RegTech Intelligence 
As the European Union starts to roll out its Fifth Amendment of the Anti-Money Laundering Directive (AMLD V), financial criminals continue to become more sophisticated and less detectable. With an 18-month transposition period, it is critical for firms to implement the new, more prescriptive rules efficiently and effectively. Join us and 20-plus firms at the Financial Conduct Authority (FCA) on the 8 August 2018 for our Seventh Client Management Special Interest Group (CMS 7) for an industry crowdsourced view on how to do just that.
Forced prostitution, child slavery, drug trafficking and numerous environmental crimes are all made possible by our inability to dismantle crime networks which exploit the global financial system each year. A recent Thomson Reuters survey estimates that modern slavery claims over 40.3 million victims globally – and only seems to be getting worse. The UK, for instance, reported a quarterly increase of 11% in human trafficking in Q1 2018 from Q4 2017, with 44% of all cases involving minors and forced sexual prostitution cases.
Historically, governments have typically responded to financial crime with increased regulation. In Europe, the Fourth EU Anti-Money Laundering Directive (AMLD IV), which came into force in 2015 and was due to be implemented by EU countries by June 26, 2017, provisioned fundamental changes to the anti-money laundering procedures, including changes to customer-due diligence processing (CDD), central registers for beneficial owners and an increased focus on a risk-driven approach to onboarding. Hot on its heels is the EU’s AMLD V which comes into force on 10 July 2018 and will amend various aspects of AMLD IV to reflect the EU’s tougher stance on fighting financial crime.
Perhaps the most effective improvement in fighting financial crime will come from enhanced access to information from firms, and increased cooperation of Financial Intelligence Units (FIU) across the EU. Additionally, they will also have access to the beneficial ownership registers, which will look to increase greater transparency on company and trust ownership.
According to the AMLD IV, corporate entities are required to obtain and hold adequate, accurate and current information on their beneficial ownership, including the details of the beneficial interests held. This information must be stored in a central, national register. AMLD V builds on these requirements by introducing an explicit obligation for beneficial owners themselves to provide obliged entities with such information. Furthermore, AMLD V will grant access to Beneficial Owner data to ‘any member of the general public’, thereby abolishing the need to establish a legitimate interest. Finally, the new regulations place increased importance on data quality, obliging Member States to take legal action against firms who do not retain good quality and up-to-date data on Beneficial Owners.
The new Directive also calls for stronger safeguards for financial transactions from “high-risk” countries. In this regard, the text acknowledges that it is important to improve the effectiveness of enhanced due-diligence measures when dealing with high-risk third countries. As a result of these new prescriptive measures, firms will need to obtain ‘additional information’ on their client (i.e. intended nature of the business relationship; the source of wealth of the beneficial owner; reasons for the intended or performed transaction; as well as approval from senior management when establishing or continuing the business relationship with the client). Additionally, Member States will also require obliged entities to examine the background and purpose of all transactions that are ‘complex’, ‘unusually large’, conducted in an ‘unusual pattern’, or do not have apparent or economic or lawful purpose.
During our last Client Management Special Interest Group (CMS 6) meeting, attendees commented on the ambiguous language used by the regulator, and the difficulty in determining what parameters to set when identifying whether transactions fulfill the conditions listed above. It was noted how there are existing technologies which could be used to automatically determine whether a transaction is ‘complex’, unusually large’, and/or ‘conducted in an unusual pattern’. Identifying whether a firm has ‘apparent economic or lawful purpose’, however, is far more challenging.
The big question is, will the amendments to AMLD IV be sufficient in decreasing the scale and impact of financial criminals in Europe? From a Financial Intuition’s point-of-view, a lot will depend on how the new requirements are implemented internally. Financial criminals are fast, smart and innovative in their methods and catching up with them can feel a bit like a game of cat and mouse. Firms should consider their own risk appetite, resources available and current procedures and ask themselves the hard questions early; putting effective systems in place both to track suspicious activity and share vital information requires the most advanced technology, and financial institutions will need to ensure their systems are up to the jobs.
More has to be done by firms to cut down the cost of compliance, whilst ensuring that all controls are robust and operating effectively. On 9 August 2018, JWG’s CMS 7 will look to focus on the Fifth EU Anti Money Laundering Directive and its effective implementation. Come discuss with peers at the FCA the key changes of the Directive and how they impact firms, their risk-assessment criteria and the re-definition of ‘obliged entities’ to include coin exchanges.
CMS has been running for over a year with major sell and buy side firms, it aims to develop a common understanding of how to approach the implementation of KYC/AML requirements by developing standardised workflows which are granular enough to take into account semantic requirements, jurisdictional differences, and size and risk of business.
JWG run all of our special interest groups at no charge for senior managers at investment firms, however space is limited so please email eman.galea@jwg-it.eu to confirm your registration and seat.