1. Information sharing prepares to move beyond big banks One of the most promising AML compliance trends for 2019, is the prospect of increased information sharing between financial institutions. Considered a cornerstone of an effective AML/CFT framework, information sharing is a key component of the recommendations set out by the Financial Action Task Force (FATF). Early initiatives bringing together the public and private sectors such as the FinCEN Exchange in the US and the Joint Money Laundering Intelligence Taskforce in the UK have all shown that bridging the gap between different players makes a big difference.
While information sharing has seen success among regulators and banks, in 2019 we should start to see it become more prevalent amongst smaller financial institutions. To make sure that this trend is a success, however, a culture of collaboration needs to be cultivated, and supported by timely guidance from regulators. Various obstacles stand in the way of information sharing, not least the inconsistency of territorial regulation and privacy legislation, all of which will need to be resolved for this trend to really get going.
Willem Wellinghoff, MLRO at Shieldpay said that “Information sharing is of crucial importance to combat financial crime effectively. We have traditionally seen challenges in being able to share and obtain information with financial institutions due to the fear of tipping off and privacy related issues,” looking to the future he continued “FinTech and emerging technologies will play a vital role in shaping the sharing of information.”
“FinTech and emerging technologies will play a vital role in shaping the sharing of information.”
– Willem Wellinghoff, MLRO, Sheildpay
Tip: In 2019 different industry groups are likely to begin thinking about how they could share more information on financial crime. Help shape the conversation and future initiatives by getting involved in early discussions and work with regulators on sustainable ways of exchanging information.
2. Get ready for more information on Ultimate Beneficial OwnersSince the release of the Panama Papers, the many creative ways criminals use shell companies and offshore structures to hide their cash have become public knowledge. To counter this, in 2019 we expect ultimate beneficial ownership legislation to become a prominent feature of the financial crime landscape. The need to increase transparency around UBOs has long been moving up the agenda of policymakers and in 2018 was a focus of the G20 Summit, where leaders made clear a desire to implement ‘international standards and the availability of ultimate beneficial ownership information’.
We predict that the global focus on UBO transparency will ramp up in 2019 as a consequence of various legislative actions from the year that’s passed. The US continued its pioneering work around Geographic Targeting Orders (GTO) which will be extended well into 2019. The implementation also of the FinCEN Final Rule on Customer Due Diligence showed that the US is committed to increasing transparency of ownership. In 2018 the EU published the Fifth Money Laundering Directive which will make ownership registries, compiled under the Fourth Directive, publically accessible. In the UK, steps were taken to introduce ultimate beneficial ownership registers for companies in overseas territories by the end of 2020. Expect to see further progress in all of these jurisdictions in 2019.
Tip: Start thinking about how UBO information which will become available in the next few years will impact your compliance process. How will you incorporate it into the risk rating of different clients and how will this change your perception of their expected behavior?
3. AML rules for crypto-businesses and virtual assets become a standardAs global cryptocurrency adoption continues, 2019 will be the year that firms get serious aboutAML compliance. Authorities have wrestled with the AML risk crypto poses for years, with some territories, like Japan and Switzerland, adopting a considered approach allowing for trade and investment, and others, like China and South Korea, opting for tight restrictions on exchanges and mining.
The unevenness of the cryptocurrency landscape has prompted efforts by governments to develop a global regulatory framework. The FATF answered this call and will release a set ofinternational AML standards in June 2019. Beyond government intervention, Morgan Creek founder, Anthony Pompliano, suggests that crypto businesses themselves should be encouraging regulation in 2019, simply to “increase the addressable market for adoption”.
At a national level, Asian regulators are likely to continue to take progressive steps in the regulation of virtual assets. Keep an eye on the Monetary Authority of Singapore (MAS) who ramped up their engagement with the sector in 2018. The EU’s Fifth Anti-Money Laundering Directive (5AMLD) will introduce AML obligations for cryptocurrency exchanges operating within member states which will have to be complied with by 2020. All this suggests that, in 2019, big moves are likely in the global regulation of cryptocurrencies – which will inevitably prompt the industry to adopt new monitoring and compliance tools. As Nick Chong, Head of Americas for Liquid, points out:
“Wider adoption and regulations are like the yin and yang of cryptocurrencies: one cannot exist without the other.”
– Nick Chong, Head of North America, Liquid
Tip: The FATF guidance should provide crypto businesses with a clear framework of how to perform AML compliance, prepare to use this to inform your risk assessment and procedures. Remember if you make any changes to your compliance practices based off this guidance you still need to align any changes with the regulations of the jurisdiction that you operate in.
4. FinTechs drive demand for automated AMLWith increasing consumer adoption and subsequent transaction volumes in a competitive FinTech climate, 2019 will see a large number of firms move to automate their AML practices to scale even faster. The motivating factor here is the sheer amount of false positives generated by legacy data and technology. The adverse effects of which are obvious: the greater the number of false positives, the more difficult it is to onboard customers and process payments, and the higher the operational overheads. Added to that, of course, is the increased likelihood of missing genuine money laundering activities amongst so many false alarms. Jan Nowaczyk the Data Protection Officer at Azimo said:
“High-quality data is the driving force of AI and machine learning tools and is the key to effective automation of AML risk management and reduction of false positives numbers. 2019 will be the year where an automated approach to AML will be mission critical if you want your FinTech to succeed.”
– Jan Nowaczyk, Data Protection Officer, Azimo
Banks and investment partners will increasingly expect to see FinTechs working with innovative compliance partners to not only reduce operational costs but also prove that they are catching illicit finance. 2019 will be the year that Artificial Intelligence and machine learning move from buzz terms to key ingredients for success.
Tip: Beat your competitors and get ahead of the crowd by engaging with an AML RegTech provider who can guide you through the process of automating your compliance workflow.
5. Regulatory regimes get an overhaulIn 2018, money laundering scandals were never far from the headlines, especially in Europe. The Danske Bank scandal, for example, exposed the worrying levels of suspect wealth that flowed, unchecked through European banks in 2014/15. In the aftermath of this, 2019 looks likely to be a year when European authorities reassess their regulatory regimes, becoming more assertive with enforcement, and less lenient, when dealing with financial indiscretions.
Head of Financial Crime at ComplyAdvantage, Livia Benisty predicts that “the ECB will have to show it is looking at the issue of regulation and supervision given the wave of scandals through European banks. However, with the upcoming review likely to stop short of real legislative reform, the key output is likely to be beefing up supervision rather than anything more.”
One regulatory regime which will see considerable change in 2019 is that of the UK post-Brexit. The UK has committed to being a world leader in the fight against financial crime and has committed to delivering effective financial compliance and regulation. In 2018 we saw the enactment of the Sanctions and Anti-Money Laundering Bill which will give the UK power to introduce its own AML and sanctions legislation once it has left the Union. In 2019 we will see this put into practice along with the likely reforms to the country’s SARs regime.
Beyond Europe, the US will maintain its regulatory financial footing in 2019 – that is, sounding out the details of new FinTech regulation, including the need to promote innovation and customer protection, but it is unlikely to take any significant legislative steps towards drastically changing its AML regime.
Tip: Regulatory reform can be disruptive to your compliance practices during this year of likely change, stay abreast of the latest developments to make sure you don’t get caught short.
6. The sanctions landscape becomes even more complex2018 was a year in which financial sanctions were employed extensively across the globe – so much so that their effectiveness may have diminished. On the targeting of Iran, former White House Official, Richard Nephew, stressed the need for sanctions to have “a compelling story”, specifically referencing the need for clear targets and objectives in ensuring compliance.
With that in mind, we predict that 2019 may see this landscape grow even more complicated. Against the backdrop of the Iran sanctions, Europe, Russia, and China might continue to try and create an alternative financing channel. If successful this will add a new level of legal complexity for anyone doing business with the country.
As a further challenge, that complexity must be managed alongside the recent targeted sanctions the US and Europe placed on Russia. The thawing of US relations with North Korea also looms in 2019 – but is unlikely to affect sanctions in place until diplomatic talks resume. A late arrival on the sanctions radar is Saudi Arabia: diplomatic outrages including the murder of Jamal Khashoggi, and the peculiar actions of Crown Prince Mohammed bin Salman, could easily prompt Western powers to respond with sanctions in 2019 – with significant consequences across a spectrum of industries.
Tip: Making sure that you can screen your client base for changes to sanctions in near-real time will be crucial to remaining compliant in 2019. Ask your data provider how quickly they include changes from essential lists like OFAC in their database, and how quickly you’ll be alerted to changes in your customer’s risk.
7. Sophisticated Transaction Monitoring solutions become a necessityIn 2019 we will see financial regulators place an increased focus on the monitoring of AML risk activities, including a push for institutions to adopt proper transaction monitoring processes. Regulators will increasingly expect firms to be able to show not only that they have a system in place to monitor transactions but also be able to prove that it is effective.
This requirement will be driven by legislation such as the NYSDFS Part 504 as well as a general move towards controls being measured by their quality of outcome.
In 2019, the availability of new transaction monitoring software platforms which can help financial institutions configure a range of monitoring scenarios, analyze data more efficiently, and better separate genuine suspicious activities from false positives, will become essential. Firms who not only want to show the spirit of compliance but also identify suspicious behavior patterns, while cutting operational workload will gain a competitive advantage from adopting such solutions in 2019. As Philip Creed from FSCom said:
“The benefit is that this will allow compliance teams to use their time more efficiently to focus their attention on high risk areas by investigating these anomalous transactions.”
– Philip Creed, FSCom
Tip: When selecting and implementing a transaction monitoring solution make sure that it is properly configured to your risk based approach and needs. Too often solutions don’t match up to a users requirements, causing more problems than they solve. ComplyAdvantage partners with its transaction monitoring clients to ensure our solutions work for our customers.