Kong, South China Sea, and then the whole gamut of intellectual property and other economic issues where the U.S. has tensions with China.

None of those tensions have gone away, of course, and they won’t go away on January 20th. So, I would expect to see a Biden administration continue to try to press China on all of those issues. What I do expect to see is an overarching strategy that does look more towards multilateral alliances and partnerships.

And that’s something I think you heard from the president-elect already that the concerns we, the U.S., had with China are not U.S. concerns alone. And so wherever possible, I think you’ll see an effort to really stand in a united front and to call China on its behavior where that’s necessary. There’s also going to be though necessarily an effort to work with China, and climate change is just at the top of that list. But, there’s a whole host of issues where the U.S. can’t do it without China.

And so, I think that walking that tight rope, more of a multilateral approach, and hopefully you’ll see an overarching strategy that pulls together all of these different threads; areas of cooperation, areas of difference. With respect to Russia, I would expect to see, I don’t know, a stiffer spine, when it comes to the U.S. approach towards Russia, and sanctions can be one manifestation of that.

But of course, sanctions are just one part of the toolkit when it comes to how we approach that country, geopolitically. And Iran, look, that’s been a major change from the Obama administration to the Trump administration, with Trump, walking away from the Joint Comprehensive Plan of Action. And you heard the president-elect say that he would go back to the JCPOA if Iran comes back into compliance with it.

And that’s going to be, I think, an early focus on the foreign policy side for an incoming team. Complicated though, by the fact that Iranian elections are just a few months away. So, they too are going into presidential elections, and a lot is going to ride on both the run-up to, and the outcome of those elections.

Finally, some big picture thoughts, I think on multilateralism you’re right. I think your question implies the fact that you will see a President Biden looking to act in concert with partners and allies wherever possible, so that it’s not the U.S. going it alone.

And that speaks, in some ways, to the question of overuse. Because when I hear foreign governments, when I hear banks and other private sector actors complaining about overuse of sanctions, it’s not the number of designations that are being announced. It’s certainly not the counter terrorism sanctions. It’s not the North Korea sanctions.

It really tends to be one of two baskets that are complained about. One, is where the U.S. is threatening partners and allies; sometimes called extraterritorial sanctions, sometimes called secondary sanctions. Those that are understandably unpopular overseas, and then the other are sanctions programs that are very onerous on private actors.

Whether that’s because they’re incredibly detailed in terms of what they require, in terms of case by case decisions. Or, because there’s ambiguity. And of course, those who try to implement these rules need clarity. So, I think those are areas that an incoming administration would be wise to watch out for, and where I think if we get that right, the complaints about, “overuse of sanctions,” will be greatly mitigated.

CHEMALI: Yeah. No, you’re right. I mean, it also beckons the question of the other financial tools that are available, that Treasury deploys, but that may not get as much attention. And so that’s a good segue to – and by the way, Jen and Chip, if you want to jump in on that, feel free. But I want to move it to the question of beneficial ownership, which all three of you actually, have done a lot of work on, have spoken publicly on.

Chip, for as long as I’ve known you, have been focused on this issue. So, let’s turn to that. And Chip, if you can, tell us quickly the rundown of where we are on this issue, why this matters, and where you think this is headed, right? This is a very unique time. I know that you’ve spoken about it publicly before. I know that we’ve also come to moments where we thought that things are moving forward, on beneficial ownership. Can you give us a little bit? Can you comment about that?

PONCY: Sure. Thanks, Hagar. And let me follow Adam’s thanking of everyone associated with this fantastic panel and reunion. Always great to see Jen, Adam and you, Hagar. Big plug for, Oh, My World. I’m a fan.

CHEMALI: Thank you.

PONCY: More importantly, my kids are fans because they find my discussion, or my description of what I do for a living to be boring. And when I showed them your show, they were much more intrigued. So, congratulations on connecting.

CHEMALI: Thank you.

PONCY: Big thanks to NSI, CSIS, FDD, and U.S. Treasury for bringing us together. On the question, beneficial ownership. How much time do we have? Clock is the enemy on this one. I see Jen laughing. This is actually where we met way, way, way back in the early days of proposed legislation to adopt meaningful company information reform. Let me back the lens up.

I’m just going to take a couple of minutes here. The first is to explain what is beneficial ownership, and why it matters? And the second is to look at where that sits now, with respect to risk management and the financial system. And the third is to look at where we might be headed, right, as you suggested. So, what is beneficial ownership?

Beneficial ownership, for those that are not nerdily following Oh, My World every five minutes, is the concept of which individual, or individuals, ultimately own or control the interest at issue.

Whether an account, a relationship or assets under management. To whom do these assets belong and who really controls them? That’s an incredibly important question in assessing and managing risk in our financial system. Because it’s so easy for, in a global economy, individuals to look to be somebody, or something other than who they actually are.

And that often happens through the use of legal entities, and the misuse of those legal entities to hide, or mask the identity or participation of individuals with whom banks, financial institutions, and other economic actors would not choose to do business.

So, if you think about sanctions, what Adam was just walking through, and fully agree that sanctions are here to stay, they’re complicated. And ultimately when you look at individuals, entities that are sanctioned, to try to find them in a complex financial system, is a lot harder.

If you don’t understand the beneficial ownership interests behind the accounts, or customers that you may be servicing, or the counterparties that your customers are dealing with. So, beneficial ownership is crucial to understanding and managing risk in the financial system. That’s really the relevance of it.

Now, where are we with respect to understanding beneficial ownership, to identify track and trace risk in the financial system? Way back when in the olden days, when we were all together, we have what we called a three-pronged approach to beneficial ownership.

And that strategy really looked at two conceptual elements. The first was that financial institutions, when they onboard customers, should understand the beneficial ownership interests behind those customers. So, if you’re ABC company or XYZ trust, that we really understand whether that ABC company is under control by an oligarch, or a Tony Soprano, or a Jennifer Calvery or Adam Szubin.

And that concept of beneficial ownership as a key element of customer due diligence, has been well established now in global standards and under U.S. law and regulation since May 2018. On the back of a lot of work done by a ton of people. And that’s a huge part of the strategy.

The second part of this strategy, the three-pronged approach, was to think about when companies are created at inception and throughout the legal life of an entity, that the beneficial ownership interests of that entity are understood by the very authorities that create them.

And just recently I was asked about the status of this particular prong of the concept and the frustrating part for those of us who were combating financial crime is on the one hand, we spend billions of dollars in our systems to chase illicit financiers, who are perpetrating trillions of dollars of illicit finance throughout the financial system.

And on the other hand, these same governments create these anonymous legal entities by allowing for the continued creation and corporation of entities, without really understanding on behalf of whose interests these companies are created. So that problem leads to the second prong of the beneficial ownership strategy, which is to get company formation authorities in countries around the world, to understand the beneficial ownership interests of the legal entities they create. And on that score, in the United States, we have a lot of work to do still.

We have to legislate nationally, congressionally, to require that States with whom the authority to create companies is generally invested, when they do that, that they identify the beneficial owners of those entities. And that that identification, ideally, sits in a centralized database like at FINCEN. So that’s the second prong.

The third prong is about both of the first two prongs, but not on a domestic basis, on a global basis. And I think there are counterparts around the world, and U.S. leadership have been instrumental in creating global standards by which countries are expected to adopt laws and regulations to require financial institutions, to understand the beneficial ownership interests of the customers that bank, what they service, and to also obtain beneficial ownership interests over legal entities that they create or authorize. So that’s kind of the state of play.

Where we need to go, we’ve got to adopt legislation, which I understand, in the latest version of the National Defense Authorization Act. Which, as I understand it, is due to be considered or adopted later this month. That there is a provision in that bill, or proposed legislation, that would amend our company formation processes to deal with this company formation prong of the beneficial ownership strategy.

And that would really be very welcome for a number of reasons, but I’ll pause there. And again, just want to thank you for raising the question, and tie it back to the relevance of all of the sanctions issues that Adam was just describing. Because if we don’t understand ultimately the interests that we are servicing our financial system, it’s really hard to implement sanctions in a way that is truly effective.

CHEMALI: Chip, I actually, I want Jen to comment on this as well. So, thank you for that background, and an explanation as to why this matters so much. We are taking questions at the end, but somebody asked a question in the chat box that I’m going to lump into this because it kind of all makes sense. So, someone was asking where the U.S. progress is on beneficial ownership as it compares with other international partners? Jen, can you talk about that? And can you, follow on this issue in general?

SHASKY CALVERY: Yeah. Sure. Sure. So again, like the others, it’s great to be here and have the Treasury alumni dance here this evening. It’s great to hear about the three-pronged approach. I’d forgotten about the three-pronged approach. It was great to get a quick review. So, thanks for that, Chip. Hagar, I haven’t seen your show yet. My excuse is because I’m over here in England, out of touch and I don’t know what’s happening in the world, but I’ll be sure to tune in.

And again, thanks to NSI and Jamil for that great introduction. So, the three-pronged approach, so I’m sitting here listening to the great old three-pronged approach. I’m like, wow, what will I think of it now? I’ve now been at a global bank for four years. Do I still even agree with the three-prong approach? And the fact is I do.

So, I was glad to see that it’s still kind of, when I think about what is my position now, as the group head of financial crime, when people ask me about this issue of beneficial ownership? The things you just outlined, Chip, are still there. I don’t call them the three-pronged approach. I think I might. I think I might go back and revert to the old language. But here at HSBC, we do the CDD and onboarding the customers, we recognize and see the importance of needing to understand who’s behind the companies that we onboard.

We find it immensely helpful when we’re operating in a jurisdiction where they have a registry, and we can consult that registry, and compare what’s in the registry with what we’re being told. And you’ll be surprised to learn we don’t always get the truth. So, we can do those comparisons and make decisions. This idea of having a registry, and having individuals self-certify their own structure, I think is incredibly important. And then having the jurisdictions who are hosting or the authorities that are hosting and responsible for that registry, having them be involved in the verification, also incredibly important.

I can tell you, Hagar, going to the question of what are different jurisdictions like around the world, we get a decent insight of this, where we operate in more than 60 countries. And so, we’re trying to keep up with our CDD obligations. We’re trying to understand what criminals are trying to move money through the bank and through shell companies, and how we can use registries as a tool to help us to get behind that. And in the jurisdictions where there are registries, we’ve made some fantastic, just fantastic discoveries and been able to mitigate risks.

So, I’ll give you an example. It’s still not a registry. It still could improve, but it is a good example. The UK has a registry. That information that we’ve managed to get out of that registry has helped us to identify really sophisticated, professional money laundering networks operating in other parts of the world, through our bank, and to mitigate that risk, to talk to law enforcement and let them know what we’re seeing, share that information with other banks where appropriate. So, it has real world impacts, being able to get that information.

The U.S. has a long ways to go. So, I would not put the U.S. in one of my top countries on this issue. I think we all know that. I think it’s why we’ve been so passionate over the years, whether it’s Chip or Adam or myself, about talking about this issue. I’d like to see the U.S. get to that next step. Obviously, there’s a lot of ideas out there, and we’ll see whether they come to fruition through the NDAA this year.

CHEMALI: Thanks, Jen. Yeah, no, I’m curious too. It’s hard to hear that we don’t do something the best sometimes, but maybe it’s necessary. Adam, do you want to chime in on this? I know you’ve talked about this issue. I believe you’ve testified on it, as well. And then, we’ll jump into the next topic.

SZUBIN: My – the substance of anything I’d say, Chip and Jen have already covered. I will say this was my leading legislative priority when I was the Acting Under Secretary, and I was unsuccessful. It was very frustrating. And the only good thing about that is I was in good company. There were a number of other officials who had this as their leading priority, and it has taken over a decade. I think we’re really close now. I’m hopeful that we’re really close now, and that will pay dividends, as Chip was pointing out, not just in terms of money laundering, but in terms of sanctions evasion, the whole panoply of bad things people do in moving money, is going to be mitigated in part by getting this transparency. So, I’m encouraged, but warily so.

CHEMALI: I hear you. All right. Well, I’ll keep my fingers crossed. So, I want to switch topics and talk about the FinTech sector, which has really exploded over the last few years, certainly since we left government. As I’m sure all of you know, those in the audience, those in the panel, a number of TFI officials have gone to work for FinTech companies, to launch their own FinTech companies, all of which have been super impressive. So, Jen, I want to go back to you and see, from your perch, can you talk about the vulnerabilities and opportunities you see with this expanding FinTech sector? I know when we were in government, we tended to focus on the vulnerabilities for exploitation of abuse and so on. But since we’ve left, I know I see a lot of the argument as well in favor of the opportunities there for development for financial inclusion. Can you talk about that?

SHASKY CALVERY: Yeah, sure. So, there’s so much to say about FinTech, where does one even start? So maybe I’ll start with payment platforms and FinTechs that are focused on the payment space. As we look at the broader digitalization of society and certainly likely accelerated by the impacts of COVID-19, we see consumers increasingly willing to embrace digital platforms and new payment technologies, which is, I think, is a good and healthy thing for the financial system.

It does have impacts though, on the space where TFI spends its time, on financial intelligence. It has an impact on regulatory supervision. And that is, I think we can see through disintermediation, probably, of payments end to end. So, a payment that had traditionally flowed almost entirely through traditional depository institutions or global banks, like an HSBC. We had visual sight of that payment end to end. Or at least, yes, we would like to improve it. We would like even more payment transparency, we would like more data, but we could see who was the originator of the payment, what institutions did that payment flow through, and who was the ultimate beneficiary on the end of that payment. You had that kind of transparency.

As we see FinTech players coming more and more into the payment space, that kind of clarity end to end is starting to break up. And that’s because, if you’re sitting at a global bank like ours, we’re probably banking MSBs or third-party payment processors who are FinTechs, who are the ones, it is their customers who are moving money. And we, as a bank, are serving as a movement of wholesale payments from one part of that company, to another part of the company in a different country.

And you don’t have the same visibility and the same information available, the same information reported through financial intelligence, to be able to see the full string of the payment. And so, I think the risk there is going dark from an intelligence standpoint. If I look back with my own FinCEN hat as a financial intelligence unit, their job is to collect financial intelligence, share it with law enforcement, so it could be useful. You lose that visibility over the payment space.

And we can talk about how those players are also regulated, but we have to be cognizant of the fact that they’ve got different supervisory expectations, often lesser supervisory expectations. And just because of the way the payments are flowed, even if they’re as sophisticated as can be, as mature as can be in terms of their reporting, they too don’t have all the pieces of the puzzle. And so, it’s just making the ability to follow those flows more difficult.

So, I think that’s the danger. And the danger of then not having that intelligence, of course, is that we can’t put together the really good investigations that support sanctions, that support law enforcement outcomes, that support the use of other treasury tools and stop the flow of illicit funds. So that’s the danger there.

The opportunities are that a lot of the companies that are involved in these payments, they’re highly digital companies. They don’t have the legacy technology systems that a big global bank, like mine, is still stuck with and trying to overcome every day. They have the ability to be able to put together the type of reporting, the type of insight, that could be incredibly valuable in the illicit finance space.

And they often have the will to do it, as well. So, it’s about trying to make sure that we marry up our regulation, that we understand where the gaps are, in terms of any type of regulation, any type of supervision, and capitalize on the willingness and tech and data abilities of these companies to help us on the illicit finance front.

And maybe just one last bit, since we’re talking FinTechs, I’ll say one thing on RegTechs as well and the real promise that we see there. There is no doubt, and I’m sure we’ll get into it more as the discussion goes on, that the innovations that we see in the RegTech sector, we’re adopting them at a traditional bank like ours, we adopt them, we invest in them, we buy their technologies, but even whether it’s within the institutions or external, the technology that’s being brought to bear now, the analytics techniques being brought to bear now on this problem, give us real promise to get past the days of rules-based systems with high false positives and legions of people whose only job it is to close out false positives and what an amazing waste of investment that is, and to target those funds, the activity towards actually solving the problem and having an effective AML/CFT system globally, and get away from compliance for compliance sake.

CHEMALI: You touched upon, at the beginning when you talked about payments and the black holes. I wonder if we could dive a little bit more deeply into cryptocurrency and the question of digital currencies. And so, when I was in government, I remember this was when it was things, Bitcoin and all that was starting to become more fashionable. And I think at that time, Bitcoin was the only one that existed. And I remember very clearly Secretary Lew saying that he just couldn’t really wrap his mind around it. And frankly, neither can I. I probably missed out on investment opportunities there. But Chip, maybe can you talk about the implications for stable coins or even government created virtual currency, when it comes to protecting against AML safety risk?

PONCY: Sure. Thanks, Hagar. And I love listening to you and Jen and Adam on these issues. It’s a bit of memory lane, and obviously we’re all learning more every day in the jobs that we’ve taken since leaving Treasury. This question is fascinating. You mentioned Bitcoin, which in many ways really did put digital currencies, virtual currencies on the map. But I will say that our experience predated that, and I’m very happy to say it was at a time when we were all together, but the first 311 action against a virtual currency provider was Liberty Reserve. And I think that was done under Jen’s watch at FinCEN and when Adam was at OFAC.

And what an interesting case study of how we would use in that instance, a 311 action, when we could have used a sanction too. There are lots of tools in the toolkit in how we best use the authorities of Treasury to go after a risk or a threat, as Liberty Reserve was in banking, effectively, criminal interests that were all over the world on the internet, and doing it in a way that was thought to be outside of our reach because it was operating from off shore. And in that instance, shutting it down through a 311 action, broadcasting to the world that this is a high-risk player for all the reasons that we stated.

And it also showcased just the systemic vulnerability of what a virtual currency provider can do by operating in the virtual space and not really being grounded. In many ways, it feels like a shell bank. It doesn’t really have a terrestrial presence or something you can grab. It just is a digital representation of value that can be traded, can be exchanged. And really important here, when we look at the risks and the risk mitigation measures and the underlying purposes and uses of digital currencies, to understand definitions. Really important to start there, and I think there’s still a lot of confusion about this, but right at the outset, to recognize that virtual currencies or cryptocurrencies, as if they’ve often been called, or digital currencies, should be thought of differently than fiat currencies. Where fiat currencies, U.S. dollars, and others have digital representations of value. Every bank in the world does that. And they’re backed by the full faith and credit of the economy and the country that issues it.

We all had the gold standard a long time ago. So, in many ways, our fiat currencies are digital representations of value that aren’t necessarily backed by anything other than the full faith and credit of the economy. But that is a meaningful distinction between a digital representation of value of a fiat currency, versus those digital currencies that are not tethered to a fiat currency. And that’s a Bitcoin and all these others that have proliferated in the interim.

And to me, the threshold question remains, in many ways, a question of adoption and what are the use cases? And I think there’s a healthy debate among real economists and financial policy advisors about what those efficiencies and legitimate uses may be. There’s no question there’s lots of legitimate interest in virtual currencies, but I think the jury is still open as to why. And at the end of the day, if these are assets that are being used to create efficiencies around how value is stored and traded, then we have to go back to the basics of how value is stored and traded.

And if you are seeking a depository on facility to safeguard your assets, then in many ways, your depository institution starts to look a lot like a bank. And if you’re extending credit against that, you look even more like a bank, and that’s not always clear with respect to the functionality of these virtual asset service providers. What exactly are they doing, and functionally speaking, how does that correlate to how we regulate?

When it comes to transferring value, which is really the core premise of many of these digital currencies is to be an instrument or a vehicle for exchanging value, money transmitter, then you’re a classic money service business. But, when you look at the digital space versus a typical money transmitter, questions arise as to what is the benefit of working through a virtual currency, as opposed to a traditional money remitter. And at least in my mind, it comes down to settlement, how effectively and efficiently can we settle, and messaging, how much do we know about the transaction that we are settling?

And if virtual currency prevents opportunities of efficiency, with respect to how payments are executed and value is transferred, a core question is why aren’t those efficiencies being contemplated in terrestrial payments, as I would call them, or with fiat currencies? And the fact is they are, but they may not be happening at the speed or pace for reasons that Jen’s referenced, which is that fiat currencies, terrestrial payments suffer from, in many ways, and benefit as well, from the legacy of systems and controls that we have in place.

So even as we are looking at messaging systems on distributed ledger technologies and blockchain that may allow for instantaneous settlement or real-time settlement, we have real payment systems, terrestrial payment systems, that are doing the same thing. And whether in the virtual space or the terrestrial space, there will be a need to balance the efficiency and speed and perceived effectiveness of real-time settlement with the risks that that entails. And that’s particularly acute with respect to fraud.

So, this is a conversation that happens all the time, when we talk about enhancements to payment systems in the terrestrial space. It hasn’t really happened in the virtual space yet. So that day is coming because it gets fundamentally to the question of what are we trying to solve with the virtual currency adoption? And I don’t know that that question’s really been effectively answered. That’s a question for others. From a fin crime perspective, I think what Jen said is spot on, which is, if it looks like a duck, quacks like a duck, it’s a duck. So, if you are taking deposits, and you are issuing credit against it, you got to regulate it like a depository institution. If you are accepting funds transfers and executing on behalf of underlying customers, you’re a money service business.

And there, we’re really exacerbating vulnerabilities that Jen referenced, which are not U.S. centric. They are global in nature. And that is, it’s one thing to say we have a level playing field across different elements of the system, with respect to global standards, or even with respect to national law and regulation. It’s another thing to say that that level playing field exists all the way through supervision, examination, enforcement, compliance. And we’ve struggled with that as a global financial system, as we get further and further away from core commercial banking, as we go up into capital markets, and we go down into occasional transactions, we struggle more with that concept in fin crime, where commercial banks are still, I think, best in class, at understanding and managing these risks.

And so, we have a lot of work ahead of us, if there’s going to be more adoption of virtual currencies, to really extend what a level playing field means in terms of capability and expectation and enforcement.

CHEMALI: Cool. Thanks, Chip. All right. I want to ask one more question to Adam, and then I’ve got a round robin for all of you before we open it up. Adam, can you talk to us a little bit about the use of sanctions in targeting human rights abuse? This administration made it a priority. We’ve heard from our Under Secretary Sigal Mandelker talk heavily about this issue, and so I’d love to know – And obviously, it started before when you were in government. What are your thoughts on this tool? Do you expect the Biden administration to continue using sanctions to target human rights abuse and, do you think it’s been effective? And if you could lump into that your views, this issue doesn’t get a lot of airtime, I know it’s something that Danny Glaser and I have expressed personal interest in, is the question of using sanctions to target violent white supremacy groups. This administration targeted the Russian Imperial Movement a few months ago, but then they didn’t follow up with any kind of broader campaign, which was an argument Danny and I made in an op-ed shortly after that it should. So, can you comment on that as well? Give your thoughts. Do think that that’s where the Biden administration might head?

SZUBIN: Great questions. So, thank you. On the Global Magnitsky Act, which was a law passed by Congress that authorized Treasury and directed Treasury to go after human rights violators and impose targeted financial sanctions against them, that was really a major development. That’s an approach that we had used against first narcotics cartels, then terrorist groups, WMD proliferators, and organized crime, but here it was being used against human rights violators. It’s not, as you point out, new to focus sanctions against human rights violators, but it had been done historically on sort of a country by country basis. So, I was very involved when I first arrived at OFAC in 2006. My top priority was Darfur and I was directed by the administration, that was the George W. Bush administration, to do everything we could to pressure the Sudanese government over horrible atrocities going on in the Darfur region.

So, we have a lot of experience with human rights-based sanctions, but the idea that we have a free-standing authority and can apply it anywhere in the world where we see a problem develop gives us more, I would say, flexibility, the ability to be nimble and quickly responsive. And it’s also true that sometimes you’ll see a one-off violation in a country where you don’t want to declare a national emergency. And one example of that for example, was Turkey where you had a pastor who had been detained for a long time on illegitimate charges and targeted sanctions were actually quite effective as I read the stories in getting that individual free without having to declare that Turkey, as a government, as the country, represented a national security threat. So that’s definitely, I would say an upgrade in the arsenal that the U.S. government now has.

How effective are they in general? I would say stepping back, while I think they can be very effective in those kind of micro one-off cases, it’s hard to argue that sanctions have deterred widespread atrocities of the type we saw, for example, in Rwanda, or the type we saw in Darfur, or the type that are very worrisome happening among the Rohingya in Myanmar. In those kinds of major in-country atrocities, it takes a lot more than just sanctions. There needs to be an international concerted effort that involves isolation pressure of which sanctions can be a part. But I think we don’t want to overstate the utility of sanctions here because these challenges are so massive and they really require a lot of attention across government and across governments.

To the white nationalism question, it’s a really tricky and fascinating issue. If you’re talking about white supremacist groups abroad that are engaged in violent acts, then it falls into a legal basket that’s easier to address. If they’re committing acts that are intended to intimidate a population, then you can designate that group under your terrorism authority and make it a crime to provide them with material support, block any transactions that touch the U.S. financial system. Some of those overseas groups have tentacles in the United States, and there too, we have legal precedent. So, just the same way if Al-Qaeda or Hamas had a front group in the United States or a charity that was actually raising money, diverting money to those terror groups, the Treasury Department, the Justice Department can shut it down.

But where you’re talking about truly domestic U.S. white supremacist groups, and I fully acknowledge that the lines between foreign inspired, foreign controlled, foreign directed, those are going to be gray, but where you have truly free-standing U.S. white supremacist groups, we don’t have the legal authority for that. And there’s a lot of debate about whether we should have additional authorities and if so, should they, can they constitutionally go as far as the foreign authorities go, because at the end of the day, those foreign authorities really make it a crime to do anything, to give any type of material support, to act on behalf of. And if you’re saying to U.S. persons that that type of approach is going to be taken towards their association with U.S. groups, there are a number of legal scholars who say, “Whoa, you’ve got constitutional problems.”

CHEMALI: Right, yeah, we can imagine it would be awkward. All right. That was very helpful. Let’s do a round robin. If you guys were back at Treasury, what would you tell the new incoming undersecretary as to what you’d see as the most pertinent issue that he or she should focus on, in one sentence? I know you’re laughing. And what can you tell the current government folks watching right now? What would you tell them about their work and about their mission?

SZUBIN: I’ll go first on the message to the undersecretary, because I still have him muted. So, I feel like I’ve got that advantage. My first priority for an incoming undersecretary would be the organization, would be the people because TFI has accomplished an amazing amount of things in its 15 odd years of existence, but it’s all been off the strength of the individuals. It’s just has remarkably creative hardworking people, and to invest in those people, to make sure that you’re listening to those people as to what are their current concerns, where do they think they need help, where do they think they need more resources, and what additional tools or steps or resources or authorities they feel like would help them in their mission? I think that has to be the first priority for an incoming leader.

CHEMALI: As a former staffer, I love that. It’s a great answer. Okay, Jen, and then Chip, if you were back there, what would you say?

SHASKY CALVERY: Wow, that’s a tough act to follow because I couldn’t agree more with you, Adam. I’ll do my best to nonetheless follow that. Maybe I’ll focus this one on the work that the Treasury team has done on the regulatory reform. I think keep it going. I think that’s been some really important work and this is the right discussions and the right actions happening. We can see it in the advanced notice of proposed rulemaking out of FINCEN recently. This idea of how can we stop doing less impactful work so that we can focus the resource’s attention on more impactful work? That discussion between the regulated industry and Treasury and the wider system is incredibly important. Setting priorities, focusing on impactful work, making sure that we are effective in getting the outcomes that we all wanted. So certainly, not as good of an answer as Adam’s, which I put as number one priority, but number two, I would go with the focus on the impactful work.

CHEMALI: All right. Thanks. Okay. Chip with number three.

PONCY: I love going last after these guys. Wow.


PONCY: Someone just dropped the mic twice. So, one sentence with like eight parts to it. Kidding.

CHEMALI: Eight-pronged strategy.

PONCY: An eight-pronged suggestion. There are two words that come to mind. One is integrity and the other is sustainability. And with integrity, I think what I have seen since I left Treasury, and I saw this when I was at Treasury, for sure, and we spent most of our time explaining to our partners and our counterparties abroad what we were trying to accomplish together and getting their support for everything from systemic architecture, all the way down to specific targets and disruption. But I think on the outside, there’s still an incredible amount of work to do around the importance of the integrity mission. What is it, why do we do it, and how is it done?

It’s surprising to me on the outside, 19 years after 9/11, that there still is an incredible gap of cultural appreciation and awareness of why we do what we do. Even some of the questions that I’ve noted on the chat coming in, and that’s not anyone’s fault. It’s arrogance and presumption on my part and on others who do this for a living that as it turns out 99.9% of the world doesn’t do this for a living. So, you can’t say, “Well, I don’t understand why they don’t understand.” They don’t understand because they don’t do this every day. So, they being, whether it’s bankers, or banks’ customers, or non-bank financial institutions, or even regulators and investigators to say, “This is why financial information and financial integrity is so important to the underlying real economy, and the integrity of markets, and the integrity of those markets being so important and critical to the overarching growth of the global economy.”

That seems so simple, but it’s not well understood. Without financial integrity, you don’t have market integrity. Without market integrity, you don’t have growth on any sustainable way. So that big, big picture sort of set of connections needs to be highlighted and colored in on a global basis, not for the specialist and nerds who do it every day, but for those who live under those laws and regulations and whose support and buy in we need. So that to me is integrity and sustainability. The other piece of sustainability is that this is all dynamic. So, I’ll use one example here. This morning I was looking at an advisory that we’re pulling together for a client on trade finance and some of the numbers that we’re all fairly familiar with, but, the reality that trade has moved away from traditional trade financing instruments into basically clean wires, where it’s basically open account trading, and that’s more or less been well understood now for a decade.

But it’s a good example of how, in a real economy, you have, in an increasingly globalized market, more and more trust between suppliers and buyers and ways that you don’t necessarily need to hedge on a payment risk if you’re a seller because the market’s just too competitive. So, you’re invoicing and billing like everybody else, whether you’re domestic or cross border. That’s a function of dynamism in the global real economy that the financial systems responded to by saying, “We’re sort of folding up a lot of our traditional trade finance instruments and moving towards faster payments,” akin to what we were talking about earlier. And at the end of the day, the ability of the financial institutions to assess and manage the risk associated with those payments is less and less because they’re seeing less and less because they’re not getting the information, they don’t have the time to consider it, and assess the imagined risks that they used to.

That problem is going to continue to grow. And so, sustainability here really is about understanding that we have to recognize the changes in the real economy, how that’s driving changes in the financial system, and ultimately questioning do we have the information that we need to continually assess and manage risk in a way that protects the integrity of the market? And that’s a constant challenging question that we don’t ask ourselves as often as we need to, to stay in front of and not catch up with, but stay in front of these changes.

CHEMALI: That’s a good one. I like it. It’s a long sentence, but I liked it. All right. So, we have 10 minutes to go through questions and then Jamil will close. So, let’s start. I’m going to jumble them up. Let’s start with Josh Rudolf, who asks, “It seems a key priority of the Biden-Harris administration’s foreign policy will be fighting corruption from foreign kleptocrats and their oligarch proxies to their professional enablers in the West. What would a TFI-wide strategy to counter corruption look like?” Who wants to take that? Adam, do you want to start with that one?

SZUBIN: I’m happy to. I’m also happy to announce that it comes back to beneficial ownership in part.


SZUBIN: It’s been a number of investigative journalists, and I think we have some on today’s call or today’s video cast have uncovered Russian oligarchs, for example, moving money through the UK, through the U.S. financial system, using shell companies, U.S. shell companies and others. And so that has to be part of the strategy. I think you’re right and I also detect that the incoming Biden administration does want to prioritize combating corruption. I think Treasury can play a big role in that. I think that the work with the FATF, the work with other international, either bilateral or multilateral groups to raise the tide for all ships, to increase transparency and the security of the global financial system is a big part of what I think of as defensive work.

And then on the offensive side, going after kleptocrats, whether using existing tools, whether developing new tools in the sanction’s toolkit, in the DOJ toolkit to both prosecute and to be able to forfeit assets and to bring them back to the countries from whom they were taken. I think there is more that can be done if this is elevated to be a priority. And I do get the indication that it will be.

CHEMALI: Great. So –

SHASKY CALVERY And Hagar, I would just add to that as well. Using public private partnership, so we’ve got some very defined public private partnerships in the U.S. between industry and Treasury. I think leveraging those, making it clear that corruption is a priority and then leveraging those groups to go after it would be another very powerful tool.

SZUBIN: Totally agree.

CHEMALI: Great. Good. All right.

PONCY: Can I add real briefly on that, Hagar, just because it’s been a – Anyway. So, we’ve got the underlying economy, the FCPA and similar UK anti-bribery Act and UNCAC and other things going after corporate players that are paying the bribes to the senior political officials and figures. On the financial side, AML regime, anti-money laundering systems, we have enhanced due diligence on senior political figures in order to address really the demand side of the problem. What’s interesting is, and this picks up on Adam and Jen’s points, how much are we going after the other end of the transaction financially in the real world? So, the public private partnerships that target the kleptocrats that are the senior foreign political figures that we focus on in the banking side and the financial system, having that intel correspond with the investigators, prosecutors who are going after these corrupted officials on the street makes a lot of sense. On the supply side, it’s been a little bit slower, and this is my view, and Jen is going to want to shoot me after this.

But for every senior foreign political figure that takes a bribe, there’s somebody making a payment. And the SCPA is all about that, but it’s just shocking to me that now, even now in 2020, how many financial institutions do not look at the risk on the supply side. Which of my corporates are engaged in high-risk markets, high-risk sectors where procurement processes may be vague, where contracts may be won in ways that are not necessarily transparent? That’s really hard for a bank to do. And you can’t get there alone. You do need the public, private partnerships, but it opens a target set literally by another 100 percent because you’ve got half of that problem is sitting in our financial system making the payments. And we’ve just started to see some of that movement with the Dutch Telecom, for example.

SHASKY CALVERY: I’m not going to shoot you, I’m going to disagree with you. I can’t tell you how much of my days are spent on that very issue and our organization, our business more broadly, very much focused on that issue. So much so understanding the anti-corruption compliance regimes of our customers and how effective those are as a basis for our due diligence and whether we’ll do transactions with them, whether we’ll onboard them, and whether we’ll maintain them as customers. And if they’ve got a problem ensuring that they do in fact enhance those compliance regimes, we believe it, we can see it, and we can verify it. And I know we’re not the only institution out there doing it and I can see the impact it’s having on industry as they’re now getting more and more fluent in the corporate world in being able to talk about what they’re doing on this issue.

PONCY: That’s great news and –

SHASKY CALVERY: A long ways to go, but –

PONCY: No, no, that’s great news. And you anticipated my question, which is how prevalent is this? Because you guys, as you know, are a leader in so many aspects of combating financial crime. It’s getting that practice into a more systemic adoption.

SHASKY CALVERY: More needs to be done, but I see it happening more and more in different parts of the world and parts of the world that you’d be surprised or wouldn’t have thought that it was moving in that direction.

PONCY: Great news.

CHEMALI: Interesting. All right. Let’s try and squeeze in two more questions. I’m going to push this one in from Ian Tally. Hey, Ian. So, he says, “Hi all, glad to see you all, if only digitally. Two questions, well, we’re going to make it one. Wondering if anyone can say what Yellen will bring to office in terms of financial diplomacy and sanctions. Does she have any expertise that will allow her to shape foreign policy in this regard or holes in her resume that could mean Treasury’s voice in shaping those policies is muted within the broader administration?” I’m just going to say, I think Janet Yellen is bad-ass so I’m not worried about it personally, but anyway. “And two, how difficult could it be for the administration to disentangle from the maximum pressure policy against Iran?” Who wants to start with Yellen? Jen.

SHASKY CALVERY: All right, I’ll start. I’m going to start by not answering it. Look, we’ve had all kinds of secretaries come into that position with differing amounts of knowledge about the elicit finance space before they got into that role. And the thing that’s so important and so fantastic about Treasury is that you have all the career people who have the knowledge and are there to, if there are holes in the resume, I’m not suggesting there are any, but if there are, you have the career people there to be able to advise, to bring folks up to speed, and that’s what makes our institutions tick. I think we’ve spent a lot of time looking at our democracy over the last several years and I’ve become more and more convinced that it’s the institutions that make up the democracy and the full functioning of those institutions and not any given person who’s in an office at a particular time.

CHEMALI: That’s so true. Having gone myself through transitions, I agree with that fully.

SZUBIN: I very much agree. And I don’t think that a Hank Paulson or a Tim Geitner would say that they came into the job with a strong background in, let’s say sanctions policy or anti-money laundering, but they’re both brilliant as is Janet Yellen. And they were both more than capable of absorbing that advice and information that Jennifer’s talking about. And I thought they were excellent on these issues. Not to mention Jack Lew who had been the Deputy Secretary of State. So, he might be in that rare category of being able to hit the ground running. On the second question of disentangling, I think it kind of jumps ahead a little bit because the Biden administration is going to be focused first on the strategy and the negotiations, vis-a-vis our allies, and then vis-a-vis Iran. The disentanglement from sanctions, if it comes, is going to be based on steps that Iran takes.

And, so, it’s a lot to go through in terms of the diplomacy before you get there. But, look, I was a part of disentanglement under the Obama administration and it is complicated, but it is possible. We were able to disentangle nuclear sanctions, which were removed as part of the JCPOA, from the counter-terrorism sanctions that remained, from the U.S. bilateral sanctions that remained in place. And we were able to build a framework that both, I think conceptually made sense, Iran had made commitments on the nuclear portfolio, but not on these other portfolios, so their sanctions relief was relegated to just those areas. And I don’t see any impediment to doing that if the situation warrants. You do see, I see occasional mentions in the press of this action or that action is being taken to box in an incoming Biden administration, and I don’t really think it works that way.

I mean, of course, legally, any action that one executive takes, another executive can reverse, so there’s no legal boxing that can go on, but from a more substantive perspective, I would expect an incoming Biden administration would look at it, look at the sanctions based on its objectives, based on its strategy, and go from there. And if the sanctions are warranted and in support of what it’s trying to achieve, those sanctions are going to be kept in place. If there’s going to be sanctions that are viewed as an attempt to box in an administration or overlap, let’s say there are existing sanctions that had been in place and they put counter-terrorism sanctions on top to make it harder to remove nuclear sanctions, I think that would be seen for what it is and is not going to put them in a box from which they can’t get out.

CHEMALI: Perfect. Okay. Listen, officially, technically we’re out of time and Jamil is going to close, but I want to squeeze in one more, just one quick question, because there’s a theme running with a number of these questions that I think we can merge into one. And it comes from a bunch of – Basically, a lot of people are questioning how Treasury can help, can use its tools, or maybe they can create new ones, to help those who are affected by sanctions inadvertently, whether it’s mitigating the effect of sanctions, the collateral damage, or it’s about financial inclusion and bringing people in. Does somebody want to talk about that very quickly? What is the opportunity there for Treasury, what more can be done in that regard? And then Jamil will try and do the close. Chip, go ahead.

PONCY: I’ll be super-fast. First-based approach is a lot harder in practice than it is on paper. And there’s no question that Treasury has the tools and it has the expertise, it has the relationships, but it requires an entire system to understand that, all the way through from policy to regulation, to supervision, to examination enforcement, across all the authorities that are responsible for pursuing the financial system. When you take a look at the types of sanctions programs that are in place and how narrowly drawn they can be, the licensing regimes to create additional flexibility, the blend between that and AML, which is truly risk-based, there’s plenty of legal and policy flexibility to narrowly tailor and to create elbow room for legitimate interests, and certainly for humanitarian causes. The question is whether we can institutionalize those levers in ways that allow those intentions to manifest all the way through the system.

CHEMALI: Perfect. Yeah, you’re right. Jamil, why don’t you close for us? Sorry for running late. For all of you still with us, I really appreciate it.

JAFFER: Not at all. Thanks to you, Hagar, and to the entire panel, Jen, Chip, Adam, really appreciate you joining us. To the audience, for those of you that are left here, please join us for three events we have coming up here in the next week. Thursday, December 3rd, this week from 5:00 to 6:00 PM ET, we’ll have Elliot Abrams, special rep for Iran and Venezuela at the Department of State. Next Monday at noon, we have a conversation with Ambassador David Schaeffer, the first ambassador of large war crimes issues which we’re co-hosting with another GMU institution, a couple of them, The Policy School, as well as the Center for Transnational Terrorism and Crime and Corruption. And then finally, on Wednesday, December 9th, from 11:00 to 12:00 eastern, we’ll be hosting our next China’s Rise event. Confronting China’s Challenge to the World Order with Kylie Atwood from CNN, Ryan Hass from the National Security Council, and Ambassador Kurt Tong from the State Department.

For all these things, you can find them on our website at nationalsecurity.gmu.edu. You can also see our list, New Law Policy Papers and Covering Global Pandemics, the IC, UN response to China and the like, and follow us on LinkedIn and on Twitter @MasonNatSec, watch our podcast online, Fault Lines, Iron Butterfly, NSI live on iTunes, Spotify, anywhere else. Thanks again, Jen, Hagar, Adam, appreciate it. Everyone have a great afternoon.

CHEMALI: Thank you.

PONCY: Bye everyone.


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Sanctions and Illicit Finance