Senate Committee on Banking, Housing and Urban Affairs
Hearing entitled: An Update from the Treasury Department: Countering Illicit Finance, Terrorism and Sanctions Evasion.
On April 9th, 2024, the Senate Banking, Housing, and Urban Affairs Committee held a hearing for clarity from the Treasury Department on Illicit finance, terrorism and sanctions evasion.
Witness (testimony linked):
Honorable Adewale “Wally” O. Adeyemo, Deputy Secretary, Department of the Treasury
Hearing Takeaway:
The nearly two-hour hearing covered broad topics including the effectiveness of U.S. sanctions and the Biden administration’s recent decision to release another Iran sanctions waiver, indicating a focus on global finance and geopolitical issues.
In terms of digital assets, Deputy Secretary Adeyemo reinforced his earlier calls for more rigorous regulation and monitoring in response to their increasing use in illicit activities. He advocated for Congress to allocate more authority to Treasury to effectively manage the risks associated with cryptocurrencies, though the details of these expanded powers were not thoroughly explored.
There was a shared recognition between parties and Treasury of the challenges posed by the evolving use of cryptocurrencies in illicit finance. Both parties acknowledged the necessity for effective regulatory frameworks to address the misuse of digital assets by terrorists, state actors, and criminal organizations. While their focus and proposed solutions may differ, there is a common understanding of the need for legislative and regulatory actions to adapt to the changing financial landscape, ensuring U.S. national security and financial system integrity.
Republican Takeaway:
Ranking Member Tim Scott (R-SC) and other Republicans expressed concerns about the current administration’s focus, particularly on digital assets, which they viewed as potentially distracting from more significant security threats and economic policies. They were also critical of policies toward countries like Iran and Venezuela, connecting these to broader security and economic issues in the U.S., such as the fentanyl crisis. The Republicans seemed skeptical of the heavy focus on regulating cryptocurrencies, suggesting it might be an overemphasis at the expense of addressing broader financial and international policy issues.
Democrat Takeaway:
Democrats, led by Chairman Sherrod Brown (D-OH), emphasized the threats posed by the misuse of cryptocurrencies by terrorists, autocrats, and criminal organizations. They supported strict regulatory measures for crypto platforms, akin to those for traditional financial institutions, to close gaps in anti-money laundering and counter-terrorism financing. They expressed urgency in equipping the Treasury and other agencies with the necessary tools to regulate and monitor illicit activities facilitated by digital assets, emphasizing the need for legislative action to address these challenges.
Member Opening Statements:
In his opening statement, Chairman Brown emphasized the threats to American national security posed by various global actors, including autocrats, terrorists, and drug traffickers. He specifically highlighted the increasing use of cryptocurrencies by these groups as a method to move money and evade traditional financial safeguards like KYC rules. Brown pointed out incidents involving Bitcoin, Tether, and North Korea’s crypto activities to underscore this trend. He emphasized the need for crypto platforms to follow the same regulatory standards as traditional financial institutions and urged for the closing of legislative gaps to effectively combat illicit finance involving digital assets.
Ranking Member Scott (R-SC) emphasized the need for U.S. leadership in tackling global security issues, expressing concern over the administration’s policies towards Iran and Venezuela. He criticized the easing of financial restrictions on these countries and linked these international policies to domestic challenges, particularly the U.S. fentanyl crisis. Scott also expressed disappointment in the administration’s focus on climate goals over security concerns. Notably, his statement did not specifically mention cryptocurrencies or their role in these issues.
Witness Statement:
Deputy Secretary Adewale O. Adeyemo’s testimony focused on the Treasury Department’s efforts to combat illicit finance, emphasizing the growing challenge of cryptocurrency use by terrorist groups and state actors. He highlighted instances of digital asset misuse by al-Qaeda, Hamas, and countries like North Korea and Russia. Adeyemo proposed three key reforms: secondary sanctions against foreign digital asset providers involved in illicit finance, updating existing authorities to cover digital asset players, and managing jurisdictional risks from offshore crypto platforms. Adeyemo stressed the importance of Congressional action to provide the necessary tools to address these challenges effectively.
Questioning:
In the questioning between Chairman Brown and Deputy Secretary Adeyemo, the focus was on the risks associated with the gaps in the illicit finance framework, particularly concerning digital assets. Chairman Brown asked about the potential risks if Congress fails to address these gaps, especially in preventing terrorists and drug traffickers from exploiting cryptocurrencies. Adeyemo responded by emphasizing the shift of such groups towards cryptocurrencies as traditional financial monitoring becomes more stringent. He noted that cryptocurrencies provide an easier and faster route for illegal transactions, which is why obtaining tools proposed in recent legislation is crucial.
The discussion also covered the administration’s actions against China regarding the fentanyl trade. Adeyemo mentioned ongoing dialogues with China, emphasizing the U.S.’s preparedness to take action against companies supplying precursor chemicals for fentanyl if China does not act. He highlighted the importance of U.S. sanctions in discouraging such activities. Furthermore, Adeyemo addressed the Chairman’s concerns about Russia, detailing efforts to build international coalitions to reduce Russian revenues and disrupt their ability to finance their military operations, including the war in Ukraine. Lastly, Chairman Brown mentioned he would send a written question about the use of stablecoins in illicit activities.
Ranking Member Scott (R-SC) questioned Deputy Secretary Adeyemo on the administration’s focus on digital assets, suggesting it is a scapegoat given other pressing global financial issues, particularly regarding Iran. He expressed concerns that U.S. policies were inadvertently aiding Iranian resources and endangering American interests. Adeyemo clarified the Treasury’s limited control over certain financial transactions involving Iran and its need for authority over cryptocurrency transactions.
Senator Bob Menendez (D-NJ) focused on challenges in sanction enforcement against Iranian oil exports, particularly considering China’s involvement. Adeyemo highlighted the need for more authority to tackle the use of cryptocurrencies in circumventing sanctions. Further, Menendez questioned the Treasury’s efforts to regulate Virtual Asset Service Providers (VASPs), especially those not fully complying with Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) controls. Adeyemo affirmed the Treasury’s commitment to enforcing existing laws and updating regulatory frameworks to address these challenges in the digital asset space. He emphasized the necessity for Congress to provide the Treasury with more authority to effectively regulate VASPs and similar entities within the evolving digital asset landscape.
Senator John Kennedy (R-LA) questioned Deputy Secretary Adeyemo about the U.S. waiving sanctions on Iran, suggesting it indirectly aids Iran financially. Adeyemo assured that the funds in question have never and will not go to Iran, noting that this policy began under the Trump administration. Kennedy argued about the fungibility of money and its potential indirect support to Iran. Adeyemo countered by insisting that the funds would not be used in such a manner.
In the exchange between Senator Mark Warner (D-VA) and Deputy Secretary Adeyemo, Warner discussed CANSEE and how it targets efforts to evade sanctions through cryptocurrencies and DEFI (Decentralized Finance). He suggested applying similar legislative tools against Hamas.
Adeyemo expressed willingness to work on this and acknowledged the need for additional tools. Warner elaborated that the proposed bill would expand coverage to foreign financial entities facilitating transactions for any terrorist group. Adeyemo highlighted the challenges of curtailing Hamas’s access to funds, as they are moving away from traditional financial systems to methods like cash and cryptocurrencies. He underscored the necessity of secondary sanctions tools to disrupt these networks.
Finally, Warner asked about the need for additional resources for entities like OFAC or FinCEN, given the evolving challenges in tracking illicit funds. Adeyemo agreed, emphasizing the importance of equipping these agencies with the necessary resources to effectively pursue these complex financial investigations.
Senator Thom Tillis (R-NC) questioned Deputy Secretary Adeyemo around the challenges of regulating digital assets and cryptocurrencies. He expressed frustration over previous administrations’ policies towards Iran and the need for effective regulation in the digital asset space. Tillis mentioned the ENFORCE Act, aimed at creating a regulatory framework that accommodates the unique nature of digital assets without overburdening them with traditional banking regulations like BSA, AML, and KYC. He stressed the need for a balanced approach to ensure the U.S. remains an attractive jurisdiction for digital asset enterprises.
Adeyemo agreed that a differentiated, risk-based approach is necessary and emphasized the role of the regulatory process in providing certainty to digital asset companies. Tillis inquired about the timeframe for implementing new regulations, to which Adeyemo responded that it could be as quickly as a year.
Tillis highlighted the need for regulations that address the evolving tactics of illicit financing and terrorism, including the use of digital assets by cartels for money laundering. He suggested a joint classified briefing with the Treasury and DEA to better understand and address these challenges, aiming to create a regulatory environment that effectively counters these illicit activities.
Senator Elizabeth Warren (D-MA) questioned Deputy Secretary Adeyemo about the Treasury’s request for Congress to close gaps in anti-money laundering rules, specifically after reports of Hamas receiving crypto funding. Adeyemo explained that as traditional financial avenues are monitored, groups like Hamas are turning to cryptocurrencies, which are harder to track, necessitating additional tools to counteract this shift.
Warren inquired about how Hamas accesses financing, to which Adeyemo mentioned their turn to alternative means, including cryptocurrencies. She highlighted the broader use of crypto financing by various illicit actors and pointed out the lack of stringent rules for crypto validators compared to traditional banking. Adeyemo confirmed that there could be instances where such validators are involved in processing transactions for illicit activities, including for groups like Hamas and North Korea.
Warren raised concerns that Iran, despite sanctions, could be profiting from validating crypto transactions, illustrating the potential for sanctioned entities to exploit the growing crypto market. She emphasized the need for a robust regulatory framework, especially with the growth of the crypto market and the introduction of new on-ramps like stablecoins. Adeyemo agreed, noting the tendency of bad actors to exploit expanding markets. Warren concluded by stressing the importance of implementing effective anti-money laundering rules in the crypto sector.
Senator J. D. Vance (R-OH) had a line of questioning on GDP growth in Russia compared to our European allies, and how the REPO Act would affect Russian sanctions.
Senator Raphael Warnock (D-GA) expressed concerns with sanctions affecting innocent people disproportionately and the humanitarian crises in Gaza.
Senator Katie Britt (R-AL) voiced her concerns about Iran’s increasing oil profits and the Biden administration’s approach towards Iran. Deputy Secretary Adeyemo acknowledged the risk of Iran using cryptocurrency to evade sanctions and emphasized the need to make sanction evasion more costly for Iran. When asked about unused tools in sanction enforcement, Adeyemo highlighted the significance of U.S. dollar-based tools. Additionally, Britt inquired about loopholes in the petrochemical sector, with Adeyemo noting that Iran is utilizing financial mechanisms other than U.S. dollars to circumvent sanctions.
Senator Catherine Cortez Masto (D-NV) was the last to question Deputy Secretary Adeyemo. She questioned Adeyemo about the Treasury’s ability to combat the use of cryptocurrencies in drug trafficking. Adeyemo highlighted the need for additional tools to target the crypto ecosystem, especially parts attempting to evade U.S. jurisdiction. He noted the necessity of updating regulations to include cryptocurrencies and the potential of a secondary sanctions regime.
Senator Cortez Masto asked if the FEND Off Fentanyl Act would aid in enforcement, and Adeyemo confirmed its utility, but warned that as traditional financial avenues are targeted, traffickers might increasingly turn to cryptocurrencies.
She also inquired about cryptocurrency mixers and their role in illicit financing. Adeyemo explained that mixers allow for anonymous transactions and are used by bad actors to move money illicitly. He emphasized the importance of gaining more tools to effectively combat these elements of the crypto ecosystem, as they provide means for illicit actors to evade traditional financial monitoring.