Seize and Desist podcast

S&D E13 - The role of compliance in asset recovery

Author
Lo Furneaux
Marketing - Associate
“It’s going to be pivotal for us to keep up with where criminals are going”


In this episode, Aidan and Kristen explore the future direction of asset recovery compliance.

Kristen shares her perspective on the international effectiveness of the Financial Action Task Force (FATF), the challenges of implementing the travel rule, and the significance of sanctions in asset recovery to combat financial crime. 

They also explore the role of stablecoins in the evolving financial landscape, the potential use of AI by criminals and the implications of this technology for compliance professionals. 

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Timestamps

03:00 Kristen’s background in cross-sector compliance

07:00 Scrutiny on crypto companies and enforcement actions

10:30 The influence and challenges of FATF in financial regulation

22:30 Future of crypto enforcement and stablecoins in the US

28:30 The complexities of managing frozen and sanctioned assets

34:00 The future of AI in compliance and fraud detection

37:30 Positivity in financial crime compliance

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Resources Mentioned

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About our Guest‍

Kristen Hecht brings a wealth of expertise from her long career in financial crime prevention and compliance. 

For several years, she worked closely with the US Treasury Department as a Senior Advisor in the Office of Terrorist Financing and Financial Crimes (OFAC) and the Financial Crimes Enforcement Network (FinCEN), before transitioning to the private sector, where she developed regulatory frameworks for financial crimes at HSBC China, Meta, and Binance.

Kristen is also a regional ambassador for the Association of Women in Cryptocurrency in France and the San Francisco Bay Area and an advisor for compliance and regulatory matters at DeFi startup Moonberg.

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Disclaimer

Our podcasts are for informational purposes only.  They are not intended to provide legal, tax, financial, and/or investment advice. Listeners must consult their own advisors before making decisions on the topics discussed.  

Asset Reality has no responsibility or liability for any decision made or any other acts or omissions in connection with your use of this material.

The views expressed by guests are their own and their appearance on the program does not imply an endorsement of them or any entity they represent. Views and opinions expressed by Asset Reality employees are those of the employees and do not necessarily reflect the views of the company. 

Asset Reality does not guarantee or warrant the accuracy, completeness, timeliness, suitability or validity of the information in any particular podcast and will not be responsible for any claim attributable to errors, omissions, or other inaccuracies of any part of such material. 

Unless stated otherwise, reference to any specific product or entity does not constitute an endorsement or recommendation by Asset Reality. 

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Transcription

Speaker: Aidan Larkin

There's no asset seizures without compliance and intelligence gathered at the beginning. What do you think your sector is going to look like? What do you think is the role of AI? Are you all gonna be out of jobs and some clever chat TPT seventeen is just gonna be doing all the compliance screening for you? 

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Speaker:  Kristen Hecht

It's so fascinating and there's so many changes ahead and I know in multiple circles we're discussing, like, how is AI going to impact us on many different fronts. First of all, for compliance as a discipline and, you know, to operate within a company and to help mitigate risk, we need to be using AI to help with detecting suspicious activity, detecting fraud, etcetera. So I think we're going to see an increase in tools in that regard. It's absolutely critical and it's going to be pivotal for us to keep up with where criminals are going. I think where I'm particularly concerned, and I know this is already happening, is AI being used to manipulate an identification. It's not just stealing identification, but creating entirely new personas and IDs. And then also the background documentation to verify the identification. I think that's just going to be a huge problem for us moving forward. 

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Speaker:  Noah McHugh

I'm Noah McHugh, chief security officer, Asset Reality. Welcome to Seize and Desist. In this episode recorded on the nineteenth of July, Aidan is joined by Kristen Hecht. She brings a wealth of compliance expertise from her long career in chief compliance positions at HSBC, Meta, and Binance, as well as her work within US Treasury Department. Aidan and Kristen discussed her experiences implementing cross sector compliance programs in everything from the US government to banking and the digital asset space. How effective the financial action task force really is around the world. The role of sanctions and asset recovery, use cases for stable coins, and the future of emerging technologies like AI and digital asset compliance. Thank you for listening. 

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Speaker: Aidan Larkin

Kristen Hecht, hello, and welcome to Seize and Desist podcast. Thank you very much for taking the time to join us. 

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Speaker:  Kristen Hecht

Thank you, Aidan Larkin. It is such a pleasure to be here from sunny California. 

Speaker: Aidan Larkin

Yeah. We were just talking before we hit record that we don't really get summers in the UK. Sometimes there's no occasionally warm rain and that's kinda what it's like today and I'm reliving my memories of being in San Francisco where you have consistent sunrises, sunshines, sunsets. No. We don't get to make plans. We don't get to do that over here. So, yeah, I'm very jealous on your location. We bumped into each other now quite a bit all around the world from there's a DeFi retreat in Paris and Consensus in Texas and obviously through our mutual friend, Amanda Wick, and the Association of Women in Cryptocurrency. So we always try and find guests to come on the show who understand our sector and understand problems and challenges and hopefully opportunities that sit within the asset recovery sector. And I'm always on the lookout for people that have a cross section of a career that has little bit of public sector, little bit of private sector, startups, big companies. You've been in some interest in places. Would you like to tell the guest your career to date? 

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Speaker:  Kristen Hecht

So yeah. So I've actually kind of gosh. My career spans nineteen years, which is pretty wild to think about it. I started off in the US government. I then went into banking and then over to the digital asset space. And now I'm kind of in the well, I am definitely in the startup space, which is pretty exciting. So, yeah, it's a lot of experience there. Maybe just quickly, like, so I started my career at the US Treasury Department. I was in the office of terrorist financing and financial crimes for nine years. I was a senior policy adviser there and was working extensively with OFAC, the US sanctions regulator, and FinCEN, the US AML regulator, as well as working on national security issues with the White House, State Department, Justice, the intelligence community. It was a really fascinating time in my life. We were developing sanctions programs with OFAC on Iranian and North Korean WMD, terrorist financing, even including, like, Al Shabaab, you know, the militant Al Qaeda is a style group in Somalia talking about banning charcoal. I mean, it was just it was a really interesting career. Then I moved over to HSBC. I was there for six years, did three years in Singapore, three years in Shanghai. HSBC at the time had a deferred prosecution agreement with the US Department of Justice, so I helped them roll out their first ever global financial crime compliance program. I helped set up the sanctions advisory team in the Asia Pacific region. Then I moved over to Shanghai to become the head of financial crime compliance there for China. And then, you know, crypto world started becoming a lot more interesting. COVID happened too. And I ended up getting a job with Novi, which was Facebook or now Meta's digital asset wallet project, which was associated with it was Libra and then turned into Diem, which was the very ambitious project backed by Mark Zuckerberg, for brand new blockchain and stablecoin. So I was the chief compliance officer there for a bit of time, which was fascinating, working with all the US regulators. And then did a short stint over at Paxos. And then after that, I was at Binance Global where I was the deputy chief compliance officer. I helped them with negotiations on the US resolution leading up to the historic enforcement action this past November and also helped them with a number of issues in setting up their compliance program. And now the last few months, I'm on the advisory board now on regulatory and compliance issues for a really fantastic Zurich based, DeFi startup called Moonberg led by a really incredible founder Oz Khume. Then I just started a new full time role as a chief compliance officer on a very exciting web three fintech project. However, we are not public right now, and we aim to make some announcements later this summer. So that's, I guess, kind of in a nutshell, my life, my professional life. 

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Speaker: Aidan Larkin

It's a pretty big nutshell. Yeah. I'm now sitting sort of furiously taking notes going where on earth did I start with all of this? And I think that again, this is why I'm so grateful to have you on because we talk ad nauseam about the fact that asset recovery has challenges and that only one percent of assets are seized, that you have these astonishingly high estimates because we don't have any data. Two to five percent of GDP is laundered globally. And it sounds to me like you get brought in as that sort of fixer because you have that experience of going into places where maybe fires are burning, and it's a case of how can you make it right. And, again, it's easy to take cheap shots at any I think crypto companies get it in the neck right now and exchanges get it in the neck. It's easy to criticize banks from sort of failure around, you know, money laundering controls. And I think that sometimes we mush them all together and we sort of forget that banks have been at this for decades, centuries, theoretically speaking, in some cases, and we still have major major problems. But on the crypto side, and the reason that's so interesting to us is because that enforcement activity is what leads to asset seizures. It's what leads to these big cases. Like, what do you see as someone who's been across all of these segments and has been in banking, been in crypto, been on the treasury side developing those sort of sanctions programs, is it fair, do you think? Is it with great power comes great responsibility? Why do you think there is so much more scrutiny on the crypto companies right now versus, for example, we're not seeing monthly or quarterly headlines about banks going through, or we don't really see a lot of bankers in prison, whereas, you know, there seems to be people calling for the heads of exchanges at different times. I'd love to just get your insights into why we see that disparity, and do you think it's fair as it deserved? 

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Speaker:  Kristen Hecht

Yeah. No. Absolutely. There's a lot to unpack there. I'm, like, trying to figure out which direction to go. So why so much scrutiny on crypto right now? I actually think it's good to go back about maybe a little more than a decade when you really started to see, like, the the US Treasury Department before some of those really historic enforcement actions on AML and sanctions violations against, like, HSBC, Societe Generale, BNP Paribas in particular, which was nine billion. Before those, they were really small enforcement actions. Like, the total dollar value that was in the hundreds of thousands, you know, millions. Like,it wasn't really anything. And that bank executives could laugh that off, and it didn't really matter if they just had to pay them off. So there was this wave from I think it was like 2010 to 2015ish where there was just a series of these big enforcement actions and deferred prosecution agreements with global financial institutions, mainly banks, trade finance, etcetera. So there was that. And if I recall, there were no no executives went to jail. There were definitely discussions, you know, within Department of Justice as well as in the broader community about, you know, there were definitely camps of, like, who should go to jail and why not. But, you know, ultimately it was chosen not to send these banking officials to jail. So now what we're seeing, and this is why people think there's so much scrutiny on the crypto sectors because it is somewhat new comparatively to other financial industries. And, you know, now all of a sudden it's like, okay, the US government and others, you know, the FC and others in the UK, they have their sights set. They're like, we've already gone through this wave with the banks. We're now focusing on different sectors. So and it's also not just crypto. It's payment companies as well. So they're really kind of going toward this fintech space as well as crypto. And kinda how I think about it is, you know, you had in November the historic enforcement action against Binance Global. You also had things wrapping up with the Sam Bankman Fried trial in November as well. And for my view, that really kinda set the stage for the waterfall of enforcement actions that are going to be coming. As we move forward, I would say the rest of 2024/2025 , I think everyone should fully expect more enforcement actions against global crypto exchanges. I mean, obviously, the US exchanges have already faced their own issues with the SEC, the Paxos', the ripples, the, you know, others. They've all been dealing with that, but I think we should really keep our eye open on what's going to happen with other non US exchanges moving forward. You know, and I'm trying to think through just, like, why there are calls now for executives going to jail. That remains to be seen. Again, I think we're gonna have to see where the US government and others land with the next enforcement actions and if they will also be seeking jail time. If not, then would that have been just against Binance? I'm not sure. And Sam Bankman Fried, but we're just gonna have to watch that space there. 

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Speaker: Aidan Larkin

Do you think that this 2010 period of activity, just to take it back to that, do you think that was in any way FATF? There's been a lot of talk recently about, you know, just how effective is fat f. If nobody has implemented the standard, is that a failing on fat f, not setting correct guidelines and implementation, not having enough teeth, or is it the opposite? Is it the case of they're setting a really high bar quite rightly and countries aren't getting to it? We made a bet, and we assume in the sector anecdotally that FATF focused on the threats around crypto and travel rule and virtual asset service providers in 2019. And then we saw now in 2023, the announcement that asset recovery was gonna be the strategic priority. And, of course, with that, we see lots of big asset recovery cases and it tends to be that FATF say something, things happen. What's your own personal view on that speed of activity around 2010? And what are your thoughts on I mean, as someone who sits in that sector, just how I don't wanna say threatening is the word, but just how influential is FATF in terms of those standards. Is it a tick box or is there a genuine we need to get this right because of that? Because I'm trying to predict what's their impact gonna be like on asset recovery. Yeah. Because we haven't seen a lot of bankers go into jail. So does that mean we're not gonna see a huge uptick in asset recovery? 

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Speaker:  Kristen Hecht

Right. No. I think that's a really great question. And actually, I think my personal view and I think a lot of people globally in like, the technocrats in the industry feel this. FATF is extremely influential. And actually, you know, when speaking with others from other industries and sectors, like, it's one of the very few kind of global international organizations that does have quite a bite and a punch when they issue their gray list and black list. Businesses, companies around the world, they pay attention to this. And so it's really important how countries are doing in relation to the FATF standards and the effectiveness and implementation of them. It's something where it really does impact the reputation of a country. And, you know, I actually worked closely with the FADF and, and I led the US delegation for Java, which is the West Africa FATF, and then the ESMOG, which is the East Africa FATF. So working very closely with these countries that are usually under the radar and scrutiny of, you know, the larger OECD countries, they really are concerned because it really could be, you know, a decision between a company wanting to go invest in that country and whether or not they might hold off for a few years until the landscape improves. So these countries, they want access to liquidity. They want access to reputable companies and to help take them along their economic journey. So it really is quite important. I think something where it's challenging is, you know, you have FATF if they set the standard, obviously influenced by the OECD members. They set the standard for VASP. They set this, you know, asset recovery, etcetera, travel rule. But then it's up to each individual jurisdiction to then come up with the national jurisdictional framework of how they're going to implement those standards. And I think that's where it becomes a bit challenging or quite challenging, actually. And you see this with the travel rule globally. You have Japan. You have the US. You have France. I mean, every other jurisdiction, they have different monetary thresholds that constitute what the travel rule should be when you would have to provide the, you know, originator and beneficiary information, and then what field should be included when you're passing messages for the travel rule. So and that's a very widely known industry challenge right now, you know, on how countries are dealing with it. You know, and how countries are dealing with it. Well, and mainly how the industry is dealing with it. The burden's been put on the industry. So I think FATF is doing it right. It can be a bit political because you have the core OECD members really heavily influencing the process. But overall, I think it's very effective. 

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Speaker: Aidan Larkin

This is an important point that I wanna dive into raised by Kristen about the travel rule. The travel rule, as Kristen summarized very well, it basically is about the originator and the beneficiary of the transaction. Who's sending it? Who's receiving it? And it's been subject of a lot of debate because trying to implement this particular requirement involving virtual assets is very, very complex for a number of reasons. Interoperability, the different data protection rules in different countries. It's one thing to say in jurisdiction x, you must have implemented travel route recommendations. But if you're a crypto exchange, a virtual asset service provider, a VASP in that jurisdiction, maybe when someone, a customer, has received a transaction and then wants to deposit it into your account, maybe there's nothing wrong with that transaction. They just haven't collected the information because the other jurisdiction where the other person lived or the transaction originated maybe doesn't have the same level or requirements or that just technically, they aren't collecting that type of data. And you have to sort of zoom out and remember, we've been here before. We have seen when cash was identified as, you know, this significant vehicle for money laundering and terrorist financing as maybe as long ago as twenty five, thirty years ago. There was that crackdown on using cash. And nowadays, if you went into a bank and you normally receive your salary via a direct transfer from your employer and you try to lodge even five thousand or ten thousand pounds or dollars or euros, you'll get lots of questions from the bank teller, and they're trying to figure out why are you making this cash deposit. That's because of the FATF controls. So when you're trying to do a version of that with crypto, I understand the intention, but I also appreciate the challenges that the sector faces. And it's not an easy thing to remedy. There's been at the time of recording this podcast, there was actually an update published by the Financial Action Task Force where they summarized how our country's performing in trying to implement the recommendations that were laid down. And the sad reality is the implementation of travel rule, to quote them, remains insufficient. A third of jurisdictions now still haven't implemented their legislation. There's been ongoing progress regarding interoperability citing success, while it's noting that architectural differences and data protection requirements continued to pose challenges. And then that takes us on to the wider point. There was a very interesting comment. David Lewis, the former executive secretary and a previous guest on Seize and Desist podcast. David's now the head of global anti money laundering at Kroll and very well placed to comment on such matters. And he wanted to encourage a debate about the value of chasing technical compliance and also what it means to be truly effective. What we're thinking about that is that there is little evidence in that FATF evaluations that show strong correlation between technical compliance and effective. Some of the jurisdictions that have been marked as fully compliant, for example, still have a well known and public problem with tackling money laundering. And the results of FATF evaluations show that you can be judged as effective, to quote David, the UK, the US, France, Israel, but they're not technically compliant. So I think that implementing the travel rule is continuing to be a challenge and will be for some time, and that sits within the overall debate about the challenges of implementing the FATF standards. 

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Speaker:  Kristen Hecht

One other bit I wanted to raise too, but before you ask more questions is when countries are added to the gray list, any reputable financial institution, including crypto exchanges that will then adjust their customer risk rating model. So then a customer will then become higher risk if the country is added to this gray list. So that will then add more scrutiny and a bit more time into the amount of due diligence that needs to be carried out on that particular customer from that gray listed jurisdiction. So that's another reason why countries who are in that category really strive to work so hard to get out. 

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Speaker: Aidan Larkin

Yeah. There there's a hard compliance cost. To doing business when you're in that truck now. And we've seen that first half. I didn't realize your involvement with the samlag. It's in the public domain that Asset Reality supported Seychelles during various stages of enforcement and capability and helping set up the new asset management unit there and a lot of the recommendations. So we certainly see that countries take it incredibly slate of food and saying make it better. How? Just better. So sometimes it lacks that specificity but and then particularly, I feel for FADF in the sense of as well because the US is a phenomenal example of this you know, my little home country of Ireland. Countries often don't agree internally on big issues. So how you can set global standards? We see this with every sector. It's impossible to get uniformity with virtually anything at all. It's difficult to get countries to agree on things. So I do see that. But just to zone in on the private sector expect your confidentiality, but just anecdotally about the sector, from the bank's point of view, is it a eye rolling this FATF thing? Or is it a case of because it actually does hit the bottom line, that there is also that wanting to adhere. Like, I was involved in the UK with the gym, like, the task force that was set up where banks and private sector would work together to share intelligence with police. We've seen this replicated in crypto world where you've got FIUs being set up in crypto exchanges and intelligence being shared and SAR data being shared. But I'm just interested as someone who's been on the private sector on the banking side. What's the banking sort of attitude to FATF standards? 

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Speaker:  Kristen Hecht

Yeah. That's a great question. I think the banking attitude is it's they take it very seriously. There's definitely no eye rolling whatsoever at the FATF, which is really great. It shows again the reputation of the FATF among the private sector, not just the public sector. So every decision I was involved in, especially when a FATF rail list or blacklisting came out, we would immediately go through the updating of all of our of the lists for the screening and the matching as well as the customer risk ratings and having to go through that. And then deciding, like, what are the key relationships in that business relationships in those jurisdictions? Do we need to then if we're gonna have we need to have enhanced due diligence now on some of these. And those are gonna be very tricky conversations, but there was never an instance in my experience at HSBC and also dealing with other financial institutions where no one took it seriously. It was taken very seriously, and everyone wanted to make sure that we had the right information on hand to determine whether or not we had the appetite to maintain that customer relationship or not. 

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Speaker: Aidan Larkin

And I think that you made a comment around this extra enforcement invite. It's worthwhile for listeners or if it's someone's first episode they're listening to. People also forget that we talk about historically, and you'll know this from your days in treasury especially, money laundering cases are incredibly difficult to prosecute. They're not interesting. They're not headline grabbing. They take years and years and years of work and patience. You're trying to, you know, map an opaque sort of universe together just to try and get a case across the line. And I think we can count on probably one hand globally how many pure money laundering cases there have been. And actually one of the first pure money laundering cases, I believe it was in Kosovo linked to the OneCoin scam where they got a stand alone money laundering charge, has now just been appealed. And I think it might even be overturned. We'll have to put that in the show notes. Like so, like, that one case, they're going to celebrate it for over a year. I think the appeal was successful and it sort of back to the drawing board potentially a little bit on that. But what the point we're making is is that the ROI in crypto cases, politically, headlines, Netflix specials and also just the sheer amount. I mean we're looking now through the lens of asset recovery and seized assets and getting money back. Every single crypto case we've tracked, and I know a lot of this has to do with the rise in the value of crypto, but when you look at the return to creditors in a field exchange, MTGox payout, BlockFi payout, people don't get cents on the dollar. People tend to get a hundred percent of their return or they get their ten Bitcoin that they lost four years ago and all of a sudden their ten Bitcoin is worth a heck of a lot of money versus what it was in the past. So I completely agree with you. I think we're seeing these astonishing IRS CI seizures. We're seeing these enormous just valuable seizures taking place. And ultimately, I think that's where the attention's going to go. Why go after the complicated fiat case if you can get this quick, easy smash and grab? Twenty four months door to door FTX was, whereas, you know, Madoff was twenty years door to door 

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Speaker:  Kristen Hecht

Right. 

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Speaker: Aidan Larkin

And recoveries. Did you think that will be one of the big factors or will it be you're sitting in the US right now? I mean, I've never seen a presidential election where two people are basically saying, I like crypto more than you. What do you think is the future of crypto post election? Is it no more enforcement or or possibly less enforcement? 

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Speaker:  Kristen Hecht

I think, again, we're definitely going to be seeing a really big wave of enforcement actions over the next couple years that's already started. That trajectory started with finance and…

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Speaker: Aidan Larkin

Clear the debacle type. 

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Speaker:  Kristen Hecht

It's already in progress. It has nothing to do with the presidential elections. I think something else that doesn't have to do with the presidential elections, but will certainly shape it, are the two draft bills that are in the US House and the Senate right now. Those are providing, you know, comprehensive frameworks for digital assets as well as stable coins. And that is something that I think all of us in the industry are just really keen on getting passed. It seems very unlikely right now that the senate will be passing the legislation before they go on break, this fall. And also, I mean, just before presidential election too. So we'll see. I mean, interestingly, I mean, obviously, the Trump camp are trying to woo over Robert F Kennedy who is the biggest crypto proponent. But Trump is, you know, obviously saying all the right things to get the crypto community on board, whether or not you agree or disagree with his politics or manner of getting to them. But then the Biden camp from what I'm hearing, which is really good news, is that people within his kind of national security apparatus and team are really taking crypto more seriously and the value at which they see as having the US taking a lead role in this. I would have thought this would have been very obvious several years ago. You know, it does from what I'm hearing, this is obviously taking more precedence and importance within the current administration for the election. It's a big issue. You know, you have US and China, and who's going to dominate in this space? And that's obviously something that Washington is contemplating right now. 

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Speaker: Aidan Larkin

You may have heard about stablecoins and being confused as to what they are. The simple definition is that they're a type of cryptocurrency, that they have been designed to maintain a stable value by being pegged to a commonly known asset, a fiat currency like the US dollar or a commodity like gold or even other cryptocurrencies. The main purpose of a stablecoin is to offer the benefits of digital currency. All the things like fast transactions, low fees, but minimize the volatility typically associated with crypto. Criminals want the same fast transactions, low fees, and minimizing volatility just like everyday people. And that's why we're seeing it popping up in fraud cases, in money laundering cases. So we have a luxury of having Kristen on the show to crack out her crystal ball and give us her insights into what she thinks the future landscape will be and also to hear on her thoughts on potential enforcement action and common use cases of this interesting asset category. 

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Speaker:  Kristen Hecht

My crystal ball on Tether. Interesting. Well, let me go back a sec. So a lot of the Novik Libra folks, several of them went over to Circle for the Stablecoin project. And then you also saw David Marcus started LightSpark, which is the Bitcoin payment network. So there's been a lot of folks going in those different directions. And so stablecoins. Let's see here where to begin. I mean, you know, there's been a lot of research done, and I know Chainalysis as well as TRM and a bunch of the others and Liptics have also produced trends over the last year. And obviously, the vast majority of financial crime is occurring within stablecoins and not necessarily Bitcoin anymore, and Bitcoin was where it was all at for a while. 

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Speaker: Aidan Larkin

There's also the great UNODC report that Erin West and the guys were all sort of involved in talking about that golden triangle and these sort of scam factories and that just has a prominent role. 

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Speaker:  Kristen Hecht

Yeah. Absolutely. And I think by and large, Tether I can't remember the exact percentages, but it's it was pretty extraordinary, like, maybe ninety percent or more, but that needs to be fact checked, has the vast majority of financial crime activity or illicit activity happening within a space. You know, like any maturing industry or asset class, it's going to take some time just to get the rules right, understand how the industry should operate around it, and understand how to operate in a very transparent manner according to the rules and regulations. I do think that as the use cases for stable coins become more obvious and integrated into the, like, the average person, you know, everywhere around the world and not just within the crypto community, I think that's going to help quite a bit. I mean, I think two of the most obvious use cases for stablecoins that will just be enormously beneficial to everyone globally is obviously remittances. So you have dollar backed stablecoin that someone in Guatemala has access to and they have someone who wants to send them funds from the US, it's instantaneous and there's almost no fees. Whereas you have the other companies, the Western Unions of the world, I mean, they're gonna charge you three plus percent, etcetera. So, like, that's an obvious win for folks. 

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Speaker: Aidan Larkin

Especially the unbanked populations are globally as well. 

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Speaker:  Kristen Hecht

You know, and also folks that maybe the second one I'll highlight is just like avoiding currency volatility. You know, you have someone in Argentina who can invest in stable coins in the US backed or, you know, GBP back. That's going to be extremely beneficial for them. So I think, like, once those types of use cases are, are just better understood and more prominent, I think then that will then kind of help ease the validity of the overall asset class. And my son just was trying to make an entrance there, of course. 

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Speaker: Aidan Larkin

He's welcome to give his views on all things Tether and Argentinian inflation. 

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Speaker:  Kristen Hecht

He can tell us about Tether. The Tether ball. 

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Speaker: Aidan Larkin

Kristen, all around the world, we've seen headlines over the last couple of years now of these huge stories where assets are being frozen subject to sanction activity. And I get commonly asked or I get asked for an opinion on, oh, hey, that vessel has just been frozen. It's a frozen asset therefore it's your word laden and it's a seized asset and what's going to happen next? And I find myself looking over my shoulder for a Christian somewhere to go, no. This is sanctions. This isn't asset recovery. They're like, what do you mean? It's a seized asset. Surely, it's asset recovery. If we were to sort of future gaze, we understand they're designated as an authority subject to sanctions. And for that reason, all of the stuff gets locked down. I mean, has there been cases historically where the designation has changed and assets have been given back? Have we ever seen anything, I'm not aware of it in my lifetime anyway, when we've seen such enormous portfolios. There's tens of billions of dollars right now locked up around the world subject to sanctions. What will be the next steps for those assets to actually not become subject to sanctions? And then assuming they then have to be frozen, they then have to go through a forfeiture process, or they have to be given back. Has that happened in during your tenure? Is that something you're taught at sanction school in the treasury? 

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Speaker:  Kristen Hecht

At sanction school at the treasury. And in my experience so, yeah, I would say ninety nine percent of the time that most individuals or entities, especially entities, you know, you have vessels or airplanes, they are blocked and they remain blocked. They're on OFACS Specially Designated Nationals list, which is effectively OFACS black list. So they will, they remain there. And for the case where there's actual, you know, there's bank accounts involved, those bank accounts have to remain frozen or blocked as OFAC, but the official term is in an interest bearing account, which is interesting, but no one has the right to touch it. So the bank is effectively custodying that account on behalf of this designated entity. 

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Speaker: Aidan Larkin

They're just stuck there. No one can do anything with it. Just like the vessel, it's sort of stuck in the harbor. Right. It's toxic physically. 

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Speaker:  Kristen Hecht

Exactly. Exactly. And I would say maybe there's less than one percent of the time where a designation can be challenged in the US court of law. And they have been challenged, I would say, almost one hundred percent of the time in that in those cases, the US government does prevail, which maybe isn't that surprising. But in the event that a sanctioned or designated individual entity is able to prove beyond, you know, a reasonable doubt that they are not involved in this activity and have not been involved in this activity, then there is a possibility to be removed from the list. But it is so rare and it's so unlikely for that to happen. 

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Speaker: Aidan Larkin

Well, have there been cases though where let's use the hypothetical, like, vessel situation. Yeah. You've got a person who's designated, their corporate entity's designated, the assets sit within that corporate entity. What is the actual legal mechanism then for it to end up in my world of asset recovery? What needs to happen just for our listeners? 

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Speaker:  Kristen Hecht

Sure. This is super fascinating. This kinda goes back early into my career at the Treasury. So the US government approaches sanctions as kind of like the second lever or tool that they have within the whole, you know, kind of foreign policy space. You know, you can either have you have diplomatic the first one, I guess, would be, like, just diplomatic conversations. Right? Like, trying to work closely with the government bilaterally to see if things can be solved. The second lever then is sanctions. Like, hey, look, we're not appreciating where the direction this country is going. It's going against US national security policy. And so we're going to start targeting, you know, the kind of economic space within that country and making things a little bit more a little bit more challenging and see if they can bring them to the table to discuss. And then the third lever is obviously the military route, which everyone wants to avoid. And that's why you'd seen in the last twenty years, especially, especially since nine eleven, the use of sanctions playing a very prominent role within US government policy. So those are kinda like the three routes. You have diplomatic sanctions and then the military, kind of that direction. So that's why, you know, you've seen, again, that rise. 

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Speaker: Aidan Larkin

How can do you then have to freeze the sanctioned asset to pull it into the world of, like, DOJ that eventually ends up with the US Marshals to be forfeited? Does that sanction actually get released or does the sanction actually stay in place and it's just because it's an enforcement authority, they can deal with the asset? I'm just I'm fascinated by the the actual mechanics. 

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Speaker:  Kristen Hecht

Yeah. So okay. Based on my understanding, the asset would continue to be blocked or frozen as it's being dealt with by US government authorities and other authorities globally. In terms of the exact mechanism to make it shift over to the seizure folks and to folks like human recovery, that I don't have the expert overlay on. However, my understanding is it does stay frozen or blocked during that entire time. 

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Speaker: Aidan Larkin

So I think that's the mental note for that's probably an episode onto itself because it's such a common inquiry that what is going to happen. I think there's a particular clearing house in Belgium that has billions of euros that just at the point of the designation was made, they're sitting with this enormous balance. They're not able to do anything with it, generating all of this interest. There's lots of there's easy political points to be scored going give it all, you know, to the war effort or give it all and people don't realize there's a very it's as difficult as it is to remain agnostic and unemotional, there's still legal processes. So there has to be, again, there has to be rule of law. Even if you know someone is the criminal, they still have to go through a trial. Sort of civilized society. And I think it'll be fascinating to see how it unfolds because we've seen on our side of the fence just the very practical problems. If you've got a sanctioned vessel and it's our job to realize the value in that vessel because it's being forfeited to the government, when you're trying to maintain the value, how do you pay the crew if your bank account won't allow you to send money to maintain? So I think that's maybe an entire episode to to itself, around seized asset and asset management. Have you come across in your word of the debate around every time government sees crypto assets, there seems to be a headline. The government should stake it. The government should hold it. I mean, the government should keep this in treasury. We saw the German case just a couple of weeks ago where they dumped billions into the the economy. And do you think there will be a moment in time when governments sit on they sit on gold bars? Will will governments eventually take that into the treasury? 

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Speaker:  Kristen Hecht

That is a really great question. I'm curious, like, how they would handle it because I think right now, they're just there isn't the legal administrative mechanism to make that happen. I have heard some of my current US government and former US government colleagues talking about that. So I think there are definitely conversations happening within the hallowed walls there of justice and treasury and others, but I don't know. I just feel like it's still, like, far off. I don't have a real, like, thorough answer there, but it's definitely… 

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Speaker: Aidan Larkin

I don't think anyone does. I think it is that misunderstanding of the fact that they're frozen or sanctioned assets. You can't do anything with it. Yeah. The same way the government can't just drive around in the boat or drive around in the car. They can't use the crypto assets.

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Speaker:  Kristen Hecht

It's not have traditional assets. I mean, it's just not something. And I know the conversations have been happening for years. 

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Speaker: Aidan Larkin

They will continue, I think, for quite some time. Yeah. I wanna wrap up but maintain our future gazing theme as we've put you under pressure here of asking you all of these questions. In terms of you've had the wonderful sort of fortune of having this very, very career in the same sector, but getting to wear different hats on different sides of the table. We ask everyone the same sort of question about the future direction. What are your thoughts on where AI fits into this? For me, is it a productivity tool? What do you think the direction of travel is going to be? Because the reason we're so interested in compliance on cease and desist is because you are literally the tip of the spear. The first suspicious activity report or the SAR, the frontline teller in the bank or the person on the exchange that sees the suspicious transaction, that becomes the intelligence that gets developed, That intelligence becomes the first court application. That gets the door kicked in. That gets the person arrested. There's no asset seizures without compliance and intelligence gathered at the beginning. What do you think your sector is going to look like over the next two, three, four years if someone's listening? Or is what do you think is the role of AI? Are you all gonna be out of jobs and some clever Chat GPT seventeen is just gonna be doing all the compliance screening for you? 

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Speaker:  Kristen Hecht

Absolutely not. No. I think it's so fascinating, and there's so many changes ahead. And I know, like, in multiple circles, we're discussing, like, how is AI going to impact us on many different fronts. I think first of all, for compliance as a discipline and, you know, to operate within a company and to help mitigate risk, we need to be using AI to help with detecting suspicious activity, detecting fraud, etcetera. So I think we're going to see an increase in tools in that regard. It's absolutely critical and it's going to be pivotal for us to keep up with where criminals are going. I think what's more concerning is obviously AI being used by criminals. I mean, there are so many instances already of it. I think where I'm particularly concerned and I know this is already happening is AI being used to manipulate an identification. It's not just stealing identification, but creating entirely new personas and IDs. And then also the background documentation to verify the identification. I think that's just going to be a huge problem for us moving forward. And how we're going to manage that, I think is going to take a lot of people like you, me, and others in our community to put our heads around it. I think AI is going to very much dominate our space, and we're going to have to improve on the compliance tooling side as well as, you know, have to be on the lookout for what the criminals are doing, which that they're always several steps ahead of us. But to your question though, it will not be replacing any of us any time soon. I think maybe, you know, sometimes on the operational front, the ops side, you know, you can definitely see an immediate impact. But I think having the expertise in the domain for now will very much be able to keep our jobs for the time being. 

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Speaker: Aidan Larkin

I remember being at a blockchain conference at 2018, and there was this very irritating man who just kept sort of shouting at everybody saying, like, you'll all be out of jobs. And all of these attorneys, conveyancing, solicitors, and realtors, you won't have jobs because of the blockchain. I think that it's a really interesting insight because actually one of my colleagues Hugo Hoyland who you met in Paris at the DeFi retreat has a whole presentation around sort of digital identity. And that role that I know entirely created, sort of AI created identities from an intelligence point of view, creates such a challenge at knowing who's behind the scam. Erin West talks a lot about this because you have these tools. Yeah. I do agree with you. I think it for me, it harks back to, you know, blockchain and blockchain analysis. It's like the thing that is dangerous is often the savior as well because, yes, you have new digital technology in a blockchain. We should all run-in duck for cover because it's gonna be so terrible. But actually, the thing that makes it really traceable and detect things is the same technology. And I think what we're seeing now is the existing asset recovery ecosystem is struggling. We have lots of STRs and specialist activity reports being filed, and people don't have the time or the resources to even look into them. So actually AI allows we've seen great tools developed. Forget the EU jurisdiction. I'll have to I'll put in the notes. Developed an AI tool to basically programmatically screen all of the disclosures that were coming in to pick out those ten critical ones, and a small unit was able to process tens of thousands of reports, whereas in the past, they just couldn't have got to them and they weren't getting opportunities. And they weren't able to get those quick interim freezing orders over to the exchanges to say grab that. Don't let that go. We'll get a freezing order. So I think that whilst there's the scary use case, again, if governments, private sectors put their sort of brains together, it could also develop some of the most interesting technology to combat it as well. So I think that will be the positive note on which we will bring this episode to a close. That's okay with you. We'll keep the positivity going instead of banging there. I always hit the, it's no, it's crypto. It must be bad. It's AI. It must be bad. It's like anything in the wrong hands is bad. We just need to make sure there's enough good people working on it too. 

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Speaker:  Kristen Hecht

Yes. Absolutely. And there's plenty of us good people here, and we can take that positivity into the weekend. I'm happy to do that. 

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Speaker: Aidan Larkin

Well, listen, Kristen, thank you again so much for getting up early to join us, kick off your day. This way, it's an early morning start for you. As I said at the beginning of the call, my favorite memory in San Francisco was discovering that there was a Larkin Street. That's my new hobby to see is there other Larkin Streets around the world. But thank you so much again for your time, and I hope this is not the first and last time that you're on the show. 

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Speaker:  Kristen Hecht

Thank you so much, Aidan. It was such a pleasure to speak with you, and I'll get up early any day for Asset Reality. 

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Speaker: Aidan Larkin

Thanks so much. 

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Speaker:  Noah McHugh

Thank you, Kristen, for joining us on Seize and Desist. Please go follow her on LinkedIn for any updates on financial crime compliance programs. If you enjoyed today's conversations, please like and subscribe to the Seize and Desist podcast on your preferred platform. And please leave a comment and any suggestions for guests you'd like to hear from in a future episode. Next time, Aidan will be joined by Asset Reality's new US compliance officer, David Tyree. He's an anti money laundering detection and prevention specialist. They'll discuss his background in US law enforcement, anti money laundering investigations, and expert court witnessing, and how those areas relate to asset recovery, especially when it comes to the dark web and cryptocurrency seizures. Seize and Desist is brought to you by Asset Reality. Thank you for listening. 

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Speaker: Lo Furneaux

Our podcasts are for informational purposes only. They are not intended to provide legal, tax, financial, and or investment advice. Listeners must consult their own advisers before making any decisions on the topics being discussed. 

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