RegTech Intelligence

Financial crime and counter terrorist financing updates

The attacks in Paris and the continued threats posed by the Islamic State of Iraq and the Levant (ISIL) have once again seen fresh emphasis placed by financial regulators around the world on countering terrorist financing and money laundering.

The Financial Action Task Force (FATF), a Paris based intergovernmental body that sets standards and promotes effective implementation of legal, regulatory and operational measures to help counter money laundering and terrorist financing, has highlighted the need to increase levels of communication and information sharing, to put in place legal frameworks to penalise and deter money laundering and terrorist financing and develop a detailed understanding of how technology and the evolution of financial services is changing how people can transfer and hide funds and launder money.

As a result of the heightened emphasis, regulators have reshaped the AML rulebook over the last few years, including the EU Anti-Money Laundering Directive (AMLD IV) which was passed in May 2015.  The EU has also recently put forward an action plan to tackle terrorist financing, and the Egmont Group and FATF meet regularly, reporting in to the G20 on updates and progress made globally in the fight against financial crime.

Call on the Financial Action Task Force to intensify efforts

Since the attacks in Paris, the G20 has called upon the Financial Action Task Force to intensify efforts in identifying and tackling terrorist financing loopholes and to strengthen consistency of standards to tackle financial crimes and their application across member jurisdictions.

The FATF, whilst confident that most countries have in place the legal frameworks to tackle financial crime and terrorist financing, worry about the minority that lack such systems.  Efforts in those countries are being made to make amendments reflecting the FATF recommendations, but the view is that there still needs to be a prioritisation of putting legal amendments in place.  FATF has focused on developing effective tools to share information, an element that has been consistently emphasised throughout plenary meetings to help effectively combat terrorist financing.  It is hoped that barriers to sharing data and information will be decreased once agreements, new regulations, such as the new EU General Data Protection Regulation (which will introduce a level of standardisation for data protection laws amongst EU Member States) and a new data transfer agreement between the EU and US (replacing the safe harbour rule) are in place.  The safe harbour rule was an agreement between the US and EU allowing businesses to transfer personal data on EU citizens to the US.  In Q3 of 2015, the European Court of Justice invalidated the agreement with immediate effect in the Schrems case, which challenged the rule on the basis that the agreement allowed for the violation of certain fundamental rights under EU law, primarily Article 8 of the European Charter for Human Rights, which provides protection on the use of personal data.

Countries that are deemed to have insufficient legal frameworks and counter terrorist financing tools include Iran and the Democratic Peoples’ Republic of Korea (DPRK).  The FATF has advised its members to treat business relationships with special attention, and to enhance their scrutiny of any transactions involving Iran.  DPRK remains a concern for its failure to address concerns on its AML regime and the consequential impact those deficiencies could have on the international financial system.

In addition, the FATF update to the G20 included emphasising a consolidated effort to:

  1. Remain on top of threats posed by ISIL, which includes developing understanding and intelligence on how ISIL source, move and use funds for terrorist financing
  2. Promote the use of existing tools, such as financial sanctions, to tackle terrorist financing
  3. Identify barriers to information sharing and work with countries to reduce – and eventually eliminate – these.

The FATF have agreed to provide a report on progress on this to the G20 in July 2016, and identify jurisdictions that still fall short.

Risk-based approach updates

Since the recommendation and published guidance to implementing a risk-based approach to assessing risk of money laundering and terrorist financing, the FATF has provided updates to the guidance.

The risk-based approach is designed to add flexibility for firms when developing their anti-money laundering and counter terrorist financing frameworks, with a view to making them more tailored, cost effective and efficient.  By developing a more tailored approach, AML frameworks will ideally consist of less gaps.  For example, firms are required to adopt tools that reflect their exposure to certain threats, such as a high concentration of clients resident in a high risk jurisdiction like Iran.

This approach has now been extended to money or value transfer services, which have been identified by the FATF as being vulnerable to money laundering.  Money or value transfer services are those that “involve the acceptance of cash, cheques, other monetary instruments … and the payment … to a beneficiary”.

The non-binding guidance reflects the risk-based approach already in place and has been adopted by FATF members.  Consequently, money or transfer value service providers should look to financial services firms for practical implementation of the risk-based approach.

EU push for rapid AML adoption

Germany and France have expressed a need for a rapid pan-European adoption of stringent AML procedures amongst financial services firms.  The European Commission, on 3 February, published a proposed action plan to counter AML and terrorist financing.  The proposal placed emphasis on the need to tackle illicit trade and terrorist financing, calling for financial institutions to undertake due diligence on flows of money from high risk third countries and to ensure that virtual currencies fall under AMLD IV.

AMLD IV will come into full effect in Q1 2017 and will introduce increased scope of predicate crimes, a more stringent risk-based approach to client due diligence and greater emphasis on identifying beneficial ownership and those who are politically exposed persons.

The proposal set forth by the EU was described as being good, however, it was expressed that the regulation needs to be implemented rapidly in order to start tackling the problem as early as possible.

The proposal must first be approved by the European Parliament and Council of the EU.  If approved, the proposal could be enforced immediately but otherwise at the latest by Q4 2017.  If passed, the action plan amends AMLD IV, therefore providing further complexity for banks.

At the 2015 end of year session for JWG’s Customer Data Management Group (CDMG), which meets once a month to discuss customer data and KYC challenges, it was identified in a survey that client onboarding divisions and those implementing AML measures are under high levels of pressure to meet regulatory deadlines and the new obligations imposed by a wealth of KYC regulation for tax (FATCA and CRS), AML (AMLD IV, FinCEN CDD) and trade (MiFID II, DFA).  This new action plan if passed will only increase pressure.

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