Plan Sponsor Alert: White House Plan to Fight Illicit Financing Risks of Digital Assets

BDO Series on Digital Assets, Part 5

_{This article is part of BDO’s series on the White House’s Comprehensive Framework for Responsible Development of Digital Assets.}

The White House’s Comprehensive Framework for Responsible Development of Digital Assets would not be complete without an action plan to fight the illegal use of virtual currencies. These assets have already been used in money laundering schemes to finance terrorism, illegal drug production and distribution, and other crimes, and such actions pose a threat to the global economy and market stability.

As directed by the White House, the Treasury Department coordinated with several departments and agencies to examine developing threats in digital assets and offered an action plan to rein in these risks. Plan sponsors — even those that aren’t interested in offering digital assets like cryptocurrencies in their 401(k) plans — should pay attention to these developments because the ongoing risks in the digital asset space have the potential to harm the financial system, national security, and ultimately assets in participant accounts.

Threats, vulnerabilities, and risks

The scale of money laundering is hard to quantify; however, it is considered to be significant.  The United States is vulnerable to this illegal activity given the size of our financial system. While the U.S. government has worked hard to combat money laundering, criminals have quickly improved their methods and techniques. In addition to well-known strategies such as ransomware, fraudsters have recently started using “mixers” — virtual asset service providers (VASPs) like crypto exchanges or software designed to hide owners of certain virtual assets. 

The Covid-19 pandemic also opened the door for bad actors who exploited the crisis, according to a recent Treasury report. The pandemic increased the opening of bank accounts, payments, and lending, and increased the digitization of finance, providing additional avenues for fraud.

Today, the United States faces five specific and significant challenges in fighting illegal finance activity, including: 

• Weak or non-existent reporting and disclosure requirements for new companies and non-financed real estate transactions
• Lack of comprehensive Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) requirements
• Weakness in foreign AML/CFT regulations for virtual assets
• AML/CFT compliance issues for U.S. financial institutions
• Difficulty finding and seizing illicit cash profits and locating participating service providers 

White House action plan

In its report, the White House touted its leadership in applying its AML/CFT framework in the digital assets space but recognized that more work must be done. To fight illegal activity, the White House outlined four main action areas:

• Amend the Bank Secrecy Act (BSA), certain statutes, and laws against unlicensed money transmitting to explicitly include VASPs. Penalties for unlicensed money transfers may also increase.
• The Treasury Department will conduct an illicit finance risk assessment on decentralized finance by the end of February 2023, and an assessment on non-fungible tokens (NFTs) by July 2023. The United States and its enforcement arms will continue to monitor the digital asset space for risks as well as gaps in legal and regulatory systems.
• Relevant departments and agencies will continue to expose bad actors and address the abuse of digital assets.
• The Treasury Department will ensure private sector organizations understand the rules and illegal financing risks associated with digital assets. The Treasury Department recently closed comments on its request to the public for input on illicit finance and national security risks in this space.

BDO Insight: Evaluate efforts before considering crypto investments

According to an October study by Charles Schwab, nearly one-third of U.S. savers would like to invest in cryptocurrencies in their company 401(k) accounts. Some service providers are beginning to have crypto offerings available to plan sponsors. Plan sponsors should keep up with developments in the digital assets space so they can evaluate whether government oversight is sufficient to offer crypto investments in 401(k) accounts. As always, it is critical to remember plan sponsors’ fiduciary duty to act in the best interests of participants.

Your BDO representative is available to help review the White House report and answer questions you may have on this initiative to combat illegal financing risks of digital assets.