[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]


                    SCHEMES AND SUBVERSION: HOW BAD
                    ACTORS AND FOREIGN GOVERNMENTS
                 UNDERMINE AND EVADE SANCTIONS REGIMES

=======================================================================

                             VIRTUAL HEARING

                               BEFORE THE

                   SUBCOMMITTEE ON NATIONAL SECURITY,

                       INTERNATIONAL DEVELOPMENT

                          AND MONETARY POLICY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 16, 2021

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 117-32
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                                __________

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
45-357 PDF                 WASHINGTON : 2021                     
          
----------------------------------------------------------------------------------- 

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 MAXINE WATERS, California, Chairwoman

CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina, 
NYDIA M. VELAZQUEZ, New York             Ranking Member
BRAD SHERMAN, California             FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York           PETE SESSIONS, Texas
DAVID SCOTT, Georgia                 BILL POSEY, Florida
AL GREEN, Texas                      BLAINE LUETKEMEYER, Missouri
EMANUEL CLEAVER, Missouri            BILL HUIZENGA, Michigan
ED PERLMUTTER, Colorado              ANN WAGNER, Missouri
JIM A. HIMES, Connecticut            ANDY BARR, Kentucky
BILL FOSTER, Illinois                ROGER WILLIAMS, Texas
JOYCE BEATTY, Ohio                   FRENCH HILL, Arkansas
JUAN VARGAS, California              TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey          LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas              BARRY LOUDERMILK, Georgia
AL LAWSON, Florida                   ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam            WARREN DAVIDSON, Ohio
CINDY AXNE, Iowa                     TED BUDD, North Carolina
SEAN CASTEN, Illinois                DAVID KUSTOFF, Tennessee
AYANNA PRESSLEY, Massachusetts       TREY HOLLINGSWORTH, Indiana
RITCHIE TORRES, New York             ANTHONY GONZALEZ, Ohio
STEPHEN F. LYNCH, Massachusetts      JOHN ROSE, Tennessee
ALMA ADAMS, North Carolina           BRYAN STEIL, Wisconsin
RASHIDA TLAIB, Michigan              LANCE GOODEN, Texas
MADELEINE DEAN, Pennsylvania         WILLIAM TIMMONS, South Carolina
ALEXANDRIA OCASIO-CORTEZ, New York   VAN TAYLOR, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts

                   Charla Ouertatani, Staff Director
           Subcommittee on National Security, International 
                    Development and Monetary Policy

                  JIM A. HIMES, Connecticut, Chairman

JOSH GOTTHEIMER, New Jersey          ANDY BARR, Kentucky, Ranking 
MICHAEL SAN NICOLAS, Guam                Member
RITCHIE TORRES, New York             PETE SESSIONS, Texas
STEPHEN F. LYNCH, Massachusetts      ROGER WILLIAMS, Texas
MADELEINE DEAN, Pennsylvania         FRENCH HILL, Arkansas
ALEXANDRIA OCASIO-CORTEZ, New York   LEE M. ZELDIN, New York
JESUS ``CHUY'' GARCIA, Illinois      TOM EMMER, Minnesota
JAKE AUCHINCLOSS, Massachusetts      WARREN DAVIDSON, Ohio
                                     ANTHONY GONZALEZ, Ohio
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 16, 2021................................................     1
Appendix:
    June 16, 2021................................................    29

                               WITNESSES
                        Wednesday, June 16, 2021

Garces, Ivan A., Principal and Chair, Risk Advisory Services, 
  Kaufman Rossin.................................................     6
Kumar, Lakshmi, Policy Director, Global Financial Integrity (GFI)     8
Lorber, Eric B., Senior Director, Center on Economic and 
  Financial Power, Foundation for Defense of Democracies.........    12
Spiro, Jesse, Chief, Government Affairs, Chainalysis.............    10
Taliaferro, Jeffrey W., Professor, Department of Political 
  Science, Tufts University......................................     5

                                APPENDIX

Prepared statements:
    Garces, Ivan A...............................................    30
    Kumar, Lakshmi...............................................    38
    Lorber, Eric B...............................................    52
    Spiro, Jesse.................................................    70
    Taliaferro, Jeffrey W........................................    89

              Additional Material Submitted for the Record

Himes, Hon. Jim A.:
    Written responses to questions for the record submitted to 
      Ivan A. Garces.............................................    96
    Written responses to questions for the record submitted to 
      Jesse Spiro................................................   103
Davidson, Hon. Warren:
    THE FINCEN FILES.............................................   128
    Wall Street Journal article, ``Untraceable Bitcoin Is a 
      Myth''.....................................................   149

 
                        SCHEMES AND SUBVERSION:
                       HOW BAD ACTORS AND FOREIGN
                       GOVERNMENTS UNDERMINE AND
                        EVADE SANCTIONS REGIMES

                              ----------                              


                        Wednesday, June 16, 2021

             U.S. House of Representatives,
                 Subcommittee on National Security,
                          International Development
                               and Monetary Policy,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:03 p.m., via 
Webex, Hon. Jim A. Himes [chairman of the subcommittee] 
presiding.
    Members present: Representatives Himes, Gottheimer, Lynch, 
Dean, Auchincloss; Barr, Williams of Texas, Hill, Davidson, and 
Gonzalez of Ohio.
    Chairman Himes. The Subcommittee on National Security, 
International Development and Monetary Policy will come to 
order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Also, without objection, members of the full Financial 
Services Committee who are not members of this subcommittee are 
authorized to participate in today's hearing.
    And as a reminder, I ask all Members to keep themselves 
muted when they are not being recognized by the Chair. The 
staff has been instructed not to mute Members, except when a 
member is not being recognized by the Chair and there is 
inadvertent background noise.
    Members are also reminded that they may only participate in 
one remote proceeding at a time. If you are participating 
today, please keep your camera on, and if you choose to attend 
a different remote proceeding, please turn your camera off.
    Before we get started with the substance of the hearing, I 
want to welcome--those who are observing will note that we have 
a new ranking member on this subcommittee, my friend, Andy Barr 
of Kentucky. I am sorry to see French Hill go, but I have a 
long-standing and valuable friendship and relationship with 
Representative Barr. So Representative Barr, welcome. And I 
look forward to working with you as do the rest of the members 
of the subcommittee.
    Today's hearing is entitled, ``Schemes and Subversion: How 
Bad Actors and Foreign Governments Undermine and Evade 
Sanctions Regimes.''
    I now recognize myself for 5 minutes to give an opening 
statement.
    Sanctions are an important instrument in foreign policy, 
designed to be both a carrot and a stick in persuading an 
entity, an individual, a group, or a country to change its 
behavior. A step beyond traditional diplomacy, it also avoids 
the downsides of kinetic action. We have seen the success of 
our sanctions regimes in bringing the Iranians to the table, 
and isolating human rights violators through the global 
Magnitsky Act, amongst others.
    Our sanctions programs can only be as impactful as they are 
effective. When designated entities evade our sanctions, we 
lose an important tool from our diplomatic toolbox increasing 
the likelihood that military action would be necessary to 
maintain international order.
    Our hearing today will focus on those methods of sanctions 
evasion ranging from physically changing the name painted on 
the back of a ship, the stern of a ship, to the use of shell 
companies to cyber-enable crime like the ransomware attacks 
that have been so prevalent in the news recently.
    This committee has worked to address some of these issues 
through the passage of the Corporate Transparency Act, authored 
by Chairwoman Carolyn Maloney, and the Anti-Money Laundering 
Act, sponsored by Chairman Emanuel Cleaver as part of the 2021 
National Defense Authorization Act (NDAA). These bills give law 
enforcement the resources and authority to better track money 
launderers, including sanctions evaders, and their success will 
depend in large part on this body adequately funding their 
implementation.
    In addition, the Office of Foreign Assets Control (OFAC) 
and the Financial Crimes Enforcement Network (FinCEN) continue 
to do the extremely important work of educating market 
participants and putting out guidance on the newest typologies 
of sanctions evasion; however, serious threats to the efficacy 
of our sanctions programs are just on the horizon and are 
approaching quickly.
    Although, the launch of the Venezuelan ``Petro'' was an 
unambiguous failure, widespread use of alternative financial 
platforms could make sanctions evasion trivially simple. And 
although the Federal Bureau of Investigation was able to 
recover a portion of the ransom paid by Colonial Pipeline, we 
are likely to see continued growth in ransomware attacks from 
sanctioned entities as a way to raise funds.
    With that, I would like to, again, thank our panel of 
witnesses. We very much appreciate you being here and your 
expertise. You represent that expertise in a wide variety of 
issues we are here to discuss today, and I sincerely appreciate 
your assistance in tackling them, and I look forward to your 
testimony.
    The Chair now recognizes the ranking member of the 
subcommittee, Mr. Barr, for 5 minutes for an opening statement.
    Mr. Barr. Thank you, Mr. Chairman, for holding the hearing 
today. And thank you to our witnesses for your participation.
    Before we begin, I would like to say that I am very excited 
to be back on the National Security, International Development 
and Monetary Policy Subcommittee. And I appreciate the generous 
words of welcome from my good friend, Jim Himes, our chairman.
    And as we discussed, there is a whole lot of opportunity on 
this subcommittee for bipartisan work and work that is very 
important in the interest of our country and the national 
security interests of our country.
    This subcommittee plays a crucial role in maintaining U.S. 
national security through economic channels and ensuring robust 
international development. China continues to pose a threat to 
U.S. competitiveness, and American sanctions policy is more 
important than ever. Additionally, the impact of monetary 
policies is becoming increasingly evident to the everyday 
consumer as increased costs are hitting their wallets.
    This subcommittee plays a crucial role at the intersection 
of the financial system and national security, and provides 
meaningful oversight over the Federal Reserve's monetary policy 
activities. I look forward to working with members of this 
subcommittee on both sides of the aisle to preserve a fair 
international financial system and ensure that the Federal 
Reserve remains independent and focused on its congressionally-
directed mandate.
    During my time on this subcommittee in previous Congresses, 
including as its chairman, we accomplished a great deal of 
significant, important work. The issues we discuss on this 
subcommittee transcend party lines, and I look forward to 
working closely with Chairman Himes and all of the members on 
both sides of the aisle on our shared priorities.
    The U.S. employs a robust sanctions program to deny 
adversaries the funding, logistics, and resources to conduct 
illicit behavior or to compel them to change misguided 
behaviors. Economic and trade sanctions are enforced by the 
Office of Foreign Asset Control and are largely effective 
deterrents for bad actors; however, criminals and foreign 
adversaries continue to evolve and adapt and are able to evade 
U.S. sanctions through high- and low-tech efforts alike.
    It is imperative that this subcommittee understand how bad 
actors are currently evading sanctions and ways that we can 
mitigate their continued evasion in the future. That is why I 
am so grateful to our chairman for calling this hearing, which 
I believe will help serve that purpose, as each of our 
witnesses brings a unique and insightful expertise to the 
discussion.
    The U.S. maintains four major sanctions programs against 
Iran, North Korea, Russia, and Venezuela. These sanctions are 
as a result of actions by those nations that are in direct 
conflict with U.S. national security and global economic 
stability. Despite the government's focus in coordination with 
our international partners on sanctions enforcement, our 
adversaries are able to skirt the restrictions put in place.
    Traditional methods of sanctions evasion include trade-
based money laundering, through which bad actors move money 
through trade transactions; illicit shipping, including 
altering vessel physical identifications or corrupting other 
internationally-mandated identification systems; or utilizing 
front companies to mask the true origin and recipient of funds.
    Bad actors have utilized these sanctions evasion techniques 
for years and have recently amplified their sanctions evasion 
techniques through the use of technology. As technology 
develops and adapts to changing threat frameworks, our 
adversaries change their playbooks. For example, in the early 
years of the widespread use of cryptocurrency, bad actors would 
cash out their financing on major crypto exchanges.
    However, exchanges have increased their focus on regulatory 
compliance including anti-money laundering (AML) and Know Your 
Customer (KYC) requirements, and this has chased criminals out 
of major exchanges into unlicensed exchanges such as Russia's 
Hydra marketplace.
    Transaction volumes at Hydra and other unlicensed exchanges 
have skyrocketed in recent years as criminals identified and 
exploited vulnerabilities. I hope this hearing will shed light 
on how Congress can address these and other similar challenges.
    The instances of high-profile ransomware attacks, including 
on elements of U.S. critical infrastructure, signify the need 
for improved security and coordination between the private 
sector and the government.
    In the past year alone, victims have paid nearly $350 
million in cryptocurrency to satisfy the demands of hackers 
using ransomware. That is a 311-percent year-over-year 
increase. Congress and the Administration must keep pace with 
the changes in advances in technology as our adversaries find 
new ways to evade enforcement.
    I look forward to hearing from our witnesses today. Again, 
I thank the chairman, and I look forward to working with all of 
my colleagues on this new assignment.
    And I yield back.
    Chairman Himes. The gentleman yields back.
    Today, we welcome the testimony of our distinguished 
witnesses: Jeffrey Taliaferro, a professor in the Department of 
Political Science at Tufts University; Ivan Garces, the 
principal and chair of risk advisory services at Kaufman 
Rossin; Lakshmi Kumar, the policy director at Global Financial 
Integrity; Jesse Spiro, the chief of government affairs at 
Chainalysis; and Eric Lorber, a senior director at the Center 
on Economic and Financial Power at the Foundation for the 
Defense of Democracies. A big welcome to all of our witnesses.
    Witnesses are reminded that their oral testimony will be 
limited to 5 minutes. You should be able to see a timer on your 
screen that will indicate how much time you have left, and a 
chime will go off at the end of your time. I would ask that you 
be mindful of the timer, and quickly wrap up your testimony if 
you hear the chime, so that we can be respectful of both the 
witnesses' and the subcommittee members' time.
    And without objection, your written statements will be made 
a part of the record.
    With that, Professor Taliaferro, you are now recognized for 
5 minutes to give an oral presentation of your testimony.

 STATEMENT OF JEFFREY W. TALIAFERRO, PROFESSOR, DEPARTMENT OF 
              POLITICAL SCIENCE, TUFTS UNIVERSITY

    Mr. Taliaferro. Thank you, Chairman Himes and Ranking 
Member Barr, for the opportunity to testify this afternoon. It 
is a privilege to speak to this subcommittee and to be on this 
distinguished panel of witnesses.
    Let me state at the outset that I am a scholar of 
international security. I am not an economist nor am I a 
scholar of political economy. And my scholarship and teaching 
focuses primarily on U.S. national security and intelligence, 
the grand strategies of the great powers, both past and 
present, alliance politics, nuclear nonproliferation, and, more 
recently, cybersecurity.
    My fellow witnesses are more qualified to testify about the 
design and implementation of sanctions, about the various 
strategies and tools that targeted actors employ to evade and 
undermine them, and to offer recommendations to Congress and to 
the Administration so that they might craft more effective 
sanctions in the future. My role on this panel is to provide a 
broad overview of the geopolitics of the United States' use of 
sanctions against a variety of actors.
    Sanctions have long been an important non-kinetic tool of 
coercive diplomacy. The Office of Foreign Assets Control notes 
that sanctions are based, ``on U.S. foreign policy and national 
security goals against targeted foreign countries and regimes, 
terrorists, international narcotics traffickers, those engaged 
in the proliferation of weapons of mass destruction, and other 
threats to the national security, foreign policy, and economy 
of the United States.''
    The primary aim of sanctions, whether unilateral or 
multilateral, whether comprehensive or targeted, is to induce a 
change in the cost-benefit calculations of the target and thus 
a change in the target's behavior. But as with other tools, of 
course, of diplomacy, including kinetic force, the use of 
sanctions to secure a target's compliance is inherently 
difficult.
    My fellow witnesses will discuss some of the newer tools 
and technologies used to facilitate sanctions evasion, such as 
cryptocurrencies, central bank digital currencies, and 
ransomware; however, I would like to highlight how shifting 
geopolitical dynamics are making it more difficult for the 
United States to credibly threaten and enforce sanctions, while 
also giving targets additional means and opportunities to evade 
and subvert them.
    Having won the Cold War and forced the crumbling Soviet 
Union out of the ranks of the great powers, the United States 
emerged as the uni-pole, the only great power left standing in 
1990, 1991. And for better or worse, for 2 decades, weak 
systemic, that is, international constraints and the 
availability of opportunities to further improve its strategic 
position afford the United States wide latitude in the 
definition and in the pursuit of its foreign policy and 
national security objectives.
    This extreme imbalance of international power, however, had 
several consequences which are relevant to the subject of 
today's subcommittee hearing.
    First, the United States imposed sanctions and even waged 
wars against recalcitrant states such as Iraq, Syria, Libya, 
and Afghanistan, and non-state actors such as al-Qaida, and 
later the Islamic State, with relative impunity.
    And even when confronting state adversaries against whom 
the use of kinetic force would have been prohibitively costly, 
such as North Korea and Iran, the imposition of sanctions 
became a preferred tool of state-crafted successive 
Administrations and Congresses.
    Second, U.S. military command of the commons, along with 
American economic and technological dominance, gave various 
state and non-state actors an incentive to pursue asymmetric 
strategies, for example, the clandestine employment of cyber 
criminal organizations and individual hackers by the forward 
intelligence services of Russia, China, North Korea, and other 
states.
    Third, this unipolar distribution of power gave targeted 
states and other disaffected actors an incentive to collaborate 
with one another to evade or subvert U.S. sanctions. And 
finally, as the Biden Administration's interim national 
security strategic guidance acknowledges, the distribution of 
power across the world is changing creating new threats.
    The United States now faces two great power adversaries, a 
rising China and a declining and revanchist Russia, along with 
two regional power adversaries, Iran and North Korea. All four, 
including their respective clients and allies, will seek to 
evade sanctions in the future.
    In this changing geopolitical landscape, it might behoove 
policymakers to perhaps lower their expectations about what 
coercive economic diplomacy alone can achieve.
    Thank you, Chairman Himes, and Ranking Member Barr.
    [The prepared statement of Dr. Taliaferro can be found on 
page 89 of the appendix.]
    Chairman Himes. Thank you, Dr. Taliaferro.
    Mr. Garces, you are now recognized for 5 minutes.

STATEMENT OF IVAN A. GARCES, PRINCIPAL AND CHAIR, RISK ADVISORY 
                    SERVICES, KAUFMAN ROSSIN

    Mr. Garces. Thank you, Chairman Himes, Ranking Member Barr, 
and distinguished members of the subcommittee. I thank you for 
the opportunity to appear before you today to talk about what I 
see banks doing to identify, block, reject, and report 
transactions subject to the U.S. sanctions.
    My name is Ivan Garces, and I am a principal with Kaufman 
Rossin, a top 100 accounting, tax, and advisory firm where I 
chair the firm's Risk Advisory Services practice. I am also an 
executive committee member of the board of the Florida 
International Bankers Association (FIBA), a nonprofit trade 
association committed to supporting the international banking 
community through education, certification, and advocacy.
    My comments today are based on my experience assisting 
financial institutions and other organizations to evaluate, 
remediate, and optimize risk management and programs, including 
those related to anti-money laundering compliance and the OFAC 
compliance program.
    Financial institutions employ an OFAC compliance program 
that is generally risk-based and commensurate with their OFAC 
risk profile. OFAC compliance programs typically begin with the 
risk assessment of an institution's customer base, products and 
services, nature of transactions, geographic considerations, 
and identification of higher-risk areas of potential OFAC 
sanctions risk.
    Based on this risk assessment, financial institutions are 
expected to develop and implement policies, procedures, and 
internal controls for complying with OFAC. Sanctioned parties 
typically utilize complex structures and transactions to secure 
their interests in the absence or omit information from 
transactions to avoid detection. Two common methods utilized 
and discussed earlier are the exploitation of trade finance 
transactions and the use of shell companies.
    Financial institutions typically use a combination of 
sanctions screening and due diligence to identify potential 
sanction parties and activity. Financial institutions generally 
screen customers against the OFAC list at prejuncture. One is 
at account opening, as transactions occur, and periodically, as 
the OFAC list is updated.
    At account opening, a financial institution will typically 
follow their account-opening procedures, which typically 
include procedures to comply with the customer identification 
program and customer due diligence program requirements, both 
of which are intended to enable the financial institution to 
form a reasonable belief as to the true identity of each 
customer and assess the customer's potential risk.
    Financial institutions typically also screen the customer 
and other relevant account parties such as account signers and 
beneficial owners against OFAC at this time. This process can 
become complicated when dealing with clients presenting with 
complex corporate structures, particularly offshore vehicles.
    Financial institutions also typically screen transactions 
in real time, such as wire transfers. Financial institutions 
generally utilize automated interdiction systems to screen 
transactions and relevant transaction data speed and alert the 
financial institution of a potential OFAC match.
    For example, wire transfer information that would generally 
be screened would include the originator and beneficiary bank's 
name, and the originator and beneficiary names and addresses. 
Bank identifier codes, for example, and pretext fields would 
all be screened for potential matches.
    In the case of trade finance, banks also generally screen 
relevant parties in the transaction, such as importers and 
exporters, that have vessels, shipping companies, freight 
companies, freight forward, agents, and brokers. This latter 
process, though, is often cumbersome and manually-intensive as 
it involves inspection of physical documents and manual 
screening as opposed to automated screening.
    As I mentioned earlier, the OFAC sanctions list is updated 
periodically, and banks generally have controls in place to 
ensure their systems are uploaded with the most current list, 
and they screen their customer database on a periodic basis.
    But there are challenges in complying with OFAC. 
Maintaining a robust compliance program requires substantial 
resources. Banks must invest in people, in policies, 
procedures, and controls, ongoing training, and automated 
systems to comply with OFAC. Compliance programs are tested by 
independent parties and examined by bank regulators. However, 
OFAC-sanctioned screening is not fool-proof, and even the most 
well-intentioned OFAC compliance programs may fail to detect 
sanctioned activity.
    With an increasing number of sophisticated bad actors, and 
complexity of transactions, financial institutions can't be 
expected to connect all the dots. Sanctions compliance programs 
are pretty well ingrained in financial institution risk models, 
but evolution of sanctions compliance programs is needed in 
other industries susceptible to OFAC-sanctioned risks. 
Government outreach and efforts to enhance corporate 
transparency and implement a national beneficial ownership 
registry is a step in the right direction.
    Lastly, we can benefit from increased cooperation between 
the public and private sectors, such as is contemplated with 
the proposed OFAC Exchange Act, and the Combatting Illicit 
Finance Public-Private Partnerships Act legislation noted for 
this hearing. Government should be in a position to be able to 
take, analyze, and interpret information received not only from 
financial institutions, but other industry stakeholders, and 
connect the dots identifying trends and relationships across 
the financial system.
    Thank you, again, for inviting me to appear before you 
today. I would be happy to respond to any questions the members 
of this subcommittee may have.
    [The prepared statement of Mr. Garces can be found on page 
30 of the appendix.]
    Chairman Himes. Thank you, Mr. Garces.
    Ms. Kumar, you are now recognized for 5 minutes.

 STATEMENT OF LAKSHMI KUMAR, POLICY DIRECTOR, GLOBAL FINANCIAL 
                        INTEGRITY (GFI)

    Ms. Kumar. Thank you, Chairman Himes, Ranking Member Barr, 
and other esteemed members of the subcommittee for the 
opportunity today to testify on behalf of Global Financial 
Integrity at this hearing.
    GFI has worked tirelessly over the last decade with allies 
both domestically and internationally to address the gaps and 
vulnerabilities in the global trade and financial systems that 
serve as a safe haven for criminal actors. The U.S. sanctions 
regime is expansive and currently includes more than 30 
different sanctions programs. Despite the ever-increasing reach 
of sanctions, with evidence showing that the number of 
sanctioned vessels in ports rose at an annual rate of 6 
percent, oil exports by Iran and Venezuela and oil imports by 
North Korea keep increasing every year.
    Because much of the sanctions program is targeted at 
curtailing the ability to conduct international commerce, 
sanctions evasion techniques play an international game of 
hide-and-seek, exploiting regulatory weaknesses both in the 
U.S. and globally assisted by a network of gatekeepers and 
facilitators.
    Because of this close connection to trade, it is 
unsurprising that a leading mechanism to evade sanctions 
involves the use of Trade-Based Money Laundering (TBML) 
techniques. TBML is the process of disguising the proceeds of 
crime and moving value to trade transactions. It includes 
techniques like falsifying the origins of a commodity of good, 
over-invoicing, under-invoicing, and phantom invoicing, where 
no goods really move, but just money moves. TBML is 
particularly challenging because there are no international 
standards, even at the level of the Financial Task Force and 
little regulation internationally. It is, therefore, the 
perfect ally for sanctions evaders.
    Unsurprisingly, some of the largest sanctions evasion 
schemes most recently involving Iran used TBML techniques and 
the Iranian government was able to pocket $100 billion by 
falsifying trade records.
    Similarly, the Venezuelan government, to get around U.S. 
sanctions on its gold sector, has flown its gold all over the 
world, changing its origins. So, the gold is now supposedly 
from the Caribbean, from Colombia, from Uganda, from Dubai, 
really anywhere but Venezuela. This comes at a time when U.S. 
imports of gold during the pandemic have increased 
exponentially, by some measures over 600 percent.
    Erasing its history in this way means that the U.S. has no 
way of knowing whether the gold it imports is the same gold 
that it is seeking to sanction. Sanctioned entities continue to 
look at the U.S. as a safe haven to get around sanctions and 
other weaknesses of the real estate sector and the investment 
industry.
    Professionals that have helped Iran and North Korea evade 
sanctions, invested their lucrative commissions in real estate 
so the EB-5 investor program would invest in commercial real 
estate and buying real estate in States like Alaska. Both 
commercial real estate and many of the jurisdictions where 
these investments take place are not part of the geographic 
targeting or this real estate.
    Similarly, vehicles like private equity, hedge funds, and 
venture capital funds that are exempt from carrying out 
customer due diligence obligations are also involved in 
sanctions evasion schemes. A recent FBI leak showed that London 
and New York hedge funds purport using a scheme to sell 
prohibited items from sanctioned countries to the United 
States.
    Finally, sanctions evasion does not just exploit the gaps 
in regulation; it exploits the lack of resources that 
enforcement agencies need to detect. The ``FinCEN FILES,'' 
while problematic, revealed two different sanctions evasion 
schemes tied to Russia and Syria that were filed as suspicious 
activity reports (SARs) by financial institutions, but did not 
necessarily receive the treatment they should have, given the 
resource constraints of the agency.
    The way forward, therefore, is two-pronged, addressing 
regulatory gaps but also providing the requisite support to 
enforcement, supervision, and oversight agencies. Towards that 
end, we strongly urge four key recommendations to be 
considered.
    First, on FinCEN, create within FinCEN a national anti-
money laundering datacenter that can carry out advanced data 
collection and analysis, and facilitate increased public-
private partnerships. On beneficial ownership, continue to 
prioritize the implementation and the creation of a robust 
beneficial ownership registry.
    The sanctions evasion schemes or really any other illicit 
finance schemes that have stopped us is because complex legal 
structures and anonymous shell companies continue to remain at 
the heart of it, but real collection should also be extended to 
include other asset classes, like collecting BUA information on 
real estate and art, as well as shipping vessels that are key 
for sanctions evasion.
    Third, customer due diligence should be required for 
invested vices that are money towards vehicles like private 
equity venture capital and also for all real estate 
transactions.
    Finally, on TBML, it is necessary that we create a relevant 
set of red-flag indicators in the use of TBML, highlighting the 
risks of free zones and vulnerable sectors like gold.
    Thank you, again, for your time today, and I look forward 
to any questions you may have.
    [The prepared statement of Ms. Kumar can be found on page 
38 of the appendix.]
    Chairman Himes. Thank you, Ms. Kumar.
    Mr. Spiro, you are now recognized for 5 minutes.

     STATEMENT OF JESSE SPIRO, CHIEF, GOVERNMENT AFFAIRS, 
                          CHAINALYSIS

    Mr. Spiro. Thank you, Chairman Himes, Ranking Member Barr, 
and distinguished members of the subcommittee. Thank you for 
inviting me to testify before you today on this very important 
topic.
    My name is Jesse Spiro and I am the chief of government 
affairs at Chainalysis. Chainalysis is the first blockchain 
analysis company. We provide data, software, services, and 
research to government agencies and companies in over 60 
countries. We follow the money through human analysis, 
heuristics, and cutting-edge technology. Our tools have been 
used to successfully investigate and prosecute a number of 
high-profile criminal and civil cases. We have also enabled the 
safe growth of the legitimate cryptocurrency ecosystem.
    Our private-sector customers use Chainalysis technology to 
comply with their regulatory obligations, to combat money 
laundering, and to adhere to sanctions requirements. I am 
honored to be here today to speak about sanctions evasion in 
this ecosystem.
    Today, I would like to address some common misconceptions 
about cryptocurrency. Cryptocurrency is one way that illicit 
actors evade sanctions, but the vast majority of cryptocurrency 
transactions are legitimate. According to our analysis, in 2020 
the illicit activity was just .34 percent of all transaction 
volume. This was a decrease from 2019, when illicit activity 
represented 2.1 percent of transaction volume.
    In fact, the transparency and traceability provided by the 
public blockchain ledger used by cryptocurrency like bitcoin 
allows us to understand much more than in traditional financial 
crime investigations.
    Through blockchain analytics, investigators can follow the 
money. Bad actors who thought they successfully evaded 
detection in the past now find they have left a permanent trail 
for law enforcement and regulators to follow. This forensic 
technology, coupled with good regulatory oversight, is working.
    With that foundation laid, let me highlight a few examples. 
Through blockchain analysis, we can confirm that adversarial 
nations, terrorist organizations, malicious-enabled cyber 
actors, and transnational criminal organizations under U.S. 
sanctions have used cryptocurrency in an attempt to weaken the 
impact or fully circumvent sanctions just as they have done 
through traditional banks, trade-based money laundering, and 
cash. Detailed examples can be found in my written testimony.
    In this challenging environment, OFAC and FinCEN have both 
made progress in targeting these actors. FinCEN, through their 
Bank Secrecy Act (BSA) oversight and prescriptive crypto 
advisories, and OFAC, through enforcement actions and the 
addition of cryptocurrency wallet identifiers, two 
designations, has provided significant intelligence that 
investigators need to understand this issue and for financial 
institutions to properly screen for sanctions risk beyond named 
screening in the digital onboarding space.
    Using blockchain analysis, we can see the effectiveness of 
including digital currency addresses in designation. Our data 
demonstrates that after digital currency identifiers are 
included, financial flows cease to these addresses, indicating 
a positive impact of blacklisting wallet addresses.
    By adding digital currency addresses, OFAC creates 
awareness and adds intelligence value for investigators and the 
private sector due to the immutable providence of the 
blockchain. Additional research can identify other cyber 
activities related to designated actors and entities.
    I would like to recommend several ways to further 
strengthen the current sanctions regime, including, one, 
encouraging collaboration and information-sharing with 
international partners. To date, OFAC is the only sanctioning 
body that has listed digital currency addresses in designation. 
Cryptocurrency is global and through collaboration we expect 
for successful investigations and seizure of funds.
    Two, increasing public-private partnerships through 
proposed legislation like the Combatting Illicit Finance 
Public-Private Partnerships Act, and the proposed OFAC Exchange 
Act.
    Three, increasing funding to OFAC to support more 
comprehensive targeting and designation packages.
    And four, the creation of a national crypto targeting 
center that would enable interagency collaboration to combat 
the illicit use of cryptocurrencies. This organization would 
provide training, intelligence, and policy support, and would 
facilitate information-sharing across law enforcement and 
regulatory agencies.
    In closing, I encourage you to consider the impact any 
potential legislation could have on technical innovation. Our 
adversaries have quickly embraced cryptocurrency.
    Thoughtful regulation that promotes American innovation 
while supporting law enforcement and financial regulators will 
be crucial for the United States to maintain its position as 
leader of the global financial system.
    Thank you.
    [The prepared statement of Mr. Spiro can be found on page 
70 of the appendix.]
    Chairman Himes. Thank you, Mr. Spiro.
    Mr. Lorber, you are now recognized for 5 minutes for a 
summary of your oral testimony.

    STATEMENT OF ERIC B. LORBER, SENIOR DIRECTOR, CENTER ON 
    ECONOMIC AND FINANCIAL POWER, FOUNDATION FOR DEFENSE OF 
                          DEMOCRACIES

    Mr. Lorber. Thank you, Chairman Himes, Ranking Member Barr, 
and distinguished members of the subcommittee. I am honored to 
appear before you today to discuss how bad actors and foreign 
governments undermine and evade sanctions regimes.
    I come before this committee as an economic sanctions and 
compliance professional, having worked at the U.S. Department 
of the Treasury and advised financial institutions, 
corporations, and humanitarian organizations on ensuring they 
operate in compliance with U.S., EU, and UN sanctions 
obligations. While sanctions can be a powerful tool for 
achieving foreign policy objectives, our adversaries are 
continually developing strategies and tactics to blunt their 
impact.
    These adversaries use a range of sanctions evasion 
techniques, many of which rely on obfuscation and opacity to 
surreptitiously move funds and goods across the world, 
frustrating the impact of U.S. sanctions. Countering these 
efforts is critical to ensuring that U.S. sanctions remain 
effective in pressuring terrorist organizations, rogue regimes, 
human rights abusers, and the corrupt. At its core, sanctions 
evasion is about hiding the identity of the sanctioned parties 
involved. Many companies and individuals understand that they 
are prohibited from conducting transactions with sanctioned 
persons or in sanctioned jurisdictions, and that they face 
significant risks for doing so.
    As a result, sanctions evaders undertake substantial 
efforts to hide their identities and access global markets. 
While U.S. adversaries have developed myriad approaches for 
evasion, over the last few years the U.S. Government has 
focused on a number of key circumvention methods, including in 
the maritime and financial sectors, as already discussed.
    One area of concern in addition is the cryptocurrency space 
where we have seen rogues like Iran, Venezuela, North Korea, 
Hamas, al-Qaida, and the Islamic State increasingly utilize 
crypto assets to evade sanctions. Understanding and mitigating 
the risks that these cryptocurrencies may pose and, in 
particular, innovations like decentralized finance will be 
important in stopping sanctions evasion.
    The U.S. Government, its allies and partners, and the 
private sector must adopt a multilayered defense in-depth 
approach to effectively counter sanctions evasion. Each layer 
of defense decreases the chances that a terrorist organization 
or rogue regime can access global markets, and while each layer 
may not be foolproof, together, they can pose formidable 
obstacles.
    Elements of this approach include effective intelligence 
collection. Key to countering sanctions evasion is the ability 
to detect such activity. The Treasury Department's Office of 
Intelligence and Analysis, along with other members of the 
intelligence community, as well as FinCEN should be provided 
with the tools necessary to identify sanctions evasion.
    A legislative proposal under consideration by this 
committee, the OFAC Fusion Center Act, could help achieve this. 
This legislation would create an interagency group designed to 
share data and allow for better detection and disruption of 
illicit networks providing the private sector with the right 
tools.
    In recent years, Treasury has armed the private sector with 
information on sanctions evasion tactics and red flags that can 
help companies spot such evasion through a series of 
advisories. Combined with clearly signaling to the private 
sector their compliance obligations and pursuing aggressive 
enforcement actions against those who fail to comply, this 
additional information can help the private sector more 
effectively counter evasion. To that end, the potential 
creation of an OFAC exchange which mirrors the FinCEN exchange 
designed to help provide the private sector with information on 
illicit activity, red flags, and trends could be an effective 
way to supplement these advisories and provide additional 
information on sanctions evasion.
    Also, identifying and tackling cryptocurrency sanction 
risks. Treasury has rightly been focused on the opportunities 
and risks presented by cryptocurrencies and certain elements of 
the crypto sectors, such as decentralized finance (DeFi) that 
may pose particular sanctions risk, in part because those 
products are designed not to meet traditional gatekeepers such 
as centralized exchanges, as Mr. Spiro discussed. These 
gatekeepers often understand and implement sanctions compliance 
programs and have served as key force multipliers of U.S. 
sanctions, ensuring that a wide range of individuals and 
companies abide by their obligations. Determining how to ensure 
that new crypto market players are complying with U.S. 
sanctions while not stifling innovation will be an important 
step in combating sanctions evasion and ensuring a robust 
crypto marketplace.
    Congress, the Administration, and the private sector must 
all work together to help identify, disrupt, and deter 
sanctions evasion. While this is a challenging task, an 
approach that emphasizes aggressive designations, clear 
communication to the private sector, and efforts to ensure 
regulations and guidance that effectively address risks with 
new innovative products will best position the United States to 
continue to have powerful sanctions tools.
    I look forward to your questions and thank you, again, for 
the opportunity to testify.
    [The prepared statement of Mr. Lorber can be found on page 
52 of the appendix.]
    Chairman Himes. Thank you, Mr. Lorber. I will now recognize 
myself for 5 minutes for questions. I would like to start, 
actually, with you, Mr. Lorber, and maybe ask Mr. Spiro to 
chime in here.
    This subcommittee is particularly interested in 
understanding and evaluating cryptocurrency. You talked about 
it. Is there any way to quantify the amount of sanction evasion 
that is occurring in all of the various cryptocurrency 
mechanisms that are out there? Question number one.
    Question number two, is there a way to get a sense for the 
rate at which sanction evaders are migrating to those 
platforms?
    And then, finally, what would you recommend beyond what is 
in your written testimony or what would you highlight as ways 
of mitigating the risk of cryptocurrency used for this purpose?
    Mr. Lorber. Okay. Thank you, Mr. Chairman. It is a great 
series of questions, and I will also turn to the other witness 
for his thoughts on this as well.
    In terms of quantification, I do think that--in fact, 
Chainalysis has a recent report that they put out which 
suggests that the number of transactions which are illicit that 
use bitcoin or blockchain technology is actually fairly low 
percentagewise. It is in, I believe, the low 1 percent or 
somewhere around there. So, it is fairly small.
    In terms of specific recommendations, it is interesting to 
think about. There are two sort of sets of recommendations that 
I would focus on. One relates to ensuring that things like 
centralized exchanges are actually developing and employing 
sanctions compliance programs so that they can identify and 
stop sanctions evasion activity that is going through those 
centralized exchanges and data analytic firms like Chainalysis 
that do that type of work.
    In addition, though, there is a series or a set of types of 
activities that are outside the scope of what the centralized 
exchanges are seeing and that is where you also have a risk for 
sanctions evasion activity like I was mentioning with 
decentralized financial products. There it is going to be 
partly a focus on regulation, but it will also be partly 
focused on education to make sure that those actors who are 
working in those spaces understand that if they are U.S. 
persons, they, too, have sanctions obligations and can be held 
to account if they violate them.
    Mr. Spiro. Mr. Chairman, I will hop in, and I appreciate 
that question. In relation to specific volumes, we do produce 
data explicitly in relation to both illicit and implicit that 
we see. And in relation to sanctions, while I don't have that 
information directly available now, I can provide it via 
written testimony after conferring with my colleagues.
    In relation to recommendations, I believe that my fellow 
witness hit the nail on the head. When we talk about this 
ecosystem more broadly, the choke points are these exchanges, 
these centralized exchanges that provide the on-ramps and off-
ramps in relation to conversion. And so, these are critical in 
relation to any of the other kinds of activity that happens 
within the ecosystem.
    In relation to effective investigations being able to 
determine via blockchain analysis and analytics when illicit 
activity transacts with those choke points, that is how the 
information behind those bad actors and individuals is 
obtained, and that is how successful investigations, in turn, 
are prosecuted.
    Chairman Himes. Thank you, Mr. Spiro.
    Mr. Garces, you have noted that even with banks that have 
robust compliance programs, once there is a match between a 
customer and somebody who is on the specially designated 
national list, at that point it becomes very, very human and 
intensive figuring out what is going on and ensuring that 
illicit activity doesn't take place.
    What can you tell us about what the barriers are to further 
automation, the use of artificial intelligence (AI), and what 
should we be doing to help in that regard?
    Mr. Garces. Thank you, Chairman Himes. That is an excellent 
observation and question. The challenge is that automated 
systems can only do so much, and what they do is detect 
potential matches. It is then up to a human to investigate the 
particular transaction and determine whether the potential 
match is, in fact, a true match or perhaps a false positive.
    Advances in the technology, in the screening systems is 
definitely needed, and I believe artificial intelligence can 
help in that respect. Most systems today rely on matching 
algorithms and fuzzy logic to determine potential matches at 
certain sensitivity levels.
    What happens at the next level, what the human does is to 
collect additional information about the parties involved in 
the transaction to determine ultimately whether the transaction 
parties are a match or not. Having systems that can automate 
some of that process would certainly relieve some of the 
efforts by the banks.
    Chairman Himes. Thank you, Mr. Garces. My time has almost 
expired.
    So with that, I will yield back the balance of my time, and 
recognize Ranking Member Barr for 5 minutes of questions.
    Mr. Barr. Great. Thanks, Mr. Chairman. And I appreciate the 
testimony of all of our witnesses on how we can improve our 
sanctions enforcement and prevent this evasion.
    I want to first ask about North Korea. Mr. Lorber, I 
sponsored the Otto Warmbier North Korea Nuclear Sanctions and 
Enforcement Act, which became law as part of the Fiscal Year 
2020 National Defense Authorization Act (NDAA).
    The bill imposed some of the toughest mandatory sanctions 
ever on North Korea, yet in your testimony you detail how North 
Korea continues to evade sanctions. We have heard about the way 
they use shipping sometimes as sanctions evasion and front 
companies. Given their track record, including those front 
companies, hacking, and other tools, how can we better shut 
down North Korea's efforts to obtain hard currency or otherwise 
evade sanctions?
    Mr. Lorber. Thank you, Ranking Member Barr. It is a great 
question. This goes to, in many ways, what I was speaking about 
in both my written and oral testimony about a defense in-depth 
approach. Because if there is one target out there which is 
incredibly sophisticated when it comes to sanctions evasion, it 
is North Korea, because they use front shell companies, 
shipping, cyber attacks, so on and so forth.
    In many ways, though, the best method for combating North 
Korea evasion activity is information provisions to financial 
institutions, getting financial institutions clear typologies 
that the North Koreans are using in order to help them identify 
what looks to be potential evasion activity, as well as 
providing information to financial institutions not just about 
typologies, but also about specific entities that are 
associated with North Korea that appear to be front or shell 
companies as a way to roll them up.
    And I know that historically, the Treasury has done this 
through a series of outreach programs to financial 
institutions. In addition to that, there needs to be political 
pressure put on those who are supporting and continue to 
support North Korea. It is not a secret that, for example, 
China has created at least a permissive environment for North 
Korean operatives to work in the country. That was detailed, 
most recently, I believe in the UN DPRK panel of experts report 
from, I believe, it was March 2021, as well as North Korea 
maintains a series of financial facilitators throughout the 
world, including, I believe, in Russia and China and other 
jurisdictions that help North Korea evade U.S. and UN 
sanctions. And these individuals need to be shut down, need to 
be targeted, and pressure needs to be put on the governments 
that are hosting them to kick them out of the country.
    Mr. Barr. Yes. The tough part is that our sanctions bill 
was the secondary sanctions that applied to Chinese banks, and 
how effective that has been, I am not sure; providing 
information to Chinese banks may not be the total answer.
    Mr. Lorber. I agree with that. I think that is correct. Let 
me clarify what I mean by providing information to banks, in 
many instances by providing information to U.S. and European 
financial institutions where the North Koreans are trying to 
access those institutions through, for example, Chinese banks. 
There have been a number of court cases which have detailed 
this activity.
    Mr. Barr. Great. Thanks for that. And then, in terms of the 
effectiveness of sanctions, we have long emphasized that 
sanctions should ideally bring about behavioral change on the 
part of bad actors. The Administration is largely responsible 
for determining how this works and implementing the directives 
of Congress.
    Mr. Lorber, based on your experience at Treasury, how 
effective are we, generally speaking, in tying our sanctions 
and the lifting of sanctions to clear goals and results?
    Mr. Lorber. I do think we are good at it. We are much 
better at it certainly than we used to be. And that is 
something that we tried to do, and I tried to do while I was at 
Treasury, to clarify very clearly to sanctions targets that if 
you change the behavior you are engaged in, these sanctions 
will be lifted.
    In fact, if you look back at all of the Treasury OFAC press 
releases that were designation activities for the last few 
years, you will see that language very clearly included in 
there. So, it is a message that we have seen and it has been 
followed up by action certainly during the last Administration 
when there were sanctions which were lifted.
    For example, sanctions that were imposed on Turkey were 
lifted when, in our estimation, the Turks changed their 
activities that we found objectionable and were the reason for 
the sanctions being imposed in the first place.
    Mr. Barr. And last question, what type of feedback does 
OFAC and Treasury provide to banks with respect to implementing 
and enforcing sanctions? And are there ways the government can 
do more to strengthen or improve that public-private 
partnership with banks?
    Mr. Lorber. Yes. That is a great question. I do like the 
OFAC Exchange idea, which I believe this committee has taken 
under consideration. The idea is that OFAC would get together 
with a series of financial institutions to address a specific 
illicit issue, in this case, maybe a sanctions evasion issue.
    They would pick a number of banks or insurance companies 
that they believe may be seen as activity or potentially have 
exposure to this activity and provide them with unclassified 
and scrubbed information to get them to harden their systems. 
That is the type of information, the public-private 
information-sharing, that I think would be particularly 
effective, and I think the other witnesses may agree. I don't 
want to put words in their mouths, but they may agree with that 
approach as well.
    Mr. Barr. Thank you. I yield back.
    Chairman Himes. The gentleman's time has expired. Before I 
recognize the gentleman from New Jersey, I need to step away 
for a brief meeting, so I will thank Mr. Auchincloss for 
assuming the gavel in my, hopefully, brief absence.
    And with that, we will recognize Mr. Gottheimer for 5 
minutes.
    Mr. Gottheimer. Thank you, Chairman Himes, and thank you to 
our witnesses for being here today. Just last month, the 
terrorist group Hamas fired thousands of rockets into Israel 
[inaudible] Cutting off their funding streams. The Department 
of the Treasury's Office of Foreign Assets Control (OFAC) works 
to accomplish just that. Still, we have a lot more work to do 
to enhance and strengthen our sanctions.
    My bipartisan legislation, the Hamas International 
Financing Prevention Act, requires that the President submit to 
Congress an annual report over the next 3 years identifying 
entities, including foreign persons and governments, which 
knowingly and materially assist Hamas or the Palestinian 
Islamic Jihad and impose at least two or more crippling 
sanctions.
    Mr. Spiro, in an effort to fundraise for its military 
operations and skirt sanctions, Hamas has reportedly received 
an uptick in bitcoin donations since the terrorist group's 
conflict with Israel last month. What do we know about the 
volume of cryptocurrency being solicited by groups like Hamas, 
and is law enforcement equipped to track and prevent these 
payments?
    Mr. Spiro. Congressman, I appreciate that question. It is 
obviously very timely. And, in short, what I can say is, we 
know a significant amount of information about those payments. 
We know volumes. It is around $140,000 or the equivalent since 
September of 2020. We know additionally some of the 
connectivity in relation to services, the services that were 
used in relation to those donors. And all of that information 
comes, again, from the power of the data, from the power of the 
blockchain, and the blockchain forensics.
    When it comes to law enforcement, we work with both the 
public and private sectors, meaning they will both have access 
to anything that has been attributed to terrorist financing, 
which is the highest risk and will support directly 
investigations and mitigation efforts.
    Mr. Gottheimer. And we know that cryptocurrency is used, 
particularly by Hamas, in terms of [inaudible]
    Mr. Spiro. Yes. There is legacy information in relation to 
solicitation of donations by Hamas going back a number of 
years.
    Mr. Gottheimer. Thank you. Can you discuss the evolution 
for terror financing through the use of digital assets and how 
it may be used by illicit actors to evade terrorism-related 
sanctions?
    Mr. Spiro. Yes, Congressman. And I also appreciate that 
question. As with any other illicit activity within this 
ecosystem, you do see incremental growth in relation to the 
illicit economy as well, and as it pertains to terrorism 
financing, we have seen incremental adoption.
    It is relatively small, or I would even posit, extremely 
small comparatively not only to the other activity within the 
ecosystem, but to the illicit activity, but we have seen 
instances of it.
    I would cite the fact that law enforcement domestically has 
been capable and able to take down multiple campaigns connected 
to that kind of activity, utilizing blockchain forensics and 
their investigative capabilities, but we have seen this 
technology abused by a number of terrorist organizations.
    Mr. Gottheimer. To that point, are there other tools that 
we could provide you with to help stay ahead of the activity to 
evade sanctions?
    Mr. Spiro. Congressman, that is also a good question, and I 
think, from the private sector, we are continually enhancing 
and advancing and adopting new technologies to combat the 
illicit activities that we see in this ecosystem.
    I think the tools should be provided and applied to the 
public sector to those investigators to ensure that they have 
the resources so that they can produce the intelligence and the 
information. And to Mr. Lorber's point, when that is 
distributed, it makes it far more difficult for the bad actors 
to exploit.
    Mr. Gottheimer. [inaudible] Ignore congressionally-mandated 
sanctions. For instance, despite the Iran [inaudible], many 
companies continue to do business with Iran with impunity. 
Today, China continues to buy large quantities of Iranian oil.
    Mr. Lorber, how can Congress better ensure that the 
Executive Branch enforces existing sanctions and, in 
particular, addresses China's purchase of oil from Iran and 
Venezuela?
    Mr. Lorber. Thank you, Congressman. It is a great question. 
One of the biggest challenges of many of our sanctions 
campaigns is that there are, in effect, sanction-busting 
countries. China comes to mind in terms of purchase of Iranian 
origin crude. There are ways to do it and we actually have seen 
China respond in certain situations, and they have responded to 
aggressive designation activity of Chinese companies.
    The quintessential example of this is the--I think, it was 
the September 2019 designation of COSCO Dalian and COSCO Dalian 
management, the Chinese shipping companies, huge Chinese 
shipping companies, which were designated for transporting 
Iranian origin crude. They apparently stopped transporting that 
crude following designation and aggressive negotiations with 
the U.S. State Department and with the Treasury Department. So, 
I do think there is--
    Mr. Auchincloss. [presiding]. Mr. Lorber? The gentleman's 
time has expired.
    Mr. Gottheimer. Thanks, Mr. Chairman.
    Mr. Auchincloss. The Chair now recognizes the distinguished 
gentleman from Texas, Mr. Williams, for 5 minutes.
    Mr. Williams of Texas. Before I start my questions, I want 
to congratulate Mr. Barr on his appointment to ranking member 
of this subcommittee and also thank my friend, Mr. Hill, for 
all of his leadership through the years. I am glad we have both 
of you on this subcommittee, working through these important 
issues that are critical to the national security of our great 
nation.
    Last week, the Biden Administration rolled back sanctions 
against some former senior national Iranian company officials 
and several companies involved in shipping and trading petrol 
chemical products.
    I am very concerned that these actions will allow Iran an 
easier path to avoid sanctions and further engage in trade-
based money laundering. I would much prefer President Biden 
continue the Trump Administration's maximum pressure campaign 
against the hostile regime.
    So, Mr. Lorber, can you give us your thoughts on, if you 
think these actions by the Biden Administration open up the 
door for greater sanctions evasion, or do you believe we still 
have tools at our disposal to monitor and influence the hostile 
regimes' behavior?
    Mr. Lorber. Thank you, Representative Williams. I do think 
we still have many tools at our disposal to stop Iranian 
sanctions evasion activity. The Iran sanctions program is one 
of the most comprehensive in terms of both the primary and the 
secondary sanctions authorities. So, there is quite a range of 
authorities in place to stop Iranian activity.
    The bigger question is, what is this Administration's 
appetite for using those tools in order to stop that activity, 
particularly as they continue negotiations indirectly with 
Iranians over a potential return to the Joint Comprehensive 
Plan of Action (JCPOA)? And there, it is a much more open 
question as to whether or not the Administration will 
aggressively go after Iranian activity outside of the nuclear 
docket right now during negotiations.
    Mr. Williams of Texas. Okay. We have seen an increase in 
ransom attacks on American businesses this past year. And I 
have spoken with some small business startups around my 
district who have expressed concern that they will never be 
able to protect themselves if a hostile actor attempts this 
type of attack on their business. They see companies with 
entire teams of people dedicated to cybersecurity being 
compromised and feel hopeless if they become the next target,
    Mr. Spiro, is there anything we can be doing at the Federal 
level to help these businesses, small businesses that may not 
have the resources to put towards cybersecurity or some more 
established companies to defend against ransomware and other 
cyber attacks?
    Mr. Spiro. Congressman, I appreciate that question. And, 
obviously, that is top of mind given some of the recent 
critical infrastructure attacks that we have seen via 
ransomware. I would say that my recommended approach to 
mitigating this kind of activity is twofold. The first is to 
improve domestic cyber hygiene because, in fact, ransomware has 
been occurring since 1989, in fact, in some form or fashion. 
But given our data and what we saw as of 2020, there has been a 
significant increase which I believe was cited earlier.
    The other piece is disrupting the supply chain. And what I 
mean by that is because we have that visibility into the 
payments in relation to ransomware, when that information is 
identified, a lot of additional intelligence is born. We are 
able to see not only the money laundering networks, we are able 
to make connectivity between strains, identify the 
administrators and the affiliates in relation to these attacks, 
as well as the procurement vehicles used in relation to things 
like bulletproof hosting and VPN services.
    So, by collectively utilizing this kind of information, a 
targeted approach can be taken to arresting different 
components and making this kind of activity less viable for the 
bad actors and the ransomware operators and groups. In fact, I 
believe today there was a takedown in relation to a ransomware-
related network wherein one of the money laundering networks 
was disrupted. That would be a recommendation I would make, and 
that comes through law enforcement.
    Mr. Williams of Texas. Thank you.
    Banks in the private sector played a critical role in 
keeping hostile actors out of the financial system. As this 
process gets more complicated, banks are investing more and 
more into machine learning and automated intelligence as they 
try to scan for bad actors.
    So my final question, Mr. Garces is, can you discuss some 
of the benefits or pitfalls of machine learning in trying to 
automate this process compared to a manual screening?
    Mr. Garces. Thank you, Representative Williams. That is a 
great question. There is much to gain from automation in this 
process. Banks are already utilizing systems to help in their 
monitoring of transactions, their screening of transactions for 
potential illicit activity.
    But there is still a large human burden in the 
investigative process. I would encourage or I would hope that 
the government can continue to encourage innovation amongst the 
private sector in terms of its compliance programs.
    Mr. Auchincloss. Mr. Garces, the gentleman's time has 
expired.
    Mr. Garces. Thank you.
    Mr. Auchincloss. The Chair now recognizes the gentlewoman 
from Pennsylvania, Ms. Dean, for 5 minutes.
    Ms. Dean. I thank the Chair, and I congratulate the new 
ranking member. And I thank all of you who have testified 
before us today for your thoughtfulness in your answers.
    Ms. Kumar, I would like to start with you. In your 
testimony, I read with interest how you discussed the role that 
United States real estate, especially commercial real estate, 
plays in sanction evasion regimes. You specifically mentioned 
the Geographic Targeting Order (GTO) issued by FinCEN, which I 
might note includes 12 metropolitan areas only, to require U.S. 
title insurance companies to identify natural persons behind 
shell companies used in all cash purchases of residential real 
estate.
    Given the limited metropolitan list covered by the GTO, and 
the fact that commercial real estate is not covered, can you 
speak to both of those problems; number one, the limited number 
of metropolitan areas, my own suburban Philadelphia or 
Philadelphia [inaudible] And also the fact that it is 
residential, not commercial. Where does this fall short in 
terms of our regulating evasion?
    Ms. Kumar. Thank you. That is an excellent question, and it 
goes to sort of understanding that sanctions evasion doesn't 
just--the sanctions program doesn't just target big actors like 
Iran and North Korea. The sanctions program also targets other 
individuals involved in drug trafficking.
    And what we see is a lot of those individuals often evade 
sanctions, including former officials of the Venezuelan 
administration. All move or hide assets and move into real 
estate, and the U.S. real estate market is a popular avenue.
    Now, when we talk about commercial real estate, you are 
absolutely right in that these sort of often find an example of 
the Iranians owning a massive sky scraper in New York was a 
purchase of commercial real estate. It continues to be 
unrecognized. The EB-5 investor program is investments that 
ultimately go into commercial real estate.
    Now, a lot of this is particularly complex because 
commercial real estate involves multiple investors. It is not 
as simple as a residential purchase by a homeowner. To that 
end, we have to sort of--what is necessary is sort of a rethink 
of how we are going to apply the GTO, since the title insurance 
agents may not be the most relevant actors.
    However, to identify gatekeepers that do continue to play a 
critical role in sort of putting together these transactions 
because commercial real estate transactions always take place 
through legal structures. They are never in the name of an 
individual.
    So identifying actors like lawyers, who often play a 
critical role in this as sort of the pressure point at which 
you can conduct due diligence to know who is behind these 
transactions, is one way forward.
    You also rightly said that it only covers 12 metropolitan 
areas. And a lot of the evasion schemes that we often see tied 
to individuals, but also generally, more generally, the use of 
real estate. You often see an equal split between cases that 
occur in GTO areas versus cases that occur in non-GTO areas.
    And I will say that we have a report forthcoming in the 
next few months that actually looks at a series of reported 
cases which show that over the last 5 years, the number of 
cases that occur in non-GTO areas is actually slightly 
significantly more than in GTO areas. So, there is a whole host 
of vulnerabilities that do need to be addressed.
    Ms. Dean. Exactly. Those vulnerabilities--we have to take a 
look at what are the appropriate metropolitan areas, how do we 
include other real estate transactions, including commercial 
real estate transactions, how do we make gatekeepers have 
accountability, responsibility in their own professional 
ethics?
    Mr. Garces, following up on these items, how can the United 
States Government better communicate with the financial 
services industry actors and other industry gatekeepers about 
the risks they may encounter or the feedback on how they should 
be making decisions in terms of these complex transactions in 
order to look for sanctions evasions?
    Mr. Garces. Thank you, Representative Dean, for that 
question. I think FinCEN--there is a good amount of outreach 
that happens where FinCEN puts out, and tries to put out 
information in a very general form to the financial 
institutions, but that information can be enriched through a 
stronger public-private sector type of program like what was 
being discussed with the OPEC Exchange Act.
    I think that would be very helpful. I think institutions 
need the information that is collected at the national level 
because institutions only see what they see within the four 
walls of their organization.
    Ms. Dean. Thank you very much.
    And I see my time has just about expired.
    Thank you all for your important information today, and I 
yield back.
    Mr. Auchincloss. The Chair recognizes the distinguished 
gentleman from Ohio, Mr. Davidson, for 5 minutes. Is Mr. 
Davidson available? I am not sure we have any members on right 
now.
    The subcommittee will stand in recess subject to the call 
of the Chair.
    [brief recess]
    Chairman Himes. Okay. The subcommittee will come to order. 
Again, thank you to the witnesses for your forbearance. I 
apologize that we are in the midst of votes.
    And with that, the gentleman from Ohio, Mr. Davidson, is 
recognized for 5 minutes for questions.
    Mr. Davidson. I thank the Chair, and I thank our witnesses.
    I first would ask unanimous consent to submit two articles 
for the record. The first is the FinCEN FILES that appeared in 
Buzzfeed on September 20th of last year, and the second 
appeared today in the Wall Street Journal titled, ``Untraceable 
Bitcoin Is a Myth.'' We have supplied both of those to the 
committee.
    Chairman Himes. Without objection, it is so ordered.
    Mr. Davidson. Thank you.
    Our current sanctions regime contains faulty elements that 
often unintentionally harm American citizens and businesses. 
Too often, we see bad actors evade our sanctions infrastructure 
through trade-based money laundering, illicit shipping or front 
companies in third-party countries, and numerous other ways. 
Thankfully, as this hearing shows, I am not alone in 
recognizing the need to discuss and reform our outdated 
systems.
    This past April, it was encouraging to see the Deputy 
Secretary of the Treasury announce that Treasury would conduct 
a top to bottom review of Treasury sanctions programs. Given 
the failures in the current BSA, AML, KYC framework and gaps, 
we should understand that doubling down on the same tools of 
surveillance reporting and control mechanisms in our financial 
systems will prove inadequate. The government should stop 
trying to control the tool that is money in the financial 
system and instead focus on targeting the illicit acts and 
actors. We must explore an alternative approach to BSA/AML/KYC 
and the sanctions regime so that we can have a flexible, 
targeted, and effective approach.
    According to the Specially Designated Nationals (SDN) list, 
as of yesterday, June 15th, we have 277 aircraft, 3,668 
entities, 4,603 individuals, and 406 vessels. Mr. Lorber, 
regarding OFAC's specially designated nationals list, are 
individuals or entities that are added to that list regularly 
monitored? Is there an end goal in mind whenever OFAC 
designates someone or something to that list?
    Mr. Lorber. Thank you. It is a great question. The end goal 
is twofold, or one of two: to prevent them from engaging in 
illicit activity, you mentioned aircrafts, so preventing those 
aircrafts from shuffling or sending illicit drugs to a 
destination; or to get the targets to actually change their 
behavior, so to essentially impose possession restrictions on 
them to get them to say, this is not worth it, we are no longer 
going to engage in material support for terrorism, for example.
    So, there are end goals that are put into place, and 
Treasury, OFAC does, as a matter of course, review certain 
designations to see if they remain current, if the companies 
that were designated, for example, are no longer in existence, 
things along those lines.
    Mr. Davidson. Thank you. And I just wish I had time to 
explore how the licensing system tries to minimize collateral 
damage to Americans, but due to the--it is an old law, from 
1975. We haven't really updated staffing. We have increased our 
sanctions by a lot, and it is tedious to try to prevent 
collateral damage to American citizens and American companies. 
But I do want to highlight some things with Chainalysis, and 
particularly, the emphasis on cryptocurrency.
    Mr. Spiro, we hear a lot about ransomware attacks. 
Cryptocurrency skeptics are always fast to jump on a story 
involving a ransomware attack whenever cryptocurrency is used 
for the payment. However, the facts speak for themselves, and 
we know that crypto does not provide an advantage to illicit 
actors. Chainalysis does an excellent job of making this point. 
Do you think some people are too easily distracted with an 
anti-cryptocurrency narrative?
    Mr. Spiro. Thank you, Congressman, for that question, and 
thank you for your efforts thus far in your time on the Hill in 
relation to the broader adoption and knowledge around 
cryptocurrency and this technology.
    I think that when you look at kind of the legacy of 
cryptocurrency thus far, there has been continual pushback in 
relation to the potential threats that have been posed, and the 
previous ecosystem when there was less compliance, fewer 
regulations around this space, and less of an understanding in 
relation to the technology underlying it and the transparency 
and traceability.
    In relation to ransomware, I cited previously the fact that 
the first ransomware attack happened in 1989, and obviously did 
not utilize cryptocurrency.
    Mr. Davidson. Thanks for that. My time has expired, but you 
make great points, as you will undoubtedly throughout the 
hearing. The United States seized over $1 billion in crypto 
last year, so clearly, there is a way to do it. I yield back.
    Chairman Himes. The gentleman's time has expired.
    The gentleman from Massachusetts, Mr. Auchincloss, is 
recognized for 5 minutes.
    Mr. Auchincloss. Thank you to the Chair and to our 
witnesses for their thoughtful testimony and also for their 
patience as we work out these logistics.
    I actually want to build on what my colleague, Mr. 
Davidson, was asking about with Know Your Customer and 
blockchain. Mr. Spiro, I would like to engage with you on these 
questions. And because there might be a few of them, I would 
ask with respect that you try to keep your answers relatively 
concise.
    So, is Know Your Customer harder with blockchain for 
technical reasons, for political reasons, or not at all?
    Mr. Spiro. Congressman, that is a wonderful question. And 
in relation to it, I think that KYC, that kind of collection, 
is now a different challenge because we pivoted from the brick-
and-mortar institution into digital finance. As such, fake 
identities and fraudulent identities and deepfakes are 
problematic. They were cited, in fact, in relation to a recent 
designation on second eye solutions. And those kinds of 
providers providing that kind of fraudulent information means 
that bad actors, including sanctioned actors, could circumvent 
those kinds of controls and exchanges.
    Mr. Auchincloss. Okay. So you are saying that there are 
technical reasons why blockchain would be a good vector for bad 
actors to evade KYC. And am I right in saying that there are 
also political reasons why it is hard to do KYC, because states 
like Russia, for example, are not providing the international 
cooperation we need to find these actors?
    Mr. Spiro. I think in relation to the regulation in this 
space, that different jurisdictions are choosing to apply or 
not apply them. Those that have regulatory arbitrage, unclear 
regulation, or have chosen to ban cryptocurrency run inherent 
risks in that you will see illicit activities bundled into 
those jurisdictions.
    The Financial Action Task Force conducts mutual evaluations 
in relation to money laundering that potentially would impact 
mutual evaluation if it would continue. But it is something 
that we have seen in different jurisdictions that have either 
chosen not to apply regulation to ban cryptocurrency, for 
example.
    Mr. Auchincloss. You had also mentioned in your 
recommendations that getting more sanctioning bodies to list 
the digital currency addresses would be a major step forward. 
Can you speak more to that? What would be the [inaudible] of 
sanctioning bodies that would need to list the digital currency 
addresses?
    And has there been any kind of progress on that front, 
especially with states with whom the United States does not 
have a good relationship right now, and where a lot of these 
actors are operating from?
    Mr. Spiro. I can't speak to progress with other nations or 
those that the U.S. may not have such cooperation with, but I 
do know that other sanctioning bodies like the U.N. are 
becoming more familiar with abuse by countries that are under 
sanction, for example, in relation to virtual assets. So, I can 
say that.
    Mr. Auchincloss. Okay. I want to circle back to the first 
question I asked, because I am not sure I totally understood 
the answer to it.
    If you are a criminal operating in an polity who is 
regulating KYC such that you did not think you had an off-ramp 
to do a mixed fund or to wash it out, would blockchain offer 
you an advantage in obfuscating your identity over a different 
type of currency?
    Mr. Spiro. No. I would actually posit the complete 
opposite, Congressman. What I would say is that the only 
vulnerabilities that I would address in relation to KYC are the 
fact that people could circumvent them. But even if they were 
to, if they are engaged in illicit activity that can be seen in 
relation to illicit crypto activity, it is going to be very 
difficult for them to do anything within the ecosystem.
    Mr. Auchincloss. Got it. Okay. If you were the head of 
OFAC, what would be the next step? Or if you were able to 
advise Congress to take any steps that would influence OFAC's 
measures, what would you advise that we do?
    Mr. Spiro. I would just advise you to apply more resources 
to that agency specifically in relation to there are risks 
associated with cryptocurrency and sanctions evasion wherein 
they can produce more designations that include cryptocurrency 
wallets. Because as identifiers for the private sector, when 
they have access to that information, that is how they can 
potentially mitigate the illicit activity.
    And because of the activity with cryptocurrency, when a 
wallet is put on that designation list, any associated 
activity--or within a designation, excuse me, any associated 
activity and legacy activity in relation to that look back can 
also be--
    Mr. Auchincloss. It is all visible, yes. So, you are saying 
OFAC can build KYC for the blockchain?
    I yield back my time to the Chair.
    Chairman Himes. The gentleman's time has expired.
    The gentleman from Arkansas, Mr. Hill, is recognized for 5 
minutes of questions.
    Mr. Hill. I thank the Chair, and I appreciate our 
witnesses. It is a great panel. I appreciate their patience as 
we go through our Constitutional duty of running back and forth 
to vote.
    And, Mr. Lorber, I really enjoyed reading your testimony. I 
thought your outline of America's sanction regimes was very 
helpful to members, particularly new members on the committee, 
in terms of the different kinds of sanctions that are imposed 
by the Legislative and Executive Branches.
    You referenced a U.N. report from March, and this is, I 
assume, looking back at the U.N. sanctions on North Korea. Is 
that correct?
    Mr. Lorber. That is correct, yes. It is a 1718 committee.
    Mr. Hill. And what is your view of, have we held together 
on this topic of the United Nations? Would it be good if the 
Biden Administration's new Ambassador asked for a Security 
Council meeting on this particular topic to assess where we are 
on it, or will they do that automatically, having issued that 
report?
    Mr. Lorber. The panel of experts reports on that committee. 
They issue a report and brief member states. I am not sure if 
there is an automatic Security Council meeting to discuss it. I 
will say in response to your first question, though I think it 
is fairly evident, based on the report itself, that members of 
the Security Council, in particular, China and Russia, don't--
at best, don't appear to be enforcing U.N. sanctions related in 
particular to North Korean financial facilitators that are 
operating in those jurisdictions.
    Mr. Hill. And is that equal land-based and maritime or 
mostly maritime?
    Mr. Lorber. It is a combination. As I mentioned before, 
North Korea is extremely sophisticated in how they conduct 
sanctions evasion. They all combine strategies. They all do 
maritime obfuscation along with the use of front and shell 
companies with foreign financial facilitators. It is oftentimes 
packaged into sort of one extremely complex and sophisticated 
evasion network.
    Mr. Hill. And are we not doing an adequate job? When I say, 
``we,'' I mean the United States and other major financial 
jurisdictions that have good AML/BSA work. Most of these things 
can pass through a European or an American touching 
institution, for example, somehow, somewhere. Are we not doing 
a good enough job on the secondary punishment, secondary 
sanction arena with those Russian and Chinese actors?
    And if so, I know we don't have much clout to get them, to 
punish them, but tell me where you think that your point of 
weakness is aside from the fact that North Korea is great at 
using front companies and shell players.
    Mr. Lorber. Yes. I think it is two separate choke points. 
One choke point is the access that the North Koreans actually 
oftentimes try to get to the U.S. financial system. There is a 
kind of myth out there that they are a hermit kingdom, and they 
have no access to the U.S. financial system. Recent cases 
suggest that is actually not the case. So, providing as much 
information, including typologies but also very specific 
information that is quietly provided to U.S. and European 
financial institutions, can be really impactful and helpful in 
helping them identify activity.
    But in addition to that, the second choke point is actually 
focused on Russia and China who continually provide 
assistance--or let me rephrase that. It will at least provide 
extremely permissive environments in which North Korean trade-
based money laundering and front and shell companies can 
operate without penalty or fear of retribution.
    Mr. Hill. I take it that the maritime aspects are really a 
needle in the haystack situation in terms of, I know, during 
the Trump Administration, as we attempted--the Treasury did a 
good job, I think, trying to name flag vessels and increase the 
heat on that. President Trump was not always on the same page 
with Secretary Mnuchin on that, but we deployed Coast Guard 
cutters to South Korean waters. But that is not really not 
effective, is it?
    Mr. Lorber. It is effective in limited cases, but I will 
say one thing, that State and Treasury and the U.S. Coast Guard 
did do is in early 2020, they issued a global maritime 
sanctions advisory that was extremely detailed and long, which 
basically signaled to the maritime sector that have sanctions 
compliance obligations. And if they don't follow those through, 
they may be at the point where they end up with an OFAC 
enforcement action or designation.
    And frankly, and candidly, that sent a significant chill 
through the maritime sector to say, hey, we actually need to do 
a much better job bolstering our sanctions compliance or else 
we are going to be in bad shape with U.S. regulatory 
authorities.
    Mr. Hill. So, that is a potential place through the 
Financial Action Task Force meetings and through our work with 
Treasury and our colleagues. That is a place we could put more 
emphasis. Is that a good thought?
    Mr. Lorber. Yes. I think that is right. Figuring out how 
financial institutions are actually working to reduce trade 
finance-related sanctions, evasions in--
    Mr. Hill. Thank you for your testimony.
    I yield back, Mr. Chairman.
    Chairman Himes. The gentleman's time has expired.
    The gentleman from Ohio, Mr. Gonzalez, is recognized for 5 
minutes.
    Mr. Gonzalez of Ohio. Thank you, Mr. Chairman, and 
congratulations to my friend, now Ranking Member Barr. I know 
he is down on the House Floor, but I'm excited for him in this 
new role.
    I want to start my questions with Mr. Spiro, and I want to 
talk specifically about DeFi. So, there is a sentiment and a 
fear that DeFi, by design, does not allow for monitoring 
sanctions compliance.
    One, is that true? That is sort of the first question. And 
the second one is, if not, how can we build that capability 
into OFAC as more transactions move into the DeFi space?
    Mr. Spiro. Thank you for that question, Congressman. It is 
a very good one. And it pertains to the emerging technology 
that we see on top of the preexisting technology that we see in 
the cryptocurrency space. Admittedly, I am not a DeFi expert, 
but what I can say is that DeFi provides software or claims to 
provide software which can then be used in a peer-to-peer 
capacity by those users in relation to trade.
    And, as such, in relation to issues of accountability or 
sanction screening or transaction monitoring, vulnerabilities 
exist. And you can see how sanctions evasion could occur 
outside of other kinds of sanctions-related illicit activity 
like extraction attacks that could be executed by hackers, for 
example.
    I believe that DeFi, given the nature of that model, does 
not fall under some regulatory regimes. But the Financial 
Action Task Force has taken the position and said that these 
kinds of services are, in fact, virtual asset service 
providers, or has taken a position that is pending this summer, 
I should say, that these kinds of providers are, in fact, 
virtual asset service providers or exchanges and are, 
therefore, subject to AML/CFT controls which would include KYC, 
which is not currently happening in much of the space and 
transaction monitoring and oversight.
    Mr. Gonzalez of Ohio. Okay. So sort of building on that, 
what sort of questions should we be asking of OFAC to make sure 
that they can, in fact, monitor sanctions via DeFi? Because the 
promise of DeFi--I think DeFi is a really cool concept, but 
obviously, it has its challenges. The promises you don't have--
you don't have the central intermediary, you just go peer-to-
peer? So I guess, what should we be asking OFAC to make sure 
they have this properly on their radar and are developing the 
capabilities?
    Mr. Spiro. That is a great question also, Congressman. I 
think in relation to the different kinds of activity from what 
I have heard, OFAC and certainly FinCEN, who coordinates with 
OFAC and other agencies within the Treasury, is studying this 
kind of activity, is reviewing any potential illicit activity 
in the space, so I do believe that is happening.
    But again, in relation to what degree the focus is applied 
and the kind of information intelligence that is being built in 
relation to potential additional designations and packages is 
something to certainly consider because the advancement of that 
technology right now in DeFi is rapid.
    Mr. Gonzalez of Ohio. It is very rapid.
    Mr. Lorber, do you have any thoughts on this?
    Mr. Lorber. Yes. It is a great question, Congressman. I 
think Mr. Spiro really spoke well to it. In my mind, to a 
certain extent, it is a question of education as well as a 
specific regulatory approach. One thing that I've seen quite a 
significant amount of is firms who are operating in the DeFi 
space, or are coming into the DeFi space, or thinking about 
investing in the DeFi space, don't have a sense of what their 
OFAC obligations are. Not that they don't know that they are 
U.S. persons who are subject to sanctions. They know that, but 
they don't necessarily know how that is operationalized or what 
they should be doing for screening or for KYC and how they are 
supposed to do it.
    I do think that in addition to some regulator clarity, 
there is a need to go out there and do some education once that 
clarity is provided to make sure that everybody knows that this 
is what is expected of you. And if you don't do it, then there 
may be enforcement activity that follows.
    Mr. Gonzalez of Ohio. Thank you for that. I think my time--
well, my time is about up. Mr. Lorber, I am going to ask you 
one more question. Do you think we should be adding China to 
the list of countries that we currently sanction? And if so, 
how would you structure those sanctions?
    Mr. Lorber. I think there are many differences we have with 
the Chinese and many activities they engage in which I think 
are where sanctions can be impactful. I would not recommend 
putting in place essentially a comprehensive embargo like the 
U.S. has on Iran and Syria and North Korea and Cuba, et cetera, 
on China. I think--for all sorts of different reasons--that 
would be a mistake. I think the targeted way--I realize the 
time is up. I think the targeted way that both the Trump 
Administration and the Biden Administration are approaching 
sanctions towards China is prudent right now.
    Mr. Gonzalez of Ohio. Great. Thank you.
    I yield back.
    Chairman Himes. The gentleman's time has expired. It 
appears that we have no further Members with questions, so I 
would like to thank our witnesses for their testimony today. 
And thank you for your patience around the vote-induced chaos.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    With that, this hearing is adjourned.
    [Whereupon, at 4:02 p.m., the hearing was adjourned.]

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