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An increasingly globalised business environment, coupled with a growth in technology, continues to increase the risk of financial crime for all institutions.
With this in mind, our Regulatory Compliance Consulting team have identified what they see as the key financial crime threats and issues that should be of focus for Heads of Financial Crime, Money Laundering Reporting Officers, Compliance Officers and members of management. Some of these are emerging themes, whilst others are more traditional areas where we continue to see issues in control and risk management.
Over the next few weeks, we will be exploring each of these themes in more detail. If you would like to receive updates, please register here.
The need for heightened regulatory overhaul and scrutiny is leading regulators to take a tougher stance on financial crime when dealing with financial imprudence. This has been highlighted by an increasing number of s166 Skilled Person Reports being required in the UK. Furthermore, the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is due to deliver its final report in February. It has exposed deficiencies in operational policies, procedures and controls, which will have implications for financial crime now and in the future.
One significant trend in 2019 is the prospect of increased information sharing between financial institutions. This is a key component of the recommendations set out by the Financial Action Task Force (FATF). We have already seen initiatives taken by the Joint Money Laundering Intelligence Taskforce in the UK and the FinCEN Exchange in the US and the benefits of voluntary public-private sharing partnership among law enforcement, financial institutions and organisations aimed at effectively and efficiently combating money laundering, terrorism financing, organised crime and other financial crimes.
Turn on the TV, jump on social media or simply read the newspapers and you will note the level of uncertainty regarding changes in legislation and regulation in the run up to Brexit. FCA Chair Charles Randall has warned that the UK will be unable to manage the risks of financial crime under a no-deal Brexit, emphasising the critical role played by cross-border data sharing agreements with EU member states. There is uncertainty about whether there will continue to be alignment in areas such as AML and sanctions regulations between the UK and EU post-Brexit. Consequently, the UK enacted the Sanctions and Anti-Money Laundering Bill in 2018, which will give the UK power to introduce its own AML and sanctions legislation post-Brexit.
There is increasing political tension between the US, EU, Iran, China and Russia (and their allies), which is enhancing the scope and breadth of international sanctions. Sanctions have become a preferred tool to enforce change on foreign governments, but has led to a more challenging economic climate especially given the speed at which sanctions are being imposed or amended. We expect this landscape to become even more complicated in 2019. For instance the EU may seek to bypass US sanctions imposed on Iran by using trade finance tools. Such an effort would deepen a transatlantic rift and add a new level of legal complexity for anyone doing business with Iran.
2019 is a year where firms will need to get serious about AML compliance in relation to the regulation of cryptocurrencies and virtual assets. Given the unevenness of the cryptocurrency landscape, governments are making efforts to develop a global regulatory framework. Regulators in the Far East have already taken a proactive step in virtual asset regulation and Australia has passed an amendment to include digital currencies in their AML Act. What is particularly unclear is the effectiveness of any regulation with technology moving faster than the ability of authorities to keep up with the challenges with differing approaches across jurisdictions where digital currencies do not align with traditional jurisdictional boundaries. This may be aided by FATFs planned release of a set of international AML standards in June 2019.
Caution is needed with the growing reliance on RegTech and ArtificiaI Intelligence to monitor financial crime, as many entities in 2019 are automating their AML practices to reduce the number of false positives generated by legacy data and technology. However, there is an increased likelihood of missing genuine money laundering threats without human supervision and intervention. Furthermore the exposure to a data breach or cyber-attack is ongoing. Aligning information and cyber security together with data privacy and employee behaviour to reduce a siloed approach is essential to reducing the threats proposed by corporate and state espionage, which is becoming increasingly common.
There are concerns that legacy issues regarding Ultimate Beneficial Ownership (UBO) and source of wealth are widespread and many entities are deficient even before applying enhanced due diligence regulatory requirements. We expect 2019 to usher in additional UBO legislation which will become a prominent feature of the financial crime landscape. This will mean that firms will need to move beyond simple remediation to adopting aligned and efficient approaches that go beyond compliance to focus on enhanced experience for customers that can be a competitive advantage.
The proposed simplification of the AML laws in Australia, the addition of lawyers, accountants and real estate professionals will overhaul a regulatory environment which has seen little change since 2006. This, coupled with recent enhancements of anti-bribery and corruption requirements in line with global standards and greater protection for whistle-blowers, provides a perfect opportunity to reassess financial crime systems, controls and governance. The tendency just to add more layers has become ineffective and results in adverse outcomes for firms and customers alike. Using the opportunity of remediation to promote lasting change should be high on the agenda. This has been made more challenging by a shortage of financial crime skills in the job market, an issue which is also being impacted by decreased mobility due to stricter immigration controls in the US, UK and Australia.
© Norton Rose Fulbright LLP 2020