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The United States takes additional action against the Russia-based cybercriminal group Evil Corp, identifying and sanctioning additional members and affiliates

WASHINGTON — Today, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) is designating seven individuals and two entities associated with the Russia-based cybercriminal group Evil Corp, in a tri-lateral action with the United Kingdom’s Foreign, Commonwealth & Development Office (FCDO) and Australia’s Department of Foreign Affairs and Trade (DFAT). On December 5, 2019, OFAC designated Evil Corp, its leader and founder Maksim Viktorovich Yakubets and over a dozen Evil Corp members, facilitators, and affiliated companies pursuant to Executive Order (E.O.) 13694, as amended by E.O. 13757 (“E.O. 13694, as amended”). The United Kingdom and Australia are concurrently designating select Evil Corp-affiliated individuals designated by OFAC today or in 2019. Additionally, the U.S. Department of Justice has unsealed an indictment charging one Evil Corp member in connection with his use of BitPaymer ransomware targeting victims in the United States. Today’s designation also coincides with the second day of the U.S.-hosted Counter Ransomware Initiative summit which involves over 50 countries working together to counter the threat of ransomware.  

“Today’s trilateral action underscores our collective commitment to safeguard against cybercriminals like ransomware actors, who seek to undermine our critical infrastructure and threaten our citizens,” said Acting Under Secretary of the Treasury for Terrorism and Financial Intelligence Bradley T. Smith. “The United States, in close coordination with our allies and partners, including through the Counter Ransomware Initiative, will continue to expose and disrupt the criminal networks that seek personal profit from the pain and suffering of their victims.”

Evil Corp is a Russia-based cybercriminal organization responsible for the development and distribution of the Dridex malware. Evil Corp has used the Dridex malware to infect computers and harvest login credentials from hundreds of banks and other financial institutions in over 40 countries, resulting in more than $100 million in theft losses and damage suffered by U.S. and international financial institutions and their customers. In a concurrent action with OFAC’s December 2019 sanctions designations, the U.S. Department of Justice indicted Maksim and Evil Corp administrator Igor Turashev on criminal charges related to computer hacking and bank fraud schemes, and the U.S. Department of State’s Transnational Organized Crime Rewards Program issued a reward for information of up to $5 million leading to the capture and/or conviction of Maksim.

Additionally, Maksim used his employment at the Russian National Engineering Corporation (NIK) as cover for his ongoing criminal activities linked to Evil Corp. The NIK was established by Igor Yuryevich Chayka (Chayka), son of Russian Security Council member Yuriy Chayka, and his associate Aleksei Valeryavich Troshin (Troshin). In October 2022, OFAC designated Chayka, Troshin, and NIK pursuant to E.O. 14024. 

Evil Corp Members and Affiliates 

 

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Eduard Benderskiy (Benderskiy), a former Spetnaz officer of the Russian Federal Security Service (FSB), which is designated under numerous OFAC sanctions authorities, current Russian businessman, and the father-in-law of Evil Corp’s leader Maksim Viktorovich Yakubets (Maksim), has been a key enabler of Evil Corp’s relationship with the Russian state. Benderskiy leveraged his status and contacts to facilitate Evil Corp’s developing relationships with officials of the Russian intelligence services. After the December 2019 sanctions and indictments against Evil Corp and Maksim, Benderskiy used his extensive influence to protect the group.  

While he has no official position in the Russian government, Benderskiy portrays himself as an aide to the Russian Duma. Around 2017, one of Benderskiy’s private security firms was involved in providing security for Iraq-based facilities operated by the Russian oil company Lukoil OAO. This same private security firm has been lauded by the FSB, the Russian Ministry of Foreign Affairs, the Russian Duma, and other Russian government bodies. 

From at least 2016, Maksim had business interactions with Aleksandr Tikhonov (Tikhonov), former commander of the FSB Special purpose Center, Russian government leaders, including OFAC-designated persons Dmitry Kozak (Kozak) and Gleb Khor, and leaders of prominent Russian banks like OFAC-designated person Herman Gref (Gref), the Chief Executive Officer of Sberbank. In 2019, Benderskiy used his connections to facilitate a business deal that included Maksim and Kozak, which they believed would earn tens of millions of dollars per month. In the same year, Benderskiy hosted a meeting with Maksim and Gref to discuss business contracts with NIK.  

After the December 2019 sanctions and indictments against Evil Corp and Maksim, Maksim sought out Benderskiy’s guidance. Benderskiy used his extensive influence to protect the group, including his son-in-law, both by providing senior members with security and by ensuring they were not pursued by Russian internal authorities. 

OFAC designated Benderskiy pursuant to E.O. 14024 for being owned or controlled, or having acted or purported to act for or on behalf of, directly or indirectly, the Government of the Russian Federation, and pursuant to E.O. 13694, as amended, for having materially assisted, sponsored, or provided financial, material, or technological support, or goods or services in support of, Maksim, a person whose property and interests in property are blocked pursuant to E.O. 13694, as amended.  

Benderskiy is the general director, founder, and 100 percent owner of the Russia-based business and management consulting companies Vympel-Assistance LLC and Solar-Invest LLC. OFAC designated Vympel-Assistance LLC and Solar-Invest LLC pursuant to E.O. 14024 and E.O. 13694, as amended, for being owned or controlled, or having acted or purported to act for or on behalf of, directly or indirectly, Benderskiy, a person whose property and interests in property are blocked pursuant to E.O. 14024 and E.O. 13694, as amended.

Viktor Grigoryevich Yakubets (Viktor) is Maksim’s father and a member of Evil Corp. In 2020, Viktor likely procured technical equipment in furtherance of Evil Corp’s operations. OFAC designated Viktor pursuant to E.O. 13694, as amended, for having materially assisted, sponsored, or provided financial, material, or technological support, or goods or services in support of, Evil Corp, a person whose property and interests in property are blocked pursuant to E.O. 13694, as amended.  

Maksim has been careful about exposing different group members to different areas of business, however, he placed a lot of trust in his long-term associate and second-in-command, Aleksandr Viktorovich Ryzhenkov (Aleksandr Ryzhenkov). Maksim started working with Aleksandr Ryzhenkov around 2013 while they were both still involved in the “Business Club” group. Their partnership endured, and they worked together on the development of a number of Evil Corp’s most prolific ransomware strains. In 2016, Aleksandr Ryzhenkov, who is associated with the online moniker “Guester” (a pseudonym he has used while conducting operations on behalf of Evil Corp), sought to acquire internet bots in an Evil Corp operation targeting Switzerland-based targets. Since at least mid-2017, Aleksandr Ryzhenkov served as an interlocutor for Maksim with most of the Evil Corp members and oversaw operations of the cybercriminal group. In mid- 2017, Aleksandr Ryzhenkov targeted a New York-based bank. Following the December 2019 sanctions and indictment, Maksim and Aleksandr Ryzhenkov returned to operations targeting U.S.-based victims. In 2020, Aleksandr Ryzhenkov worked with Maksim to develop “Dridex 2.0.” 

Sergey Viktorovich Ryzhenkov (Sergey Ryzhenkov), Aleksey Yevgenevich Shchetinin (Shchetinin), Beyat Enverovich Ramazanov (Ramazanov), and Vadim Gennadievich Pogodin (Pogodin) are members of Evil Corp who have provided general support to the cybercriminal group’s activities and operations. 

In 2019, Sergey Ryzhenkov, the brother of Aleksandr Ryzhenkov, helped to move Evil Corp operations to a new office. In 2020, after Evil Corp’s sanctions designation and indictment, Sergey Ryzhenkov helped Aleksandr Ryzhenkov and Maksim develop “Dridex 2.0” malware. In 2017 through at least 2018, Shchetinin worked with several other Evil Corp members, including Denis Igorevich Gusev, Dmitriy Konstantinovich Smirnov, and Aleksei Bashlikov, to purchase and exchange millions of dollars’ worth of virtual and fiat currencies. In early 2020, Pogodin played a crucial role in an Evil Corp ransomware attack, and in mid-2020, he contributed to an Evil Corp ransomware attack on a U.S. company. 

OFAC designated Aleksandr Ryzhenkov, Sergey Ryzhenkov, Shchetinin, Ramazanov, and Pogodin pursuant to E.O. 13694, as amended, for having materially assisted, sponsored, or provided financial, material, or technological support, or goods or services in support of, Evil Corp, a person whose property and interests in property are blocked pursuant to E.O. 13694, as amended.  

In addition to today’s sanctions designations, the U.S. Department of Justice has unsealed an indictment charging Aleksandr Ryzhenkov with using the BitPaymer ransomware variant to target numerous victims throughout the United States. Aleksandr Ryzhenkov used a variety of methods to intrude into computers systems and used his ill-gotten access to demand millions of dollars in ransom. The Federal Bureau of Investigation’s published a wanted poster for Aleksandr Ryzhenkov for his alleged involvement in ransomware attacks and money laundering activities.  Also today, the United Kingdom designated 15 and Australia designated three Evil Corp members and affiliates.

SANCTIONS IMPLICATIONS

As a result of today’s action, all property and interests in property of the designated persons described above that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC. In addition, any entities that are owned, directly or indirectly, individually or in the aggregate, 50 percent or more by one or more blocked persons are also blocked. Unless authorized by a general or specific license issued by OFAC, or exempt, OFAC’s regulations generally prohibit all transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons. 

In addition, financial institutions and other persons that engage in certain transactions or activities with the sanctioned persons may expose themselves to sanctions or be subject to an enforcement action. The prohibitions include the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any designated person, or the receipt of any contribution or provision of funds, goods, or services from any such person. 

The power and integrity of OFAC sanctions derive not only from OFAC’s ability to designate and add persons to the SDN List, but also from its willingness to remove persons from the SDN List consistent with the law. The ultimate goal of sanctions is not to punish, but to bring about a positive change in behavior. F or information concerning the process for seeking removal from an OFAC list, including the SDN List, please refer to OFAC’s Frequently Asked Question 897 here. For detailed information on the process to submit a request for removal from an OFAC sanctions list, please click here.

See OFAC’s updated Advisory on Potential Sanctions Risk for Facilitating Ransomware Payments for information on the actions that OFAC would consider to be mitigating factors in any related enforcement action involving ransomware payments with a potential sanctions risk. For information on complying with sanctions applicable to virtual currency, see OFAC’s Sanctions Compliance Guidance for the Virtual Currency Industry.

Click here for more information on the individuals and entities designated today.

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WASHINGTON — Today, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) is designating Hilltop Youth, a violent extremist group that has repeatedly attacked Palestinians and destroyed Palestinian homes and property in the West Bank, pursuant to Executive Order (E.O.) 14115. Through these violent activities, Hilltop Youth is actively destabilizing the West Bank and harming the peace and security of Palestinians and Israelis alike. Hilltop Youth has devastated Palestinian communities and carried out killings, mass arson, and other so-called “price tag” attacks to exact revenge and intimidate Palestinian civilians, and has repeatedly clashed with the Israeli military as it counters their activities.

“The worsening violence and instability in the West Bank are detrimental to the long-term interests of Israelis and Palestinians, and the actions of violent organizations like Hilltop Youth only exacerbate the crisis,” said Acting Under Secretary of the Treasury for Terrorism and Financial Intelligence Bradley T. Smith. “The United States will continue to hold accountable the individuals, groups, and organizations that facilitate these hateful and destabilizing acts.”

As noted in FinCEN’s February 1, 2024 Alert and July 11, 2024 Supplemental Alert, the United States has consistently opposed violence in the West Bank, including attacks by Israeli violent extremist settlers against Palestinians and attacks by Palestinian violent extremists against Israelis. The United States will continue to seek accountability and justice for all acts of violence against civilians in the West Bank, regardless of the perpetrator or the victim. Treasury remains concerned by reports of escalating violence in the West Bank and encourages continued reporting by financial institutions of suspicious activity potentially related to the financing of these violent acts.

Concurrently, the Department of State is designating two individuals pursuant to E.O. 14115. Eitan Yardeni is being designated for his connection to violence or threats of violence targeting civilians in the West Bank. Avichai Suissa leads Hashomer Yosh, a West Bank-based entity designated by the United States in July 2024 for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of individuals and entities blocked pursuant to E.O. 14115. 

Violent ORGANIZATION ENGAGED IN “PRICE TAG” ATTACKS AND OTHER VIOLENCE

Hilltop Youth is a violent group comprised of extremist Israeli settlers. In organized group violence and “price tag” attacks—a term created by violent settler extremists indicating that acts against their interests would carry a price—Hilltop Youth has conducted a campaign of violence against Palestinians, engaging in killings, arson, assaults, and intimidation intended to drive Palestinian communities out of the West Bank. In the April 2024 attack on the Palestinian town of al-Mughayyir, for example, Hilltop Youth set fire to homes, buildings, and vehicles, beat villagers, looted property, including livestock, and left one Palestinian dead. In June 2023, hundreds of members of Hilltop Youth attacked the Palestinian town of Turmus Aiya and burned homes, cars, and fields, leaving another Palestinian dead and others injured. Hilltop Youth has also vandalized churches and mosques, spray-painted hateful graffiti messages on Palestinian-owned property, and uprooted olive trees in its effort to intimidate and spread fear. Israel has declared that perpetrators of “price tag” attacks constitute an illegal organization and Hilltop Youth has been sanctioned in various jurisdictions around the world. 

OFAC is designating Hilltop Youth pursuant to E.O. 14115 for being a foreign person that is responsible for or complicit in, or has directly or indirectly engaged or attempted to engage in planning, ordering, otherwise directing, or participating in an act of violence or threat of violence targeting civilians, affecting the West Bank.

SANCTIONS IMPLICATIONS

As a result of today’s action, all property and interests in property of the designated persons described above that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC. In addition, any entities that are owned, directly or indirectly, individually or in the aggregate, 50 percent or more by one or more blocked persons are also blocked. Unless authorized by a general or specific license issued by OFAC, or exempt, OFAC’s regulations generally prohibit all transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons. U.S. persons may face civil or criminal penalties for violations of E.O. 14115. OFAC’s Economic Sanctions Enforcement Guidelines provide more information regarding OFAC’s enforcement of U.S. sanctions, including the factors that OFAC generally considers when determining an appropriate response to an apparent violation.

Financial institutions and other persons that engage in certain transactions or activities with the sanctioned entities and individuals may expose themselves to sanctions or be subject to an enforcement action. The prohibitions include the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any designated person, or the receipt of any contribution or provision of funds, goods, or services from any such person. 

The power and integrity of OFAC sanctions derive not only from OFAC’s ability to designate and add persons to the Specially Designated Nationals and Blocked Persons (SDN) List, but also from its willingness to remove persons from the SDN List consistent with the law. The ultimate goal of sanctions is not to punish, but to bring about a positive change in behavior. 

For information concerning the process for seeking removal from an OFAC list, including the SDN List, please refer to OFAC’s Frequently Asked Question 897 here. For detailed information on the process to submit a request for removal from an OFAC sanctions list, please click here.

Click here for more information on the persons designated today.

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As Prepared for Delivery 

It’s October. Here in DC, that means that the annual meetings of the World Bank and the International Monetary Fund (IMF) are here! For me and my team at the U.S. Department of the Treasury, this is like Christmas or, perhaps, the Super Bowl.

Finance ministers and central bankers from all over the world come to town. Secretary Yellen meets counterparts. Think tanks and investment banks hold workshops. Distinguished academics debate various hot topics. It requires an immense amount of preparation. But it’s great.

The annual meetings are also a time to review the international economic policymaking process. One of my core responsibilities is to help oversee our relationship with the IMF, an institution that lends out tens of billions of dollars each year, tied to economic policy advice, and often with the goal of helping countries avoid, or recover from, crises. The IMF is clearly one of the most impactful elements of the global financial system, so it’s important to reflect on how to make it work even better.

In that spirit and toward that end, I wanted to kick off the season with what I consider to be five underappreciated facts on how the IMF is run – or what I refer to in the title as governance – and what I think we should do about them.

Fact 1: The IMF staff, and the IMF board, are (too) polite.

Don’t get me wrong, I’m a Midwesterner. I love politeness. But Keynes is reported to have said that the IMF had to serve as a “ruthless truth teller”. And I agree that it should do so even when it is uncomfortable, whether for borrower countries with programs or for their official creditors. 

For example, the Fund often lends based on promises made by official bilateral creditors to forgive debt or to offer new financing, promises referred to as financing assurances. But even though this financing can be central to hold the IMF program together, the details on financing assurances – who gave them, when, in what form, and any failures to deliver on these commitments – are not always publicly disclosed.

In recent years, programs in Argentina, Ecuador, and Suriname, for example, all moved ahead on the basis of financing assurances that ultimately were either not delivered, or delivered with significant delays, something that was only addressed in passing by the Fund.

Just this past year, I traveled to Quito and to Islamabad to discuss with their reform-minded Finance Ministers the possible design of new IMF programs for Ecuador and Pakistan. In both cases, real resolve and decisive action will be needed to sustainably improve their fiscal situations, and the path of their adjustment will depend on the delivery of official financing. And yet, as with those earlier programs, the Fund’s papers on these new programs were similarly “polite”. 

In the case of Ecuador, China has not provided financing assurances beyond the required first 12 months of the program. Rather than plainly detailing the risks this implies, including mentioning China by name, the program documents obliquely state that authorities are in discussions with their “main bilateral creditor.” In the case of Pakistan, program documents describe the total pooled financing coming from official bilateral lenders, but do not offer a creditor-by-creditor breakdown. We strongly support both of these programs, but for insiders and outsiders alike, this politeness can obscure key factors determining a program’s success. It also reduces the incentive for creditors to deliver, and ultimately to honor, their assurances in a timely manner. 

Helpfully, the IMF recently took some big steps to fix this. Financing assurances reviews will now be more intensive in programs involving debt restructurings. This is an important improvement, but why stop there? A clear articulation of the details around financing assurances makes sense in all programs. I hope the Fund rigorously applies this new policy, plainly characterizes the relevant promises made and fulfilled or unfulfilled by official creditors, and ultimately, considers expanding its application so it becomes standard practice.

Another area where brutal, if impolite, honesty will be increasingly important relates to the IMF’s precautionary lending programs, notably the Flexible Credit Line (FCL). Countries that the IMF staff and Board judge to have very strong macroeconomic fundamentals and institutional quality, with sustained track records of sound policies, can pre-qualify for access to financing.  Those countries can then draw down that line if needed without undertaking any required reforms or meeting other conditions, akin to a credit line from a bank. To date, six countries have had these FCLs, and some are quite large – Mexico’s 2016 FCL, for example, was for nearly $90 billion.

Last year, IMF staff recommended that, up to a size limit, these be treated as permanent, subject to periodic Board renewal, with no expectation or encouragement of qualifying countries to drop their credit lines. After all, countries pay a fee for these lines, and their strong macroeconomic positions and institutions merit a conditionality-free facility. The United States was proud to support this recommendation. It is good economics for countries to be able to purchase insurance in this way, and it is appropriate for the IMF to be the institution to provide it.

But this new policy will only constitute an improvement if the IMF staff and Board do not politely rubber stamp requests to renew these credit lines and, instead, seriously assess whether the country, in fact, remains qualified. If policies, or politics, or even shocks out of a countries’ control impair its economic situation or governance so that the borrower should no longer qualify for the credit line, the Fund must be prepared to acknowledge this.

The Fund is also sometimes too polite in its surveillance responsibilities.  For example, as described in its Articles of Agreement, the IMF was established in part to “facilitate the expansion and balanced growth of international trade” and to “maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation”. However, if you read the Fund’s Article IV Reports, you will find that these sorts of topics get less attention than they deserve, including in globally significant economies like China’s. For example, the IMF does not publicly comment on the role of state-owned banks in managing China’s exchange rate or on why changes in the People’s Bank of China’s (PBOC’s) balance sheet don’t line up with reserve transactions in China’s balance of payments data.  And while the Fund has built admirable expertise in compiling alternative measures of China’s local government debt, far beyond what authorities publish, it has neglected to apply this same analytical rigor to quantifying China’s industrial policies.

Finally, we the shareholders are also often too polite when voting on programs. A norm at the IMF Board has been to abstain, rather than vote no, to express disagreement. Why are “no” votes so rare? Perhaps early engagement between Board members, staff, and IMF leadership means that most programs only reach a vote if they command broad support. But it is important for the governance of any organization to have the ability to clearly voice opposition, in a non-stigmatized way, that is also reflected in the final tally. While I still expect it to be a very rare occurrence, I am convinced there are times when IMF members should ignore the niceties of an abstention, and vote “no” rather than accept a weak or problematic program.

Fact 2: The IMF is (sometimes) too risk averse!

Given the IMF’s role as a global lender of last resort to troubled economies, it may not shock to learn that, in many ways, it, and its Board, have a very conservative approach to risk. And for the most part, that makes sense and is what we support. But there are a few ways in which, by slightly relaxing its approach, the Fund may be more effective in accomplishing its mission.

One example is the Fund’s perspective on the possibility of having to tolerate some period of arrears. If the alternative is making disbursements to an off-track program where a country has not completed needed reforms, the IMF must choose arrears – the threat of arrears should not outweigh the need to maintain high standards. Only by designing strong programs and standing firmly behind required conditions can the IMF credibly affirm that countries are on a sustainable path. If a program is clearly off-track and disbursements are made simply so the country can pay back the Fund, it may in fact worsen the poor performance and make ultimate repayment less likely. Such behavior could also reduce other countries’ motivations to enact reforms and keep their own programs on track.

Another example is the Fund’s heavy reliance on co-financing from official bilateral creditors and multilateral development banks rather than having larger exposures on its own. Co-financing certainly has benefits – it can help share risk and marshal pressure and advice from other creditors to help the borrowing country adjust. But there are downsides too. Countries on the brink of macroeconomic disaster are sometimes forced to go hat-in-hand to bilateral creditors, which are often hesitant to lend more.  In the worst cases, creditors use their significant leverage over the debtor, which correctly views the creditor’s co-financing as key to advancing their Fund program.

Though a more thorough analysis should consider factors such as the scale of shocks hitting program countries and compositional differences in program recipients, by some metrics, it appears that the size of IMF programs might be declining. Financing from the Fund averaged about 1.5 to 2 percent of GDP in the 1980s and 1990s before jumping above 3 percent during the global financial crisis. Average program sizes have since fallen to around 1 percent over the past few years, a period when we have assessed several IMF programs to potentially be too small and relying too much on co-financing. The IMF should keep a careful eye on this dynamic and, in appropriate cases, increase its exposure with bigger programs and a commensurate increase in associated conditionality and required reforms. In this vein, we also welcome a review on the IMF’s Exceptional Access policy, which was last reviewed more than twenty years ago, to make sure the IMF is bearing risk appropriately in these critical cases.

The IMF and its shareholders should also think through other possibilities to get more out of their existing resources. It should continue to guard its rock-solid balance sheet, a bedrock protection that we and other major shareholders have long relied on to keep lending costs low and predictable. But the IMF’s precautionary balances — the buffer it keeps to protect against large-scale defaults on its lending — significantly exceed the Fund’s target. As such, the Fund might consider using some of these excess funds to shore up the sustainability of the Poverty Reduction and Growth Trust, the IMF’s tool to lend concessionally to low-income countries.

Lastly, earlier this year the IMF completed a helpful review of its Lending into Official Arrears policy. The updated policy will afford the IMF with new options in some cases to move ahead with programs even if a large creditor does not agree to restructure its debt along with other creditors in a timely manner. Though such cases inherently involve more risk to the Fund, we encourage the IMF to use this policy when needed to support its membership.

Fact 3: Not all financing flows supporting IMF programs are created equal.

In April, Under Secretary Shambaugh spoke about the U.S. Vision for Global Debt and Development Finance, which has since formed the basis for the Nairobi-Washington Vision. He called on the official creditor community to provide net positive financing flows on a coordinated basis in support of borrower countries with IMF programs. If resources flow out of countries trying to pursue appropriate reforms, they may have to forgo needed investments for their development, and will have a harder time keeping their programs on track. Our hope is that official bilateral creditors, who are themselves IMF members and part of a global community aiming to support development, collectively maintain their financing support to countries during a program. That would be the right thing to do.

The Vision specifically calls for new support to be transparent and readily accessible. The reason this is so important is that not all financing flows are the same. In particular, the purchase of strategic assets or opaque project lending with conditions attached – such as requirements on how inputs are sourced or which labor is used – are generally not in line with the Vision, even though they may technically result in net inflows.

Bilateral swap lines that carry onerous use restrictions or where the terms are not publicly disclosed are also not generally in line with the Vision. And IMF data on gross reserves often include the value of PBOC swaps, even though such swaps often come with opaque restrictions on their use and potentially do not satisfy the IMF’s rule that reserve assets must be “readily available and controlled by the monetary authorities.”

IMF country teams have approached this issue in different ways. In the case of Sri Lanka, IMF staff have noted in footnotes that the central bank’s PBOC swap assets are currently unusable. For Laos, Fund staff indicated in a footnote that it is uncertain whether swap assets are tied to specific purposes, but that “if [PBOC swap] disbursements are tied to specific uses or not under full control of [the central bank], then they should not be counted” as reserves.  In Suriname, staff created a “usable gross reserves” category that excluded the PBOC swap, while still counting swap assets toward gross reserves.  Meanwhile, in Argentina, staff have continued to accept Argentina’s classification of its full PBOC swap line in its gross reserves, but staff exclude the “unactivated share of the PBOC swap” from their estimate of Argentina’s “FX liquidity.” 

This confusing and inconsistent treatment partly reflects a lack of reporting by the PBOC on the details of each of its swap arrangements. The IMF’s treatment of swaps should be consistent and compliant with its stated policy when it calculates reserves, analyzes debt sustainability, and secures financing assurances.

Collectively, we should continue to cultivate enthusiasm and secure commitments from the official sector to invest in support of Fund programs. But we must make sure the result is the expansion of transparent, credible, and on-budget financing flows or debt relief to countries undertaking reforms, not potentially damaging forms of lending.

Fact 4: Third-party providers can sometimes help IMF programs, but sometimes can’t.

Supporting low-income countries, including those covered under the Fund’s Fragile and Conflict-Affected States strategy or where a government has a history of misuse of funds, is one of the most important things the IMF does. But programs in these countries are often also the most difficult because the IMF must minimize any chance of unwittingly abetting the drivers of corruption, violence, or illegal activity. 

In these cases, the IMF has sometimes appealed to third party implementation as a way to spend funds or administer reforms without overly relying on the government or other risky actors. This is generally a good idea. If the third party is assessed to be more transparent, more efficient, and more law abiding, it is, by construction, a less risky way to provide critical government services or to address urgent humanitarian needs than simply cutting a check to the local authorities.

But we must remember that money is fungible. And this means that third-party implementation is no panacea. Imagine the IMF wishes to support a country whose budget has deteriorated due to rising prices of social spending, but where it worries that the government might misdirect IMF resources to buy weapons. Giving money to a third party may not help, even if it faithfully and transparently implements as promised. After all, with that social spending now off the government’s budget, the government’s fiscal constraint will be relaxed. It can simply reallocate that amount of money however it wants.

Third party implementation will be most effective, and is more likely to successfully act as a safeguard, when it is designed to perform a service that the government would otherwise not be doing, or where it can be additive to the government’s efforts, rather than simply substituting funds so the government can shift its spending. Given the importance of the IMF’s work in Fragile and Conflict-Affected States, and given the subtleties of this issue, the IMF should consider developing a policy on when and how best to use, or to avoid, third-party implementation.

Fact 5: The IMF’s got a really tough job … and thankfully has great people doing it!

Perhaps I should have started with this one. I’ve just encouraged the Fund to communicate more directly even when uncomfortable, to take more risk in certain situations but to be extra careful while doing so, to be nuanced in discerning which financial flows to encourage and which to discourage, and to actively deploy safeguards while staying attentive to their limitations. Each issue is obviously subtle and tricky. Like I said, the IMF has a really tough job.

Luckily, the Fund’s staff are passionate, hard-working, well-trained, and dedicated caretakers of the international financial order. They are open to feedback, and more than capable of pushing back when it’s off the mark. At Treasury, I have a fantastic and experienced team, deep in the issues, and able to brief on macroeconomies all across the globe. Even still, while preparing to visit a country, I find the advice of the experts at the IMF and its Article IV surveillance reports to be an obvious first stop and an indispensable resource.

I can’t think of another institution as successful as the IMF in promoting stability and growth and spreading macroeconomic expertise, and it has now been doing so for more than 80 years. I am confident that, with continued support and commitment to the institution, and with occasional tweaks to its policies and governance, the IMF will continue to do so for a long time to come.

Thank you.

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As Prepared for Delivery

Thank you for joining us today.

On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA), with the goal of tackling the climate crisis while creating good-paying jobs, strengthening energy security, and lowering consumer costs. 

Just a little more than two years later, we are seeing remarkable results. Since the IRA was enacted, private businesses and consumers have invested nearly $500 billion in building America’s clean energy economy, a 71 percent increase from the prior two years. Treasury analysis shows that these investments are particularly concentrated in communities that are lower income and have fewer college graduates. 

Because the bulk of the IRA’s climate and clean energy provisions take the form of tax incentives, the Department of the Treasury has been at the forefront of implementation, in close collaboration and partnership with experts across the federal government. To date, we have issued roughly 75 pieces of guidance totaling over 3,300 pages, moving at a rapid pace to provide clarity and certainty to taxpayers.

Today, I want to outline our plans for Phase Four of our implementation of the IRA’s clean energy provisions. Between now and the end of this Administration, we will continue to provide rules of the road and certainty to help make the IRA tax policies even more effective in reducing greenhouse gas emissions, supporting the development of clean energy industries of the future and the deployment of clean energy solutions across every sector of the economy, creating good-paying jobs, supporting domestic production and manufacturing, and lowering consumer costs. 

But before I get to what’s to come, let me briefly recap our implementation work to date. 

Phase One of implementation started with the IRA’s enactment. Treasury and the Internal Revenue Service (IRS) quickly published detailed requests for public input on nearly all of the law’s clean energy tax provisions, which helped us identify and prioritize issues. And then, to support immediate investment, we focused on issuing guidance on cross-cutting bonus and credit monetization provisions, as well as credits for electric vehicles.

Phase Two focused on boosting American manufacturing to create good-paying jobs and strengthen energy security. From fall 2023 through early 2024, we proposed regulations on the section 45X Advanced Manufacturing Production Credit, the section 45V Clean Hydrogen Production Credit, the section 48 Investment Tax Credit for electricity generation, and other key provisions.

And then, starting in early 2024, Phase Three focused on providing longer-term clarity and certainty. That included issuing final rules on elective pay (also known as “direct pay”) and transferability, provisions that are growing the scope and scale of clean energy projects by expanding their financing options. Already, more than 70,000 projects and facilities have received registration numbers for the purposes of elective pay and transferability. We also issued final rules for the New Clean Vehicle and Previously-Owned Clean Vehicle credits, and, crucially, final rules for the IRA’s prevailing wage and apprenticeship (PWA) requirements, which clarify the IRA standards for fair pay and strong workforce pipelines. 

Now, in launching Phase Four, we are doubling down on our commitment to provide the rules of the road and certainty needed to realize the full benefits of the IRA. By the end of this Administration, we anticipate finalizing regulations on a number of key provisions that are especially central to the IRA’s climate and economic goals.

In particular, we intend to finalize rules for the Clean Electricity Production Credit and Clean Electricity Investment Credit, often referred to as the “technology-neutral” clean electricity credits. These credits will help continue the explosive growth of renewable sources like wind and solar while also enabling the growth of emerging clean electricity technologies that achieve a net greenhouse gas emissions rate of zero or less. A recent Rhodium Group study found that by 2035, the credits will reduce power sector carbon emissions by 29 to 46 percent, save American consumers up to $34 billion in annual electricity costs, and add between 259 and 648 gigawatts of clean electricity to the grid, all compared to a scenario without the credits. Final rules will provide additional certainty for the technologies identified as zero-emissions in the proposed rules and will chart a path for additional zero-emissions technologies to qualify.

Likewise, guidance on the existing section 48 Investment Tax Credit (ITC) also remains a priority, since it will continue to be an option for qualifying projects that began construction before the end of this year (and longer for certain property). After careful consideration of public comments, we expect to finalize rules for the 48 ITC (before finalizing rules for the technology-neutral credits) that will provide further certainty for investments, including for qualified biogas property and other types of eligible property.

We also know that clean hydrogen will be critical for reducing emissions from hard-to-decarbonize sectors in heavy industry, and we recognize that the clean hydrogen industry needs certainty. We intend to finalize rules for the section 45V Clean Hydrogen Production Credit by the end of the year. As we continue to review and evaluate the nearly 30,000 comments received on the proposed rules, we are working to include appropriate adjustments and additional flexibilities to help grow the industry and move projects forward, while adhering to the law’s emissions standards, including the requirement to consider indirect emissions.

In addition to these provisions, we also anticipate finalizing rules for the section 45X Advanced Manufacturing Production Credit, which is one of the most important provisions to accomplish the IRA’s goal of building domestic supply chains. Many of the announced investments in clean energy rely on the incentives this credit provides, and analysts have indicated that this is one of the fastest growing credits in the tax credit transfer market. We expect final rules will build on that growth and bolster market confidence for the production of clean energy components and critical minerals.

And we anticipate finalizing regulations that expand the reach of the Low-Income Communities Bonus Credit Program to additional clean energy technologies beyond wind and solar, implementing the transition from the legacy Investment Tax Credit to the technology-neutral Investment Tax Credit. Underscoring the importance of this provision, Treasury recently released a report from the 2023 program year, showing that the bonus supported nearly 1.5 gigawatts of expected solar and wind capacity and about $3.5 billion of investment that will directly benefit low-income and Tribal communities. 

The last finalization project I’ll mention pertains to the rules for electing out of partnership tax status under section 761. This will make it easier for elective pay eligible entities to partner with private developers and investors, building on the successes we’re already seeing for direct pay. We anticipate finalizing those rules by end of year as well.

In addition to finalizing critical rules, we continue to work on guidance for provisions of the IRA for which we have not yet issued comprehensive guidance. 

To date, Treasury and the IRS have issued at least initial guidance on most of the major new IRA provisions.  Following up on procedural guidance issued in May, we continue to actively work on guidance for the section 45Z Clean Fuel Production Credit, which takes effect on January 1, 2025. We also continue to work on the section 45U Zero-Emission Nuclear Power Production Credit and the section 45W Credit for Qualified Commercial Clean Vehicles. Each of these credits incorporates complex policies, and we have received substantial stakeholder input regarding the unique dynamics of the credits’ respective markets; we’re now working to evaluate these issues with help from experts at other agencies. 

Finally, as we enter Phase Four, we now have the benefit of comments received on earlier guidance and additional information about how markets are developing in key areas. For example, we have heard how helpful the domestic content safe harbor tables we released earlier this year have been for making this bonus a more usable incentive. We anticipate releasing guidance as part of Phase Four that will update these data, make technical clarifications, improve accuracy, and recognize the benefits of domestic supply chains by differentiating the treatment of solar cells that are manufactured with domestically produced versus imported wafers.

We have also heard input from stakeholders on the regulations for the section 45Q Credit for Carbon Oxide Sequestration, which were finalized by the previous Administration. We published a notice in 2022 requesting comment on this credit, and we continue to welcome input from industry, labor, and environmental stakeholders. 

I’ll close with two final thoughts. First, I want to emphasize the importance of stakeholder input and interagency collaboration in all of our work on IRA implementation. We deeply value the input stakeholders have provided, whether empirical analysis, on-the-ground experience, or feedback on the significance of key issues to specific communities. And all of our implementation work relies heavily on the expertise of our colleagues at the Department of Energy, the Environmental Protection Agency, and elsewhere across government. 

Second, all of our guidance and implementation work is made possible by strong, long-term funding for the Internal Revenue Service. The IRS is tasked with developing, administering, and enforcing tax guidance, including for the IRA’s clean energy tax incentives – and all of those responsibilities take resources. The IRA’s investments in the IRS are helping fund these core functions, as well as new capabilities, such as the Energy Credits Online portal for the electric vehicle credits. Maintaining IRS resources in the years to come will be critical to continuing the climate and economic progress that we have made to date.

Thank you.

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Total Consumer Savings on Fuel and Maintenance of Up To $6.3 billion; Estimated Fuel and Maintenance Savings of $18,000 to $24,000 Over Life of Vehicle 

WASHINGTON – Today, the U.S. Department of the Treasury and IRS announced consumers have saved more than $2 billion in upfront costs on their purchase of more than 300,000 clean vehicles since January 1, 2024, marking a major milestone in the Biden-Harris Administration’s work to lower transportation costs for Americans. 

Consumers could save $1,750 annually on average on fuel and maintenance costs, according to a 2022 analysis by Energy Innovation, which would total $21,000 of discounted savings over the typical 15-year lifespan of a vehicle compared to a comparable gasoline vehicle.^[1] For the more than 300,000 vehicle sales that have used the upfront discount to date, this equates to around $525 million annually on fuel and maintenance costs and up to $6.3 billion in costs over the life of the vehicles.

Since the passage of President Biden’s Inflation Reduction Act, the U.S. has experienced significant growth in the clean vehicle industry. In 2023, the U.S. saw around 1.5 million passenger clean vehicle (battery electric, fuel cell, plug-in hybrids) sales – the highest annual total ever, and a 50% year-over-year increase from 2022. Today’s announcement demonstrates the significant related cost savings Americans are benefitting from as a result. 

“The Biden-Harris Administration’s Inflation Reduction Act is lowering upfront costs for electric and plug-in hybrid vehicles, saving Americans more than $2 billion since January. These savings are giving consumers new choices and helping automakers and dealers to attract new customers and grow their businesses,” said Secretary of the Treasury Janet L. Yellen. “Consumers will save an average of $21,000 on fuel and maintenance over the lifetime of their vehicles and be protected from the volatility of gasoline prices.”

The Inflation Reduction Act created a mechanism to transfer the 30D clean vehicle credit of up to $7,500 and 25E previously owned clean vehicle credit of up to $4,000 to registered dealers. This mechanism gives consumers a significant upfront discount and extends the reach of the credits by making the credit available at the point of sale rather than when buyers file their taxes. Researchers have found that consumers overwhelmingly prefer an immediate rebate at point of sale. 

Since this mechanism went into effect on January 1, 2024, more than $2 billion in financial benefits to consumers at the point-of-sale have been realized through the clean vehicle advance payment program for both new clean vehicles and used clean vehicles. Of the more than 300,000 advance payments that have been issued, more than 250,000 are for tax credits related to new clean vehicles. The option to transfer the tax credit to the dealer is very popular, with 93% of new clean vehicle transactions and more than 85% of used clean vehicle transactions reported through IRS Energy Credits Online involving a transfer of the credit to the dealer.

Building on analysis from Energy Innovation Policy & Technology, Treasury’s Office of Economic Policy estimates that, when discounting expected annual savings over the 15-year lifespan of a vehicle, owners of electric vehicles will save $18,000 to $24,000 more than if they had purchased a comparable gasoline vehicle instead. Fuel is the largest contributor to these savings.^[2] Although both gas and electricity costs vary markedly by geography, fuel costs per mile are typically substantially lower for electric vehicles than for similar gas-powered vehicles. For example, for a set of cars that have both electric and gas-powered versions, as of June 2024, the average gasoline cost per 1000 miles is $120 for the gas-powered versions, twice as much as the $60 cost for electricity per 1000 miles for the electric versions.^[3]

In addition, maintenance costs are typically 40% lower for EVs than for gas-powered cars.  According to the same report by Energy Innovation: Policy & Technology, vehicle maintenance costs are assumed to be roughly $0.06 per mile for EVs and $0.10 per mile for gas-powered cars, due in part to expenditures on engine oil, transmission service, spark plugs, and engine filters.

For more information on the Inflation Reduction Act’s clean vehicle tax credits, please click here.

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The United States takes action to defend and protect U.S. campaign and government officials from Iranian attempts to interfere in U.S. elections.

WASHINGTON — Today, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated seven individuals as part of a coordinated U.S. government response to Iran’s operations that sought to influence or interfere in the 2024 and 2020 presidential elections. Iranian state-sponsored actors undertook a variety of malicious cyber activities, such as hack-and-leak operations and spear-phishing, in an attempt to undermine confidence in the United States’ election processes and institutions and to interfere with political campaigns. The designations undertaken today pursuant to Executive Order (E.O.) 13848, complement law enforcement actions taken by the Department of Justice against a variety of Iranian election interference actors. 

“The U.S. government continues to closely monitor efforts by malicious actors to influence or interfere in the integrity of our elections,” said Acting Under Secretary of the Treasury for Terrorism and Financial Intelligence Bradley T. Smith. “Treasury, as part of a whole-of-government effort leveraging all available tools and authorities, remains strongly committed to holding accountable those who see to undermine our institutions.” 

In the summer of 2024, the U.S. government identified that the Government of Iran had been seeking to stoke discord and undermine confidence in the United States’ democratic institutions, using social engineering and other efforts to gain access to individuals with direct access to the presidential campaigns. Such activities, including thefts and disclosures, are intended to influence the U.S. election process. Since at least May 2024, Iran-based hackers have increased their malicious cyber-enabled targeting of the 2024 U.S. presidential election. These intrusions have been reported as the work of “APT 42” and “Mint Sandstorm” by private security firms.

Iranian Election Interference & Malicious Cyber-Enabled operations

2024 U.S. Presidential Election Interference

Since at least May 2024, Masoud Jalili (Jalili) and other Iranian Islamic Revolutionary Guard Corps (IRGC) members compromised several accounts of officials and advisors to a 2024 presidential campaign and leaked stolen data to members of the media and other persons for the purpose of influencing the 2024 U.S. presidential election, using technical infrastructure known to be associated with Jalili. Jalili is also responsible for malicious cyber operations targeting a former U.S. government official in 2022. In 2022, Jalili used spear-phishing in an attempt to compromise the former U.S. official’s personal accounts. 

OFAC designated Jalili pursuant to E.O. 13848 for being controlled by, or having acted or purported to act for or on behalf of, directly or indirectly, the IRGC, a person whose property and interests in property are blocked pursuant to E.O. 13848. 

In addition to his designation, the Department of Justice has unsealed an indictment charging Jalili and two IRGC co-conspirators and the Department of State’s Rewards for Justice program is offering a reward of up to $10 million for information on Jalili and his two associates for their attempt to interfere in U.S. elections.

2020 U.S. Presidential Election Interference 

Today, OFAC is also designating six employees and executives of Emennet Pasargad, an Iranian cybersecurity company formerly known as Net Peygard Samavat Company, which attempted to interfere in the 2020 U.S. presidential election. 

Between approximately August and November 2020, Emennet Pasargad led an online operation to intimidate and influence American voters, and to undermine voter confidence and sow discord, in connection with the 2020 U.S. presidential election. Emennet Pasargad personnel obtained or attempted to obtain U.S. voter information from U.S. state election websites, sent threatening emails to intimidate voters, and crafted and disseminated disinformation pertaining to the election and election security. In November 2021, OFAC designated Emennet Pasargad pursuant to E.O. 13848 for attempting to influence the 2020 U.S. presidential election, and five Emennet Pasargad associates pursuant to E.O. 13848 for acting, or purporting to act, for or on behalf of Emennet Pasargad.

In February 2019, OFAC designated Emennet Pasargad pursuant to E.O. 13606 for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, the Islamic Revolutionary Guard Corps-Electronic Warfare and Cyber Defense Organization. Net Peygard Samavat Company was involved in a malicious cyber campaign to gain access to and implant malware on the computer systems of current and former U.S. counterintelligence agents. After being designated, Net Peygard Samavat Company rebranded itself as Emennet Pasargad, presumably to evade sanctions and continue its malicious cyber operations.

DESIGNATION OF EMENNET PASARGAD EMPLOYEES

Ali Mahdavian, Fatemeh Sadeghi, and Elaheh Yazdi are employees of Emennet Pasargad and were named in a November 2023 U.S. Department of State Rewards for Justice program. Sayyed Mehdi Rahimi Hajjiabadi, Mohammad Hosein Abdolrahimi, and Rahmatollah Askarizadeh are also employees of Emennet Pasargad.

OFAC designated Ali Mahdavian, Fatemeh Sadeghi, Elaheh Yazdi, Sayyed Mehdi Rahimi Hajjiabadi, Mohammad Hosein Abdolrahimi, and Rahmatollah Askarizadeh pursuant to E.O 13848 for being controlled by, or having acted or purported to act for or on behalf of, directly or indirectly, Emennet Pasargad, a person whose property and interests in property are blocked pursuant to E.O. 13848.

SANCTIONS IMPLICATIONS

As a result of today’s action, all property and interests in property of the designated persons described above that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC. In addition, any entities that are owned, directly or indirectly, individually or in the aggregate, 50 percent or more by one or more blocked persons are also blocked. Unless authorized by a general or specific license issued by OFAC, or exempt, OFAC’s regulations generally prohibit all transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons. 

In addition, financial institutions and other persons that engage in certain transactions or activities with the sanctioned individuals may expose themselves to sanctions or be subject to an enforcement action. The prohibitions include the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any designated person, or the receipt of any contribution or provision of funds, goods, or services from any such person. 

The power and integrity of OFAC sanctions derive not only from OFAC’s ability to designate and add persons to the SDN List, but also from its willingness to remove persons from the SDN List consistent with the law. The ultimate goal of sanctions is not to punish, but to bring about a positive change in behavior. For information concerning the process for seeking removal from an OFAC list, including the SDN List, please refer to OFAC’s Frequently Asked Question 897 here. For detailed information on the process to submit a request for removal from an OFAC sanctions list, please click here.

Click here for more information on the individuals designated today.

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ONAMIA, MN – Today, U.S. Treasurer Chief Lynn Malerba traveled to the Mille Lacs Band of Ojibwe (Band) reservation in Minnesota to meet with Tribal leaders and community members to discuss the importance of Tribal general welfare, which enables Tribes to provide assistance to their Tribal citizens, economic recovery efforts supported by the American Rescue Plan Act, and access to capital and banking. 

During the visit, Treasurer Chief Lynn Malerba toured the Mille Lacs Wastewater Management, a wastewater treatment facility that services the community. The Nation invested American Rescue Plan State and Local Fiscal Recovery Funds (SLFRF) in the facility to improve water quality for Tribal members, fish and wildlife, conserve water, and to protect the Band’s economy.

The Treasurer also met with a tenant living in one of the Red Willow Estates townhomes. The Red Willow Estates, a 30-unit townhome community, also received SLFRF and benefitted from the Low-Income Housing Tax Credit. Built by an enterprise owned by the Winnebago Tribe of Nebraska, the new community includes Ojibwe-inspired landscapes and a raised-bed community garden area.

Finally, the Treasurer toured the Band’s Woodlands National Bank. Mille Lacs Tribal leaders explained that prior to having a bank in the community, a lack of access to capital and credit markets was creating economic disparities.

Under U.S.  Secretary of the Treasury Janet L. Yellen’s leadership, the Department has significantly increased its engagement with Indian Country to strengthen relationships with Tribal governments. The Department has facilitated key investments under the Biden-Harris Administration in Tribal communities, including deploying $30 billion to support Tribes through various federal programs, including $20 billion through the SLFRF. Additionally, this month the Department released proposed rules for implementing the Tribal General Welfare Exclusion. The proposed rules demonstrate the value of the government-to-government dialogue Treasury has prioritized and an unprecedented recognition of Tribal self-determination and self-governance in tax regulations, as described in a recent op-ed by U.S. Deputy Secretary of the Treasury Wally Adeyemo.

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As Prepared for Delivery

Introduction

Thank you to the ETA for inviting me here today to speak. My name is Laurie Schaffer, and I serve as the Acting Assistant Secretary for Financial Institutions at the Department of the Treasury. In my current role, I oversee a broad policy portfolio, encompassing banks, credit unions, fintechs, the insurance sector, cybersecurity and critical infrastructure protection, community development, and consumer protection. 

Since beginning this role, I have observed that the growing prominence of AI touches almost all aspects of my portfolio. AI holds the promise of facilitating innovation and modernization of financial services in product design, distribution, delivery, and cost.  These are good things, and we are united in our effort to promote the beneficial uses of technology.  At the same time, we must also acknowledge that the use of AI involves potential risks and challenges, including related to fairness and privacy.

Treasury has dedicated a substantial amount of time and effort to better understand the implications of developments in AI and their potential to alter our financial environment. Today, I look forward to discussing that growing understanding with you.

I will begin my remarks with a short summary of Treasury’s views about AI broadly and then turn to how we see AI risks and benefits when the technology is applied in financial services, particularly in consumer lending and insurance spaces.  I will then highlight a few of Treasury and the Biden-Harris Administration’s key ongoing efforts to continue to evaluate the impact of AI in the financial services sector.

AI and Market Innovation

The use of AI technologies has been commonplace in the financial services industry. From early rules-based AI models like automated telephone customer service, to automated or algorithmic systems within trading markets, to the machine-learning based systems that assist in fraud detection, to the AI systems that allow us to deposit handwritten checks directly from our phones, financial services companies have implemented emerging technologies to the great benefit of their business models and their customers. 

Treasury sees the promise that AI technologies have to assist in creating a more functional, efficient, and accessible financial services industry. In fact, Treasury’s own Bureau of Fiscal Service implemented an enhanced fraud detection process utilizing AI at the beginning of the 2023 Fiscal year and has recovered over 375 million dollars as a result of that implementation.

Recent advances in computing capacity and the latest developments in AI like generative AI, represent a dramatic step up in AI capabilities. New AI models can ingest a wide range of data, generate personalized content or services based on that data, and have greater ability to self-adjust and automate decision making. All these new capabilities, when applied to the sector, could create opportunities to make financial services less costly and easier to access. 

Policy makers are not starting from zero when thinking about how to best balance the risks and the opportunities presented by advancements in AI technologies.  Policymakers have experience with changing technologies and have developed regulatory frameworks focused on building guardrails for the sector regardless of the underlying technology used.  I believe that this mindset of “technology neutral” regulation continues to guide policymakers as we look forward at the next generation of AI technologies. 

I’ve articulated some of the promises of AI, but I’d like to dedicate the next few minutes to discuss its potential risks.

Risks in AI in Financial Services

When thinking about the risks associated with AI, I find it helpful to categorize them into three main areas: 1) risks resulting from the design of the AI tool or system; 2) operational and cyber risks; and 3) risks arising from how humans use or deploy AI. 

First, risks related to the design of an AI tool or system can stem from the model, or the process by which an AI tool translates data into useful predictions, or from the data itself.

In the case of data, the quality and volume of available data will likely determine the quality of the tool’s resulting analysis. Without sufficient high-quality data, a model is very unlikely to create useful or reliable predictions. As a result, AI requires a very large amount of data from different sources, and gathering that data can create problems regarding data quality, availability, and privacy. Additionally, training a model on historical or low-quality data may perpetuate existing bias represented in those data sets due to, for example, a lack of representation of minority populations. Therefore, it is incredibly important that data used for models is clean, robust, and free of bias.

In the case of the model, Machine Learning systems do not always have transparent reasons as to why the system generates a specific output. This explainability or “black box” problem can produce, and possibly mask, biased or inaccurate results. Those flawed results could, in turn, create a host of risks, including consumer and investor protection issues.  

The second category of risk I mentioned has to do with operational and cybersecurity risks related to the adoption of AI. Recent advancements in AI have been made possible by increases in processing power and data storage capacity. With advancements in cloud computing and cloud storage, many financial institutions will likely rely on third parties cloud services to provide processing and storage for their AI systems or will opt to use an AI system developed entirely by a third party. The involvement of third parties could reduce a firm’s visibility into their AI models, and potentially contribute to a consolidation of dependencies on AI/cloud service providers. Additionally, as GenAI tools become more widely available and easier to use, larger groups of threat actors can effectively leverage these tools for cyber-attacks, fraud, or other adversarial actions.

The third category of risk I’d like to highlight today is risk arising from the interaction between the AI tool and human stakeholders. Even well-designed AI systems, if misused, can create incorrect and potentially harmful outcomes. It is important for the individual or group utilizing an AI tool to understand the underlying assumptions of that specific AI model. In addition, the adoption of AI technologies may tempt businesses to overly rely on the outputs of these systems, particularly in spaces where speed is key and human intervention opportunities are limited. When considering these situations, we must remain aware that humans are ultimately responsible for the output of these models, and risk-mitigation efforts should account for that.

I will now move on to how the AI risks and opportunities I mentioned manifest in particular contexts. As you will see, many of the risks permeate across different sectors and, as a result, require significant attention and monitoring. 

AI in Consumer Finance

Beginning with consumer finance, the use of AI for credit underwriting and scoring has received significant attention recently and serves as a useful example of the potential benefits and risks of AI when used in consumer financial products.

The CFPB has indicated that around 45 million consumers lack a credit score from one of the major credit reporting agencies. Traditional credit scoring methods may exclude potentially creditworthy borrowers because of reliance on a static range of data inputs and, in part because reliance on historical data may perpetuate bias.  As we have seen in the past several years, new market entrants such as fintech firms have utilized AI or Machine Learning driven technologies that look at a wider range of data, such as cash flow data, to arrive at different credit analyses that could broaden access to consumer credit. The Department of the Treasury’s November 2022 report titled “Assessing the Impact of New Entrant Nonbank Firms on Competition in Consumer Finance Markets” noted this phenomenon and cited some research that indicated that these models may indeed improve access – providing cheaper funding and to a broader range of customers, including minority borrowers – and perform at least as well as traditional credit scoring in predicting behavior. 

At the same time, because these alternative credit scoring tools rely on a greater amount and variety of consumer data, they may also present increased risks regarding consumer privacy and security. First, historical data – whether used in traditional modeling or AI – may embed historically biased outcomes. A lender’s reliance on such historical data may be particularly problematic if the reasoning of a model is not clear, and if a decision may result in a consumer being denied service or credit in wrongful ways. 

Second, Machine learning models use many more variables to assess creditworthiness than traditional methodologies, and much of the data used to develop these models is nonfinancial. Treasury’s November 2022 Fintech report that I mentioned earlier highlighted how this data use within consumer lending could pose broad societal surveillance and privacy risks, observing that including alternative data on consumers’ non-financial behavior in financial decision making could lead to growing amounts of consumer behavior being subject to commercial surveillance, which could have far-reaching and unpredictable effects.

Finally, the “black-box” problem of some AI tools that I mentioned earlier also raises concerns regarding compliance with existing fair lending laws if disparities are reflected in the data and/or an institution can not explain the basis for an adverse action underwriting decision.

As policymakers look more carefully at the risks and benefits of these products, they will need to analyze how they perform in comparison to traditional credit analysis techniques and will also need to ensure that these new processes are properly accountable to their consumers.

AI in Insurance

I’d like to now turn to AI’s effects on the insurance industry. In surveys conducted between 2022 and 2023, the NAIC’s Big Data and Artificial Intelligence Working Group found that 88 percent of surveyed auto insurers and 70 percent of surveyed homeowners insurers use, plan to use, or plan to explore using AI or Machine Learning. With such an expanding focus on the use of AI in insurance, it is critical to ensure that the application of these technologies does not perpetuate unequal treatment.

AI has the potential to increase the efficiency and lower the cost of nearly every aspect of the insurance business, including claims handling, underwriting, customer service, marketing, fraud detection, and ratings.  Such benefits from AI could reduce insurance protection gaps by improving the availability, affordability, and accessibility of insurance. On the other hand, a lack of opacity and explainability in both AI models and in the data fed into predictive models means that it is difficult to know if decisions reflect accurate risk assessments or if they perpetuate biases in its decision-making process and outcomes.   

For example, life insurers are also increasingly using AI to accelerate their underwriting process.  Concern has been expressed that AI could quickly identify an applicant’s health risks and corroborate information in lab reports or tests, skipping the medical exams and slow “back and forth” exchange of information typical in a traditional underwriting process.  We are not suggesting that any company is doing this now but this is an area of concern.  If an AI model is trained on data with biases, it is likely to perpetuate them in its decision-making process.  For example, algorithmic bias in AI may unfairly calculate higher premiums for a specific racial group with historically higher mortality rates, even if individual risk factors differ. 

Insurers and regulators can take important steps to better protect consumer privacy through adherence to consumer notification and consent requirements, data retention and deletion policies, data sharing agreements, and data security protocols. Further, by requiring transparency in AI algorithms—through data source tracking, audit trails, or other methods—insurers and regulators can better assess AI systems’ accuracy, fairness, and suitability.

Administration Efforts on AI

Finally, I’d like to conclude my remarks today with a few examples of Treasury’s work to understand and address the risks of AI while fostering responsible innovation in the financial sector. 

As many of you know, in 2022, the White House released a Blueprint for an AI Bill of Rights, in January 2023, the National Institute of Standards and Technology developed an AI Risk Management Framework, and in October 2023, President Biden issued a landmark Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence to establish new standards for AI use. This Executive Order supports a regulatory approach to AI that is intended to ensure its safety and security; promote responsible innovation, competition, and collaboration; advance equity; protect American workers; protect the interests, privacy, and civil liberties of American consumers, and advance American technological and economic leadership.

Following the publication of this Executive Order, Treasury released its AI report in March of this year, Managing Artificial Intelligence-Specific Cybersecurity Risks in the Financial Services Sector. This report outlines best practices and a series of next steps to address immediate AI-related operational risk, cybersecurity, and fraud challenges, and is intended to catalyze further work and collaboration that responds to the risks I’ve mentioned today.

For example, the report identifies and explores recommendations for ensuring high-integrity data. Treasury met with a wide array of organizations and financial firms to collect feedback on a host of topics, including data.  Several of those firms stated that they would benefit from standardized practices concerning the mapping of data supply chains, and proposed a standardized description, similar to a nutrition label, for vendor-provided GenAI systems to clearly identify what data was used to train a model, where it came from, and how any data submitted to the model will be incorporated. Treasury is now working with the financial sector, the National Institute of Standards and Technology, and the Cybersecurity and Infrastructure Security Agency to identify whether such a solution should be explored further.

The report also articulates the need for an appropriate comprehensive framework for the testing and audit of black box AI solutions. This framework would help guide firms through the critical steps to assess inputs, outputs, training of models, and the underlying models themselves. Such a framework should be repeatable and scalable to firms of varied sizes and complexity, and the report recommends that the financial sector collaborate to align with frameworks like NIST’s AI Risk Management Framework and to create sector specific standardized strategies for managing AI-related risk.

While the AI Cybersecurity Risk Report stands as a substantial effort towards responding to the President’s Executive Order, Treasury’s work does not stop there. Treasury is continuing its stakeholder engagement to improve our understanding of AI in financial services. Treasury issued a public request for information to seek comments from financial institutions, technology companies, advocates, consumers, academics, and other stakeholders on the uses and potential impacts of AI in the financial services sector and on the opportunities and risks presented by new developments and applications of AI in the sector. 

Through this RFI, Treasury seeks to further its understanding of the uses, risks, and opportunities of AI, including potential obstacles for facilitating responsible use of AI within financial institutions, the extent of the impact on consumers and other end-users through the use of AI by financial institutions, and potential gaps in legislative, regulatory, and supervisory frameworks related to AI risk management and governance.  

Treasury received a broad range of perspectives on this topic and is currently reviewing the over 100 comments we received, including a comment from the ETA. Thank you to all in this room whose organizations returned comments responding to this request, these insights will inform our work moving forward.

Finally, on insurance specifically, the Federal Insurance Office just conducted a roundtable on AI in the Insurance Sector on Tuesday. The insights gathered at this forum will guide the Office as they continue to monitor the sector and gather information on potential best practices.

Closing

Let me close by thanking you again for having me here today. Events like this one today are critical to moving the dialogue on AI forward and to ensuring that agencies are prepared for the days ahead. The Treasury Department will continue to monitor the use of AI in financial services, and we are committed to the responsible innovation and appropriate regulation of technologies that are accurate and fair, protect privacy and security, and advance the financial wellbeing of the American people.

Thank you.

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