By Vish Gain for AMLi
NOW THAT THE year that must not be named is finally behind us, it’s time to truly gear ourselves for the new one ahead. 2021 is a crucial year for the world’s collective fight against financial crimes, with the pandemic having accelerated criminal use of technology to exploit financial institutions’ sustained move onto the online space.
While some professionals are eager to see the effects of significant changes in the AML space such as Europe’s plan to establish a single rule-book for the bloc, implementation of the 6th money laundering directive, and the spectacular rise of Bitcoin and other cryptocurrencies, others are contemplating the political ramifications of changes in the US sanctions regime, the musical chairs game of FATF’s colour-coded lists, and of course, a post-Brexit Europe.
Yesterday may be history but tomorrow need not be a mystery. We spoke to three of the top minds in the AML/FCC space, Federica Taccogna of FTI, Rob Leslie of Sedicii and Sujata Dasgupta of Tata about their predictions of the biggest stories and trends that will shape the financial crimes world in 2021.
We also learn more about Privacy Enhancing Technologies (PETs), more transparency, big fines, AI, and of course, crypto…
Federica Taccogna
Senior Managing Director (Partner), Financial Services, FTI Consulting
What’s the top story? The operationalisation of the EU-level financial crime watchdog and greater integration into prudential approaches are extremely welcome moves. Firstly, because financial crime transcends jurisdictions and transnational cooperation/central coordination is key to our collective success in fighting it. Secondly, because large-scales failures of recent times have taught us that supervisors often missed, in their routine prudential supervision, AML/CFT red flags that could have prevented or mitigated the impact of those failures.
More enforcement. There will be more fines and wider enforcement action — continuing on the theme of 2020. With continuing international pressure, I do not see the trend reversing, in particular with the 6th AMLD coming into force.
Shadow banking systems. Criminally owned networks/shadow banking systems. They already dominate the world of financial crime. Supervisors and enforcement agencies are, however, becoming increasingly more aware of them and more capable of identifying them and this is an area that will receive a lot more attention in 2021.
What can we hope for? Better approaches to authorisations/licensing and companies’ registration. 2020 has seen the general public become more aware of how shell companies are used to facilitate financial crime. 2021 will hopefully see greater transparency on beneficial ownership but also greater/more probing due diligence on the part of companies’ registries (e.g. Companies House in the UK). I also hope regulators realise the need to probe more and better when giving licences. The number of individuals with concerning backgrounds who own and control their (own) network of banks, PSPs, e-money businesses and other financial institutions is alarmingly on the rise.
Rob Leslie
CEO, Sedicii Innovations Ltd.
What’s happening this year? First, tougher regulations for cryptocurrencies and Virtual Asset Service Providers (VASPs) are coming. FinCEN has already signalled as much with a 15-day public consultation – announced just before Christmas. The timing of the announcement delivers a very strong message – on top of the fact that it came right at the start of the extended holiday period – which will limit the number and extent to which the public and industry will be able to respond. Besides, the UK issued rules in January 2020 that require existing businesses engaged in crypto asset activity in the UK to register with the Financial Conduct Authority before they start operating. If they are not registered by January 10, they will have to cease activity.
The rise of digital and AI. We will also see a significant increase in activity using electronic evidence instead of paper-based documentation for KYC and AML monitoring. Digital onboarding is here to stay and is becoming mainstream. This has been forced on many organisations as a consequence of the pandemic simply because manual, paper-based processes are no longer fit for purpose. Traditional KYC processes are heavily dependent on human involvement which take time, are expensive to perform, and prone to costly mistakes. To overcome these barriers, new technologies are being employed that utilise artificial intelligence and a new class of cryptography called Privacy Enhancing Technologies (PETs) that allow processing of data across organisations without compromising the confidentiality of the data any organisation holds itself. This is likely to be transformational as it will enable perpetual KYC to become possible for the first time.
Increased transparency. With the passing of legislation in December in the US to make it a requirement that all beneficial owners of companies are identified, a clear signal is being sent that surveillance of shell companies is going to be ramped up. Transparency in corporate ownership structures — or the lack of it — is a mechanism that facilitates the use of corporations for illicit purposes that can include money laundering and other criminal activity. By allowing anonymity around ownership structures a green light is being shown to anyone who wishes to engage in potential criminal activity while minimising the likelihood of getting caught. This is changing. The UK, through Companies House, has already passed legislation requiring beneficial ownership information to be submitted to the register. With the further reform of Companies House likely to see all directors and shareholders formally identified, further strengthening of the registration processes will happen. This can only serve to enhance trust in the system.
A year of penalties. We say this every year and this year will be no different. Firms will come under more scrutiny than ever to ensure they comply with all the laws and regulations that apply to them. Failure to comply will see even harsher penalties being levied which will include the possibility of personal criminal sanction, potential fines and jail time, as has been evidenced by a recent case in the Netherlands. A Dutch court has recently ordered the public prosecutor to open an investigation into the activities of a former senior executive at ING and his role in the bank’s failure to comply with anti-money laundering rules that resulted in a €775M settlement by the banking group.
Eyes on Europe. At an EU level, we are likely to see sustained and concerted efforts by the European Commission, under Commissioner Mairead McGuinness, to develop a proper harmonised system of anti-money laundering rules in Europe. This will make the application and enforcement activity more likely to deliver results and for FIU’s to act with more speed and precision across all the countries within the European Union.
Sujata Dasgupta
Global Head, Financial Crimes and Compliance Advisory, Tata Consultancy Services
The ‘X’ factor. The rigours of KYC due diligence are expanding both horizontally and vertically. FIs are now required to monitor not just customers, but also several other associated parties like employees, vendors, contractors, fintech and channel partners and so on. These various parties form the ‘Xs’ on the horizontal scale, considering the broadened scope. In case of customers, due diligence has become a lot more focused and stringent for each category, e.g. retail, corporate, small & medium enterprises (SMEs), money service businesses (MSBs), charities, correspondent banks and so on. These form the ‘Xs’ on the vertical scale, considering the depth of customer focus required for each niche category.
Dynamic due diligence. In today’s dynamic digital world, waiting for 1, 3 or 5 years to review and refresh customer data exposes FIs to risks of outdated customer information in the interim. This in turn impacts monitoring of customers and their activities without their accurate information. Compelling conversations have started gaining momentum on conducting near-real-time reviews of customers and their activities, based on dynamic event-based triggers. This mechanism of incremental updates to the customer profile every time there is an identified material change, gathered from internal or external data sources, promises to keep customer risk profiles dynamically current. Perpetual, dynamic KYC is most certainly going to be a best practice in the next few years.
Artificial Intelligence. With growing transaction volumes and complexity of financial crimes, purely relying on a manual investigation is turning out to be ineffective and inefficient. Leveraging advanced technology driven by data and powered by AI to generate insights on the alerts can enable Analysts to review the holistic information on the entity, hidden networks, risk scores across multiple dimensions and so on. This can enhance the quality of alert decision-making and case closure within a reduced turnaround time.
PETs to enable secure FinCrime intelligence sharing. Data privacy regulations, like GDPR in Europe, restrict sharing of customer information among FIs without the formers’ consent. While Regulators are working on ways to resolve this conflict, innovations on privacy enhancing technologies (PETs) have delivered positive results in secure encrypted information sharing without revealing the underlying customer PII data. While the world awaits Regulators’ guidance on data sharing in this context, technology is providing a way around this constraint.
AML analytics. Financial institutions design their own AML models, with scenarios and thresholds completely based on each FI’s risk appetite, except for the specific cases where regulations mandate a threshold. With collaboration among FIs increasing in the fight against financial crimes, the time is mature for them to share insights on AML model performance and use results from multiple FIs to finetune and optimize their models.
Data sharing. Information sharing on financial crimes has been a subject of active discussion during the past 2 years. FATF provided a boost to this initiative recently with promises to drive the agenda of PPP (public-private partnership) collaboration on FinCrime intelligence sharing. Australia’s Fintel alliance, UK’s JMLIT (Joint Money Laundering Intelligence Taskforce) and Estonia’s AML Bridge are some of the initial yet auspicious steps in this direction. Such initiatives are being explored in several other countries like the US, Lithuania, Latvia and Belgium already, and we expect to see such collaboration being emulated across other regions as well in the next few years.
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