Banker's Digest

Banker's Digest

A Moving Target: Stepping Up The Fight Against Financial Crime

109.2台灣銀行家雜誌第122期 / By Olga Rakhmanina

A Moving Target: Stepping Up The Fight Against Financial CrimeBankers Digest
International policymakers and national regulators are intensifying their efforts to prevent criminal abuse of the financial services industry. Recent money laundering scandals have highlighted the limitations of the existing framework and pointed out yet again the loopholes that require urgent and coordinated action. International co-operation, transparency and information exchange are essential elements in the struggle against financial crime, but significant challenges remain in changing the status quo.The global fight against financial crime is intensifying as exploitation of financial services industry for laundering criminal proceeds continues unabated. The United Nations Office on Drugs and Crime estimates that between 2% and 5% of global GDP (€715 billion to €1.87 trillion) is laundered annually around the world . However, only a small fraction of this – just 1% by some calculations – is seized and frozen . The numbers are staggering and there is a risk that regulators, firms and the society at large fail to see a bigger picture: Facilitating financial crime helps the underlying criminal activities, including corruption, drug smuggling, terrorism, sexual exploitation and human trafficking, to continue without hindrance. The human cost and impact on the society are incalculable. When misconduct is suspected, firms suffer too as share prices collapse and industry reputation takes a hit. In extreme scenarios, companies go out of business as they incur regulatory fines and penalties: Fenergo, a provider of client lifecycle management solutions, estimates that regulators imposed nearly US$26 billion in fines for anti-money laundering (AML) and sanctions violations in the decade following the collapse of Lehman Brothers. It adds that major financial institutions’ annual spend on financial crime compliance stands between US$900 million and US$1.3 billion . Effectiveness of this spending is far from obvious, however.The ongoing investigation into Danske Bank, the largest bank in Denmark, has revealed the unprecedented scale of illicit transactions routed through its Estonian operations. According to Bloomberg, a considerable share of €200 billion which went through the branch was suspicious . Other large names in the region, such as Swedbank, Nordea and ING, have been in the spotlight too. Most recently, another instalment of financial drama from Australia has rocked the industry when the AML regulator AUSTRAC applied to Federal Court for civil penalty orders against the country’s second largest bank Westpac for allegedly breaching AML laws on more than 23 million occasions, some of which were linked to child exploitation in the Philippines and South East Asia .Global Solution For A Global ProblemThe current global framework for combating money laundering activity has long been criticised for being too constrained by national borders rendering it ineffective in dealing with the international nature of criminal activities, which tend to move across borders and economic sectors. Data is gathered, analyzed and acted on primarily at the national level thanks to the restrictions on information exchange between authorities located in different jurisdictions. International corporations struggle too as offices in one country often find themselves unable to share intelligence with their overseas operations which significantly restricts their ability to build a full picture of customers and their transactions. The EU’s AML framework is enshrined in the Anti-Money Laundering Directives (the fifth revision is due to be implemented by January 2020 ), but their transposition and application are left to Member States. This creates a patchwork of regulatory regimes which differ in the level of expertise, scrutiny and effort. The recent string of scandals has highlighted the limitations of the current framework where there is no single point of oversight and enforcement. In December 2019, EU’s Finance Ministers therefore agreed to consider conferring enhanced regulatory responsibilities to a EU-wide body . This has been on the cards for some time: France, Germany, Italy, Latvia, the Netherlands and Spain have already articulated their vision in a joint position paper earlier this year: ‘Establishing a central supervisor that can supersede national supervisors and can independently conduct supervision is necessary to ensure consistent and effective European ML/FT supervision’ . It remains to be seen if this becomes a blueprint of sorts for international co-operation in regulating financial institutions across the world. Critics point out that a new body would create unnecessary bureaucracy; instead, the focus should be on facilitating better information exchange between the stakeholders. According to The Economist, ‘hundreds of dubious clients jettisoned by Danske when regulators closed in were scooped up by rivals apparently unaware of their toxicity’ . Sunlight Is The Best DisinfectantIndeed, experts concur that success of AML efforts rely to a large extent on effective data sharing mechanisms. A recent White Paper by Deloitte, a consultancy, and Institute of International Finance (IIF), a global financial industry association, stated that ‘the limitations imposed by existing information sharing rules are entirely at odds with the realities of criminal operations, which are not bound by – and indeed actively exploit – international borders to evade civil and criminal sanctions' . The authors urge policymakers to align legal frameworks for data protection, privacy and bank secrecy as well as rethink how information gained through suspicious activity reports is managed and distributed. The paper highlights, for example, the benefits of typology reports and geographic indicators which help prioritise regulatory focus on particularly risky areas. If such information can be shared across the borders and sectors, it would significantly boost the international effort in fighting financial crime by enabling financial institutions and law enforcement agencies to act in a coordinated manner. This is a long way off, but significance of effective data exchange mechanisms should not be underestimated. As Ravi Menon, managing director of Monetary Authority of Singapore (MAS), put it in 2018: ‘We need common data standards across countries so that data can move freely in the environment of trust and security… In the digital economy of the future, data connectivity agreements among countries will become as important as today's free trade agreements’ .One area where pooling data is particularly essential is customer due diligence, which financial institutions currently perform in silos without access to the information held by other organisations. Creating utilities where a single, but comprehensive and consistent, entry can be held on individuals and businesses, would considerably reduce the time and effort spent by firms on collecting data every time customers come into contact with the financial industry. Most importantly, this will support a more meaningful fight against financial crime as organisations will have access to the records comprising the industry’s entire intelligence. A number of initiatives around the world are already trialling this approach. In November 2019, MAS said that it would re-launch its electronic know-your-customer (KYC) project, which was previously abandoned due to prohibitive cost associated with the implementing technology . Six Nordic banks, including Danske Bank, DNB, Handelsbanken, Nordea, SEB and Swedbank, announced in July 2019 the establishment of a joint venture company which will provide a platform for handling corporate clients’ KYC data. The press-release announcing the launch said ‘the objective is to improve customer experience by simplifying the KYC processes for corporate customers while strengthening financial crime prevention in the Nordics’ . Some time later Bloomberg reported that a number of Dutch banks are also exploring the possibility of a joint venture to monitor transactions and share information about them . Lifting The Corporate VeilKnowing your customers and understanding the source of their wealth have become a business imperative but there are significant challenges in accomplishing this task, particularly in relation to legal entities. Complex company structures often exist to conceal the actual ownership of the assets and facilitate criminal activity. Publication of Panama papers, for instance, has highlighted how wealth can be parked under the cover of multilayered corporate arrangements used to confuse law enforcement agencies and investigative journalists alike. This made the efforts to increase transparency of beneficial ownership – to expose those who actually control the assets – ever more so pressing.To be sure, FATF Recommendations already require countries ‘to take measures to prevent the misuse of legal persons for money laundering or terrorist financing… and to ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons’ . The Group of 20 has also previously identified this area as high priority and – with the ambition of leading by example – it developed a set of principles for countries to ensure transparency of legal persons and arrangements . However, as FATF’s own recent report concludes, ‘jurisdictions find it challenging to achieve a satisfactory level of transparency’ . The paper suggests that countries do not apply a sufficiently diversified approach to increasing transparency opting for just one mechanism for capturing information on beneficial owners, which significantly limits effectiveness of their efforts. Other challenges include poorly maintained records so that information – once it has been obtained – is either inaccurate or simply out-of-date. The lack of effective and dissuasive sanctions also fails to focus corporate minds as the issue drops down the priority list.Deloitte and IIF’s White Paper echoes these concerns and particularly highlights the issue of public registries often lacking the necessary financial and human resource to verify the information on beneficial owners. According to the Global Witness, an international NGO, the UK was the first country to launch a register of companies’ beneficial ownership in 2016, but its effectiveness is restricted by the limited scrutiny applied to the information submitted by legal entities . UK Government’s own review of the register’s implementation has revealed that law enforcement organisations and financial institutions found the register to be a somewhat unreliable source of beneficial ownership details ‘due to concerns about the quality of information’ . Brave New WorldThese longstanding problems are compounded by advances in financial innovations, such as cryptoassets and associated infrastructure which supports their exchange. FATF has reiterated on multiple occasions that new products can deliver significant social and economic benefits, including through supporting financial inclusion and facilitating cross-border remittances. Together with the broader community of policymakers, however, it also highlights new cryptoassets’ exposure to the risk of money laundering and terrorist financing because of the anonymity and ease of cross-border movement features they offer. Europol, the EU’s law enforcement agency, estimated in 2018 that £3-4 billion is laundered annually through the use of cryptoassets in Europe. Whilst still a small fraction of total funds laundered (estimated to be at £100 billion), the organisation warns that the activity is growing and is quickly becoming a concern , especially as traditional financial system is becoming less attractive to criminals thanks to strengthening of AML scrutiny frameworks. The last couple of years have seen significant activity in the area as policymakers and supervisors around the world are trying to establish workable mechanisms for regulating cryptoassets to protect consumers and safeguard market integrity. The majority of focus has so far been on businesses that provide services related to virtual assets, such as exchange, storage or transfer capabilities. The progress has been slow, however, and not in keeping with the rate of financial innovation. In its recent guidance, FATF noted that whilst ‘some governments are considering a range of regulatory responses … many jurisdictions do not yet have in place effective AML/CFT frameworks’ . In many cases, countries need to revisit their laws and regulations and potentially redraw the regulatory perimeter which requires both time and human resource. Yet, consistent approach to the regulation of new technology across the world is essential to avoid loopholes which can be exploited by criminals. And once again, cross-border co-operation – rooted in effective information exchange mechanisms and KYC capabilities – is key to the successful fight against financial crime.


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