Illicit Finance Remains Rampant in TradFi

The recent TD Bank case, where the institution failed to monitor $18.3 trillion in transactions from 2018 to 2024, highlights a glaring issue in the fight against illicit finance in the United States. In aiming to curb illicit finance, American anti-money laundering (AML) efforts are missing the mark by spotlighting cryptocurrency over the far larger illicit finance issues persisting in the traditional banking system. U.S. AML law, specifically the Bank Secrecy Act (BSA), sets out to achieve the admirable goals of preventing money laundering and terrorist financing by mandating risk-based programs for tracking illicit funds and fostering information-sharing among financial institutions, regulators, and law enforcement to protect U.S. national security. Unfortunately, regulators and law enforcement have struggled to achieve the stated goals of U.S. AML law under the current framework, the BSA. Instead of focusing on rampant illicit finance issues in the traditional banking system, which accounts for the vast majority of criminal conduct, law enforcement has turned its gaze to cryptocurrency. However, given the recent shocking cases of noncompliance in the traditional banking system, it is clear that it remains the primary means for illicit finance.

The Bank Secrecy Act 

American AML policy primarily relies on a legal framework commonly referred to as the Bank Secrecy Act (BSA). The purpose of the BSA is to prevent money laundering and terrorist financing by requiring financial institutions to implement risk-based programs and enable the tracking of illicit funds. It also aims to safeguard U.S. national security and establish effective information-sharing frameworks among financial institutions, regulators, the Treasury, and law enforcement to identify and apprehend offenders.

The BSA authorizes the Department of Treasury to impose disclosure and compliance requirements for financial institutions to help detect and prevent financial crimes. Under the statute, “Financial Institution” is defined to include, among other intermediaries, banks, trust companies, credit unions, brokers and dealers, investment banks and investment companies, currency exchanges, and licensed senders of money. Subsequent regulation added non-bank intermediaries like Money Services Businesses (MSBs) to the category of financial institutions.

Financial institutions are required under 31 U.S.C. § 5318(h)(1) to develop and implement a written anti-money laundering (AML) program which includes at a minimum: the development of internal policies, procedures, and controls; the designation of a compliance officer; an ongoing employee training program; and an independent audit function to test programs. Financial institutions must file Suspicious Activity Reports (SARs) under 31 U.S.C. § 5318(g)(1) to the Secretary of Treasury when they detect a transaction or pattern of transactions that may involve illegal activity. Financial institutions are also required to file Currency Transaction Reports (CTRs) under 31 U.S.C. § 5313(a) when they have a cash-in or cash-out currency transaction, or multiple transactions, totaling more than $10,000 during one business day for any one person, or on behalf of any one person. Multiple elements of the AML program, SARs, and CTRs contain private personal identifying information. In sum, the BSA requires various forms of financial intermediaries to collect and report information on certain customers and their transactions to help detect and prevent illicit finance in the United States and around the globe. 

The BSA is implemented and enforced by the Financial Crimes Enforcement Network (FinCEN). FinCEN oversees BSA data, manages and secures reported data, and facilitates government-wide access to this information. Importantly, FinCEN stores BSA reported data and provides access to this data to law enforcement agencies which have entered into a Memorandum of Understanding (MOU) with FinCEN. In essence, FinCEN is designed to receive, store, and review BSA data for the purposes of detecting and preventing money laundering. 

TradFi Remains the Primary Source of Illicit Finance

On October 10th, TD Bank (TDBNA), the 10th largest bank in the United States, and its parent company TD Bank US Holding Company (TDBUSH), pleaded guilty to significant violations of U.S. AML law. TDBNA violations included conspiring to fail to maintain an AML program that complies with the Bank Secrecy Act, failing to file accurate Currency Transaction Reports (CTRs), and launder money. TDBUSH pleaded guilty to causing TDBNA to fail to maintain an AML program that complies with the BSA and to fail to file accurate CTRs. From January 2018 to April 2024, TD Bank did not automatically monitor all domestic automated clearinghouse (ACH) transactions, most check activity, and numerous other transaction types, resulting in 92% of total transaction volume going unmonitored. This lack of compliance resulted in a staggering $18.3 trillion of transaction activity going unmonitored. 

According to court documents, between January 2014 and October 2023, TD Bank had significant deficiencies in its U.S. AML policies, procedures, and controls but failed to take appropriate remedial action. Although TD Bank maintained elements of an AML program that appeared adequate on paper, fundamental, widespread flaws in its AML program made TD Bank an “easy target for perpetrators of financial crime,” according to the Department of Justice (DOJ). The DOJ, in its press release, highlighted that the compliance failures of TD Bank enabled three money laundering networks to collectively transfer more than $670 million through TD Bank accounts between 2019 and 2023. 

According to charges, (Paragraphs 7-9) one money laundering network processed more than $470 million through large cash deposits into nominee accounts, more than once depositing more than $1 million in cash in a single day and then moving the funds out of the bank with checks or wire transfers. The operators of this scheme provided employees gift cards worth more than $57,000 to ensure employees would continue to process their transactions. And even though the operators of this scheme were clearly depositing cash well over $10,000 in suspicious transactions, TD Bank employees did not identify the conductor of the transactions in required BSA reports. A high-risk jewelry business moved nearly $120 million through shell accounts before TD Bank reported the activity. In another example, money laundering networks deposited funds in the United States and quickly withdrew those funds using ATMs in Colombia. Five TD Bank employees conspired in the laundering of approximately $39 million. The same Venezuelan passports were used to open multiple accounts, but the bank did not identify the problem until one of the employees was arrested. At times, piles of cash were also dumped on branch counters and ATM withdrawals which totaled 40 times to 50 times higher than daily limits. 

As part of its plea agreement and FinCEN civil money penalty, TD Bank agreed to pay or forfeit approximately $1.89 billion to the Department of Justice, $123.5 million to the Federal Reserve Board, $450 million to the Department of Treasury Officer of Comptroller of the Currency (OCC), and a Financial Crimes Enforcement Network (FinCEN) Civil Money Penalty of $1.3 billion. TD Bank also agreed to retain an independent compliance monitor for three years and to remediate and enhance its AML program. This represents the largest penalty against a depository institution in U.S. Treasury and FinCEN history. FinCEN’s action also imposes a four-year independent monitorship to oversee TD Bank’s required remediation. Deputy Secretary of the Treasury Wally Adeyemo stated in the DOJ press conference, “From fentanyl and narcotics trafficking, to terrorist financing and human trafficking, TD Bank’s chronic failures provided fertile ground for a host of illicit activity to penetrate our financial system.” How were these violations possible under the current AML framework? 

Policy Implications

The TD Bank case is an important lesson for regulators and policymakers. The traditional regulated depository financial system remains the primary source of illicit financial transactions in the United States. According to the International Consortium of Investigative Journalists (ICIJ), illicit finance in TradFi is a pervasive issue. ICIJ put together a team of 400 journalists from 110 news organizations in 88 countries to investigate the world of banks and money laundering. In a scandal dubbed the “FinCEN Files,” ICIJ’s investigation identified more than $2 trillion in transactions between 1999 and 2017 that were flagged by financial institutions’ compliance officers as possible money laundering or other criminal activity. Notably, in September of this year, Treasury’s Office of the Comptroller of Currency, issued a significant enforcement action against Wells Fargo for deficiencies in its AML program, CTRs, and SARs. Several other major TradFi institutions have gotten into hot water in recent years, with several billion dollars of illicit transactions. To make matters worse, as much as 99.9% of money laundering in the traditional financial sector goes unprosecuted, according to Katherine Haun, a former government prosecutor. 

The assertion by some regulators that cryptocurrency is a “Primary Money Laundering Concern” is not based in reality and does a disservice to achieving the stated goals of AML/CFT policy. As noted in the 2024 Chainalysis Crypto Crime Report, illicit transaction activity accounted for roughly .34% of total on-chain transaction volume. This comes in sharp contrast to global statistics from the United Nations, which estimate  that roughly 2% and 5% of global GDP is laundered per year through the traditional financial system, which equates to roughly $800 billion to $2 trillion (almost the entire crypto market capitalization). According to this plea agreement, TD Bank permitted over $18 trillion of transactions to go unmonitored from January 2018 to April 2024, a number that, at the time of this writing, is six times as large as the entire market capitalization of all cryptocurrencies around the globe ($3 Trillion). Further, this $18 trillion comes from one bank out of thousands across the United States. This is also not considering the functional law enforcement benefits of transparent public blockchain networks. 

As Steven M. D’Antuono, Section Chief, Criminal Investigative Division at the FBI testified in a 2018 Senate Banking Committee Hearing, “The sheer volume of business that banks handle on a daily basis exposes them to significant money laundering risks. In fact, in most money laundering cases, criminals employ banks at some point to hold or move illicit funds.” Further, as the DeFi Education Fund (DEF) previously explained, terrorist organizations like Hamas primarily use TradFi intermediaries to conduct illicit financial activities, and have suspended cryptocurrency use (and discouraged people from sending them cryptocurrency) due to law enforcement’s unique ability to trace and seize illicit transactions on public blockchains. 

The stated goals of American AML policy are commendable and should be advanced. However, regulators and law enforcement would better achieve their goals if they devoted existing resources to tackling illicit finance where it often starts or ends - in the traditional financial system. TradFi remains the primary source of illicit finance in the United States and around the globe due to its large volume and limited transparency. It’s time for policymakers, law enforcement, and industry participants to come together to constructively work on ways to efficiently and constitutionally achieve the stated goals of AML/CFT policy.

This piece was written by Gavin Zavatone, a policy intern with the DeFi Education Fund.