Innovate or Incriminate: Safeguarding Financial Institutions from Money Laundering Risks

Michael S. Tumsaroch CEIC December 4, 2023

What You Need to Know

In October 2023, the Department of Treasury’s Office of Foreign Asset Control (OFAC) enacted multiple sanctions targeting the supply chain of fentanyl and other illicit drugs. In addition to sanctions compliance obligations, financial institutions that deal in trade finance should modify their existing sanctions and suspicious monitoring programs to identify narcotics traffickers who produce, sell and purchase chemicals of interest. These additional efforts would both combat the fentanyl crisis and limit the financial institution’s risk of being used as a vessel to launder illicit narcotics proceeds.

Sanctions Against Foreign Illicit Drug Producers

In October 2023, OFAC sanctioned 28 individuals and entities based in China and Canada involved in the production and distribution of fentanyl as well as other illicit drugs. As a result, financial institutions must ensure that they block accounts and prohibit or reject unlicensed trade and financial transactions linked to the newly sanctioned individuals and entities. These blocked and rejected activities must also be reported to OFAC. These requirements ensure compliance with OFAC regulations and disrupt criminal organizations by limiting their access to illicit proceeds.

Trade Finance and Sanctions Compliance

Trade Finance are services offered by U.S. financial and other institutions including those with overseas branches, and non- U.S. financial institutions with US officers, to importers and exporters to assist the facilitation of international trade.  Trade Finance activities pose additional risk as they require sanctions screening to ensure that none of the parties or products involved in the transaction are sanctioned by OFAC, the U.S. Department of Commerce. Financial institutions that deal in trade finance should have controls in place to identify any sanction hits on trade finance supporting documents such as invoices, shipping documents, correspondence, and other materials. Generally, this is completed with Optical Character Recognition Technology, ongoing list management and processes to determine whether the hits are false or positive.

Suspicious Monitoring Programs – Chemicals of Interest

Financial institutions should modify their sanctions screening and suspicious monitoring programs to identify chemicals of interest being purchased by narcotics traffickers. The October 2023 OFAC sanctions were complemented by eight unsealed indictments issued by the Justice Department’s Southern and Middle District of Florida against China-based chemical manufacturing companies and employees. The indictments discussed chemicals of interest as well as their Chemical Abstract Service (CAS) Registry Numbers which are used in the production of synthetic opioids, analogues, and abused drugs. [3] The systems in place to ensure sanctions compliance and detect suspicious transactions can be modified to identify transactions where narcotic traffickers are purchasing chemicals of interest by adding lists of chemicals of interest and their CAS numbers to the already existing sanctions screening and suspicious monitoring tools. Further methodologies to identify the misrepresentation of chemicals on trade finance documents can also be developed with the appropriate knowledge.

Chemical of Interest List Management

List management is integral for successful sanctions compliance. Similarly, proper list management would be integral to detecting transactions involving chemicals of interest. Currently, there is no all-encompassing list of chemicals of interest; however, a sufficient list would include synthetic opioids, analogues, and additives or others that would be recommended by law enforcement. Maintaining the chemical of interest list would require financial institutions to liaise with the appropriate law enforcement and/or pertinent government bodies to identify new or developing chemicals of interest. Internal opensource review or coordination with industry experts could also be conducted.

Enhanced Due Diligence

Upon identification of a transaction dealing in chemicals of interest, financial institutions would not typically be required to block the unless the transaction involved a sanctioned entity or product. However, the financial institution should conduct enhanced due diligence on the transaction to determine if the customer should be exited, more strictly monitored and/or reported in a Suspicious Activity Report. Best practices for enhanced due diligence include:

  1. Communication with the customer to determine the nature of the transaction.
  2. Review of any derogatory information on the sender and receiver of the shipment.
  3. Conduct a lookback of historical trade transactions conducted by the customer to identify any chemicals of interest.

The Takeaway

Illicit actors are constantly looking for new and ingenious ways to evade financial institutions’ safeguards and use banking services to further illegal activity. While no financial institutions are completely immune to money laundering risk, they can take steps which are above and beyond what is required to identify, document, and report illicit actors who are using the financial institutions’ services. Financial institutions that proactively take innovative steps to mitigate their money laundering risk, such as modifying their existing sanction and suspicious monitoring programs to detect chemicals of interest, will be looked at favorable by regulators and law enforcement. Financial institutions that take the bare minimum approach to anti-money laundering (AML) programs risk intangible reputational costs as well as anti-money laundering fines that can easily reach hundreds of millions of dollars.

Incorporating innovative practices such as a chemical of interest detection program into a financial institutions suspicious monitoring program will require experts familiar with sanctions and AML compliance as well an understanding of the way illicit drug and chemical trafficking organizations operate.

Utilizing expert consultants uniquely qualified in all of these areas can help you take innovative approaches to todays and tomorrow’s risk.

[3] The CAS is a division of the American Chemical Society, and it maintains the CAS Registry, a list of all CAS numbers chemicals and their chemical associations.

Michael S. Tumsaroch CEIC


Michael S. Tumsaroch is an associate director in Guidepost’s Washington, D.C. office where he focuses on monitoring and compliance engagements. Mr. Tumsaroch spent the past 15 years as a law enforcement and banking compliance professional in the U.S. and Southeast Asia. He is well versed in intelligence matters, Bank Secrecy Act and Anti-Money Laundering (BSA/AML), the Controlled Substances Act, independent reviews, investigations, communications analysis, and litigation support.