HFSC Hearing Summary: Oversight of FinCEN and the Office of Terrorism and Financial Intelligence (TFI)

How We See It:

Maybe unsurprisingly, Democrats and Republicans seem to be talking past one another. Republicans emphasized Treasury’s admission that blockchain is not the preferred vector for terrorists to finance their activities while Democrats emphasized that there is still likely more illicit activity occurring than is being detected or reported. This is probably a “both, and” situation and not an “either, or”– it is likely that there is more activity taking place than is being detected and still not nearly as much proportionately as is taking place on traditional financial rails and via the hawala network. Still, this was an important admission coming from the Undersecretary for Terrorism and Financial Intelligence. Democrats advocated for additional resources to enable FinCEN to operate effectively, a perennial need, while also repeating the red herring that crypto is only used by criminals and terrorists. However, the continued attention on the topic and the positive comments of the Undersecretary are beginning to erode this kind of non-starter, unhelpful perspective that does not move the conversation forward.

Yesterday, the House Financial Services Committee conducted a hearing titled “Oversight of the Financial Crimes Enforcement Network (FinCEN) and the Office of Terrorism and Financial Intelligence (TFI)” and featured testimony from Brian E. Nelson, the Undersecretary for Terrorism and Financial Intelligence at the Department of the Treasury, and Andrea Gacki, Director of FinCEN.

The hearing primarily addressed the roles of FinCEN and the Treasury in thwarting illegal financial activities by malicious entities and terrorist groups. Discussions revolved around the enforcement of Suspicious Activity Reports (SARs) and the implementation of the Corporate Transparency Act (CTA), which mandates companies to report Beneficial Ownership Information to FinCEN, and aligning with the Anti-Money Laundering and Countering the Financing of Terrorism Framework (AML/CFT).

The most notable moment came when Representative Tom Emmer (R-MN) inquired about the extent of digital asset utilization by terrorist organizations like Hamas. Undersecretary Nelson clarified that the use of cryptocurrencies by Hamas is significantly less than reported by the Wall Street Journal, indicating that cryptocurrencies are not a favored tool among Hamas terrorists, a sentiment that Rep. Bryan Steil (R-WI) echoed later in the hearing. Other key points include:

Committee Chairman Patrick McHenry (R-NC) emphasized the need to prevent foreign adversaries from exploiting the U.S. financial system for illicit purposes, questioning the effectiveness of the beneficial ownership reporting regime in helping to catch bad actors. He also expressed frustration at the continual request for more resources and funding with a seeming lack of results.
Committee Ranking Member Maxine Waters (D-CA) highlighted the Treasury’s role in bringing the cryptocurrency exchange Binance to justice, resulting in a $4.3 billion settlement, and criticized Republicans for not supporting increased funding and authority for Treasury and other national security agencies.
Undersecretary Nelson discussed the minor role of cryptocurrency in funding militant groups and the efforts to address compliance gaps in the crypto space. Undersecretary Nelson also emphasized that the Treasury is considering systemic deficiencies in U.S. AML/CFT regime.
Director Gacki highlighted FinCEN’s five-year monitorship of Binance, the opportunities that processing SARs from activity in recent years creates and that FinCEN needs to be adequately funded being at the forefront of virtual asset expertise and monitoring.
Representative Brad Sherman (D-CA) continued his criticism that cryptocurrencies are primarily used by drug dealers and terrorists.
Representative Ritchie Torres (D-NY) argued that FinCEN’s proposed rules on mixers are unnecessary, as financial institutions are already required to file SARs for mixer transactions.
Representative Sean Casten (D-IL) highlighted the prevalence of illicit crypto transactions and use of mixers, urging FinCEN to continue its monitoring efforts while suggesting that illicit activity on-chain and on-exchange are much more prevalent than is currently reported.