When I started this Newsletter, I wanted to offer a digestible collection of both interesting and relevant materials to arm financial crime fighter’s with additional tools to help enable them to do their work. Whilst there is no substitute for reading the more detailed articles in FCN2, or across the FCN website, here are short highlights in summary form:
- Important anniversaries in 2019 include FATF at 30, the US sanctions against Iran at 40 following the taking of US hostages at the US embassy in Tehran. Reaching 100, is the use of the term “organised crime” first coined in the US in 1919 to describe the activities of mobsters such as Al Capone and it’s also a century since the criminalisation of harmful drugs worldwide agreed through the 1919 signing of the Treaty of Versailles. Financial Crime is a top ten global industry and likely the most profitable, with the combinations of traditional organised crime, the extension to other crimes, for example human trafficking & wildlife trafficking (even antiquities trafficking) but more recent examples such as the emergence of cyber crime. cyber as a service, and state and criminal players, is changing the landscape and increasing the risks. These risks, together with Sanctions Compliance, as well as emerging threats from areas such as crypto currencies, provide every justification for extending FATF’s mandate indefinitely. Corruption is another persistent risk and priority, due to its role in perpetuating and protecting criminal enterprise as is CTF, despite recent gains against IS on the ground, the UN has called for tougher action and another long term G20 priority action is on tax evasion.
- Corruption remains stubbornly persistent – with 1 in 4 people still having to pay bribes. Corruption levels are stagnating, indeed evidence that links weaker democracy ratings and less press freedom with higher levels of corruption indicate the trend ahead could well be negative. Financial crime thrives where Corruption prevails, so progress on corruption is necessary for longer term success in fighting financial crime. According to analysis on Transparency International’s flagship Corruption Perception Index carried out for FCN2, the average score since 2000 has fluctuated between 48/100 to 37/100 and is currently 43/100 with more than two-thirds of countries reported in the CPI 2018 score below 50. Examples of Grand Corruption abound with in particular 1MDB and the Magnitsky murder, cases in point and well documented in Malaysia in The Sarawak Report and in Russia in Red Notice. For an African perspective on Corruption see here.
- Whilst a new UN Resolution on combatting Terrorism passed unanimously (UN Resolution 2346) which requires Countries to do more (or in most cases to do what they had already committed to, but had not done). The debate was well attended with 70 Countries and Organisations contributing, but their comments instead showed that when it comes to terrorism, Countries in particular have a very differentiated approach to those terror groups that directly threaten them as opposed to those that don’t. (For details about the UN discussion on IS & AQ). The UN Resolution 2346 also cautioned that measures should “nevertheless respect charitable and humanitarian activities,” without providing any guidance on how to do so or how the conflict between being tough on terror and respecting charitable and humanitarian activities needs to change. Finally by describing terrorism and how terror groups are financed, with an exhausting list of methods and vehicles, set out in the Resolution itself, it’s no small wonder there remains a problem with de risking. Whilst there are undoubtedly unintended consequences, from this type of language these consequences are not unimaginable.
- The Wolfsburg Group Guidance on Customer Tax Evasion published in May 2019 comes after many years of benchmarking and experience in developing Tax Evasion Frameworks within FI’s. Tax Evasion is not like other money laundering offences but still AML Control Frameworks can be used to address these risks too. How these should flex to accommodate and manage tax evasion risks is important and FI’s will now be able to benchmark their own approaches.
- There are signs of a growing consensus that the US BSA/AML regime is ripe for reform as it reaches its 50th Birthday in 2020. The challenge is to agree on what should be legislated for that would make a difference. The discussion surrounds the progress of the Counter Terrorism and Illicit Finance Act (CTIFA), where FI’s have critiqued the existing system and are advocating for 4 major reforms, focusing on: Reg exam, CTR/SAR Reform, Greater information sharing and flexibility on technology innovation. These suggestions are not limited to the US and are being advocated more broadly in the UK and elsewhere. The Wolfsberg Group for example has provided a public comment letter to US agencies on revisions to the FFIEC manual and at the FATF consultative forum in Vienna in May 2019 called for reform, adding to those suggestions already referenced, by suggesting also greater vocal support for utilities and a need to do more on bringing actions against financial crime and cyber crime closer together, in a bid to improve effectiveness (which includes sustainability, affordability and scaleability of current preventative measures) by modernising the fight against financial crime.
- US sanctions against Iran are 40 years old, and being ratcheted up, existing sanctions against North Korea and Syria remain at least unchanged for now, but new sanctions on for example Venezuela have come into force, with more targeted sanctions likely against Russia in 2019. In this context, sanctions compliance remains crucial, which means having a comprehensive program of controls and oversight capable of addressing the unprecedented pace of change, geopolitical tensions, conflicting governmental policies, and intense interest by a range of stakeholders. Sanctions Compliance risks tend to be harder to manage as convergence and consistency between major issuing authorities reduces, as appears to be the direction of travel currently.
- As Sanctions pressures mount, in particular but not just on Iran and North Korea, circumvention activities are being identified, not least by the US via a FinCEN’s Advisory on Iran, identifying Iranian covert activities involving exchange houses, precious metals, commercial shipping and aviation companies, printing machinery to make counterfeit currency and virtual currency. RUSI also highlight virtual currency usage by the North Korean’s to support their regime in South East Asia.
- The increased attention to VC by not only sanctioned parties but also organised crime and the rise of cyber enabled crime suggests a response that better understands the risks and how to mitigate these. FI’s in particular, would be well advised to consider how FCC teams work better together with anti-fraud specialists and gain the right kind of digital and cyber capabilities to combat these evolving threats. For example Standard Chartered Bank, established a “Cyber Financial Intelligence team” (CyFI) which works closely with Anti-Fraud specialists to minimise silos and leverage techniques across the fighting financial crime space.
- The EU 5 MLD takes sensible incremental measures to mend weaknesses in the AML/CTF response in the EU, and follows agreements reached at the FATF. Still this is an opportunity missed, for example, to: i) set minimum effectiveness targets for Countries, to boost current poor scores, (according to FCN research whilst the EU beats the international average of 31%, it still only reaches 45%; ii) extend real accountability beyond the private sector, where regulation applies a zero tolerance approach to compliance, to for example Country Supervisors, FIU’s, and / or Company Registries etc where a resource based approach applies and limited success is tolerated; iii) fully empower a pan EU wide body to oversee and police AML/CTF seriously, and iv) provide Countries with flexibility to explore and test new ways of working, promoting innovation, such as information sharing, use of new technologies and the trials of utilities. Maybe a future EU 6 MLD will remedy these omissions in time and help modernise the fight against financial crime (for more details see how to do this in Part 1, Part 2 & Part 3.
- Despite Brexit the UK will implement the EU 5 MLD, and has opened a period of consultation on its proposals. Whilst this may appear contrary to those supporting Brexit whose stated purpose is to take back control of laws and regulations from Brussels, staying aligned to and committed to implementing FATF standards, appears to be something all UK parties are agreed upon, not least because the UK has been at the forefront of persuading others that these measures are necessary. A few provisions of note, which will apply EU wide, include the requirement on FI’s to report all Bank accounts to Governments and for National Company Registries to provide access to details (enhanced as a result of EU 5 MLD) to other EU Member States. These measures will impact significantly on the privacy rights of EU citizens though they appear so far to have attracted little to no attention. There are valid arguments justifying these information sharing (private to public only) measures, but these must be predicated on it being overall in the public’s own interest, but only if Governments use this information productively. Had for example, information available in Company registries and bank accounts been triaged looking for unusual or suspicious activities, the Laundromat scandals could have been identified much sooner.
- There are many lessons to be learned not just by those caught up in the Laundromat scandals but by everyone involved in combatting the laundering of dirty money. Specifically for FI’s, beyond ensuring robust KYC for each individual account, FI’s should consider how they identify potential links between remitting, receiving and onward transmission accounts, identifying common ownership or control, common registered addresses, volumes and not just balances, revenue generating accounts and/or branches or other factors which might just be the first indication of another laundromat at work. That’s important because, if one thing is certain about these laundromats, it is that we haven’t seen the last of them just yet. The Laundromat revelations shouldn’t come as a surprise as industrialised operations supporting illicit Russian Flows have been well identified and will continue to be exposed, as will FI’s with poor insights and controls. Of particular concern is how they exposed a number of EU FI’s, but that’s not all. There are questions around the quality of Supervision and how information that was shared with FIU’s wasn’t acted upon, and how agencies that had information, were ignorant of its value. If we want to truly learn the lesson we have to ask more of these difficult questions, though it seems we have learnt so far what’s obvious and not all that can prevent these Laundromats continuing in business under new ownership. Whilst the focus has reasonably been on Russian Money Laundering that help export the 2nd largest sums in illicit flows, its a surprise that equivalent operations aren’t under the spotlight too. In fairness illicit financial flows from the 3rd largest exporter, Mexico has been well documented and actions taken. Those illicit flows from China though, as the World largest likely exporter has yet to be exposed.
- China takes over the FATF Presidency in Summer 2019 from the US for the last 1 year term. Whilst China will be focussing on addressing the significant risks it still poses to the international community (see below), it will also look to lead on its own chosen priorities, which if these included counterfeiting and piracy of goods, human trafficking and/or wildlife trafficking would be areas where it could make a significant impact and make its Presidency truly game changing.
- China’s Country evaluation report was published by FATF in April 2019, and (according to research carried out by FCN2), China scored 53% for technical compliance placing it 60th and 30% for effectiveness placing it 42nd equal in each case (out of 75). China agreed a detailed action plan which will require collective effort in China over the next few years to address the identified weaknesses. From a net risk perspective, with the second largest economy in the world and a needs significant improvement rating on the response, it’s hard to see many other Countries representing overall a greater net financial crime risk than China.
- China is not alone in reporting low scores in its Country evaluation. The average scores are 64% for technical compliance and 31% for effectiveness. According to research conducted by FCN2, of the 11 Effectiveness Immediate Outcomes, (IO) published by FATF they reveal only one IO (IO2-International co operation) made it into positive territory (i.e. with more than half of assessed Countries rated positively (40/75). The worst results came for IO5 (Measures against Legal Persons and BO’s) & IO4 (Measures taken by regulated sectors, i.e. FI’s and DNFBP’s), core elements tagged to the success of “Preventative Measures.”
- Another area that has accepted a “needs improvement” rating is the Virtual Currency industry which has reached its ten years old birthday. VC’s are about to join the FATF club, which many accept as necessary to bring greater respectability to this industry. It will be a challenge for many but one that has had “inevitability” written all over it for some time. That said the regulatory settlement is not yet entirely completed with some discussions around technical aspects (originator and beneficiary information transmission) still to be confirmed, though this is expected by 21st June 2019. Recent revelations around Russian hacking and interference in the US 2016 Presidential elections using Bitcoins (as detailed in the Mueller Report) and regular reports of criminal abuse of these assets must have helped the FATF Presidency (US) come to the conclusion that enough was enough, and help persuade everyone else it was also time to act.
- Whilst VC is transitioning from its early free wheeling market place into a fully fledged regulated industry, and the blockchain upon which it relies is considered one of the most exciting technologies available, new technology is touted by many as the next frontier in the fight against financial crime. New technology per se is unlikely alone to be the answer. It forms a part of the people, process, technology and data mix, that is brought together to find solutions to problems. Whilst new technology; FinTech or Regtech, for example could help the industry in producing less false positives or be able to handle them more efficiently, we have to expect more from technology and our partners than simply doing less of the work we shouldn’t be doing in the first place. That said successful proof of concepts are at last indicating the frontier is in sight, and a number of potential “unicorns” are emerging.
John Cusack; June 2019; Copyright: Metriqa Limited