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Banks on the hitlist for UK’s anti-money laundering crusade


If the UK’s Financial Conduct Authority were to write a guidebook to help banks tackle money laundering – let’s call it ‘AML for Dummies’ – what would rule #1 be? How about: always perform due diligence on prospective account holders – especially when they present you with a suitcase containing more than £500,000 in foreign currency.

Standard Chartered could have done with this advice last year – and avoided a £102m fine by the regulators – but it would be unfair to single them out. The UK was top of the list of countries featured in September’s “FinCEN files” leak, confirming what regulators and banks already knew – the UK has become the world’s washing machine for dirty laundry.

Authorities are taking the problem seriously. In March Chancellor Rishi Sunak proposed a ‘financial crime levy’ on regulated companies to help fight fraud and, from January, crypto-asset derivatives were included in the FCA’s net of regulated transactions under 2017’s Money Laundering, Terrorist Financing and Transfer of Funds Regulations (MLRs).

The UK’s belated departure from the EU has given the regulators added momentum. ‘With the introduction of the Sanctions and Money Laundering Act 2018, the UK is seeking to carve out an independent sanctions policy, going beyond the EU’s position and driving forward its own agenda’, Neill Blundell, Head of Corporate Crime and Investigations at Macfarlanes LLP, told #Disruption Banking. The law will allow the UK to impose additional sanctions on suspected bad actors, and greater compliance demands on the financial industry.

Compliance with new laws, however, is a tricky thing. A major element of the EU’s 6th Anti-Money Laundering Directive, to be incorporated into the UK’s post-Brexit agenda, will be to allow criminal prosecutions on institutions which fail to prevent money-laundering.

It is easy to see why, in the context of the UK, such a law may be needed. Of the more than 460,000 Suspicious Activity Reports sent by UK banks to the UK Financial Intelligence Unit in recent years for suspicious transactions, the government’s Law Commission concluded that many were of “low-quality” and that many banks had a poor understanding of their reporting obligations, reporting less to assist the authorities than to avoid a law suit. Lacklustre cooperation makes the FCA’s jurisprudential job harder – and their results more embarrassing. A Financial Times report revealed shortly after the ‘FinCEN Files’ leak that it has so far failed to make a single criminal prosecution for money laundering this year and dropped half of its criminal investigations.

Michael Harris at the Financial Crime Compliance team at LexisNexis Risk Solutions told #DisruptionBanking that, in the long-term, ‘We need to move from a static compliance culture primarily designed to satisfy the regulator’ towards ‘a dynamic approach where financial institutions understand and recognise criminal behaviour much earlier in the customer relationship cycle’. A key takeaway from the FinCEN leak was the lethargy in reporting suspected crimes – an average time of 166 days between the first internal red-flag and an official report. A recent survey by defence firm BAE Systems also suggested that nearly three quarters of UK banks suspect money laundering is occurring under their watch – but go ahead anyway.

So a shuffling of priorities is clearly needed – but banks must also feel empowered to tackle the problem. Enter fintech. ‘Combining big data and human intelligence in equal measure, and broadening KYC capabilities, will go a long way to solve the issue’, says Harris.

RegTech for AML investment is already under way. Recent stories include Mastercard’s introduction of an AI-powered cybersecurity platform to protect client banks from fraudulent payments; and the ACA Compliance Group’s update to its flagship ComplianceAlpha product last month, which uses AI to improve data screening and customer due diligence through real-time access to international databases.

Firms will also have to consider organisational reforms – including better-funded internal investigation teams performing transaction reviews, and reporting directly to the FCA on suspicious activity.

The uptake in digital banking – accelerated by the coronavirus pandemic – has added an urgency to corporate efforts to harness technology. The FCA’s addition of crypto-assets to its list of regulated products is one symptom of the changing compliance landscape. Director of FinCEN Kenneth Blanco warned parties in September that the risks in this sector are no longer confined to virtual payments, and that “banks must be thinking about their crypto exposure as well”.

The FCA intends to ban the sale of crypto assets to retail customers from next year. But the retail world is a traditionally better-regulated sector. In the corporate world, the FCA’s new regulations will “likely improve its capacity to make civil and criminal convictions”, according to Alicia Griffin at Charles Russell Speechlys LLP.

Only time will tell, of course, whether the FCA will finally prosecute for a criminal fraud case in the next few years. The “public-private partnership” on money laundering touted by the government in recent years seems only to have produced new regulators with new laws to regulate – the founding of the Office for Professional Body Anti-Money Laundering Supervision in 2018; updates to the MLRs this year and next; and a new “levy” to raise and spend.

What is clearer, at least, is that Brexit is unlikely to hinder the UK’s international cooperation on money laundering. ‘Information sharing and mutual legal assistance between international enforcement bodies, inside and outside the EU, has been on the rise for many years and it will continue regardless of the UK’s formal relationship with the EU27 from next year’, says Blundell. ‘The far bigger challenge for the FCA is to build cases in this area capable of proceeding to criminal prosecution.’

That challenge must be met by the banks – and soon they’ll be getting used to a much bigger rulebook.

#AML #MLR #AI #Cybersecurity #FCA #FinCENFiles #FinCEN #SuspiciousActivities #Brexit

Author: Oliver Rhodes

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