It is difficult to write about 2020 without including COVID-19, but its long-term impact on anti-financial crime (AFC) is likely less pronounced than other events in the past twelve months. This year saw many transformational developments that are likely to have a lasting impact in the years to come: a drastic escalation of United States economic sanctions programs including those on China, Venezuela, and Iran; updates to international anti-money laundering regulations and advances in cryptocurrency regulations.
Like many others, compliance staff had to adapt to remote work which posed a challenge for some corporate IT systems, especially on-premises ones, and ways of working. For many organizations, this escalated program reviews. For others, compliance staff saw their projects and teams cut as financial institutions and fintechs tightened their budgets as the world adjusted to the new normal. All the while, criminals increased efforts across certain types of financial crime, especially cybercrime, to exploit uncertainty.
As we publish this, the European Union’s Sixth Anti-Money Laundering Directive (6AMLD) is only a few days old, the United States is days if not weeks away from signing the 2021 National Defense Authorization Act (NDAA) which includes critical AML reform efforts, and tensions continue to rise between China and the United States as Asian financial institutions fret over the latest Trump investment ban of “Chinese military companies” that includes some big names like China Mobile and China National Offshore Oil Corporation.
In this review of 2020, we will look at the key developments in financial crime and compliance this year, including sanctions, money laundering, regulations, and innovation.
Excerpt from our 2020 Highlights: AML & Anti-Financial Crime
The United States & China
In 2020, the relationship between the United States and China hit new lows against the backdrop of an intensifying trade war and geopolitical competition between the two countries. The United States has taken several measures over the course of the year to confront alleged human rights abuses in the Xinjiang Uyghur Autonomous Region (XUAR), China’s crackdown on ongoing protests in Hong Kong, and the enforcement of the controversial national security law imposed on Hong Kong.
In June, President Trump authorized the Uyghur Human Rights Policy Act which condemns Chinese government policies in the XUAR and requires the imposition of blocking sanctions and visa bans on government officials identified by the United States Government as having involved in violations of human rights in the region. A month later in July, President Trump signed the Hong Kong Autonomy Act.
OFAC has also been particularly active, repeatedly designating entities and officials under the Magnitsky Act, as well as most notably adding Hong Kong Chief Executive Carrie Lam to its SDN List in July. China has responded with “corresponding sanctions” in a tit-for-tat manner that has targeted American officials including Senators Marco Rubio, Ted Cruz, Tom Cotton, and Pat Toomey — all of whom have been critical of China’s actions vis-à-vis Hong Kong. While these sanctions on China’s part have largely been described as “symbolic” thus far, it appears indicative more retaliatory actions from China are ahead.
In a report to the United States Congress on October 14, the Department of State warned that it was preparing to identify and sanction financial institutions operating in Hong Kong which is believed to be doing business with recently sanctioned Hong Kong officials. The warning came as part of a report required by the Hong Kong Autonomy Act (HKAA), which passed through the United States Congress in July this year following protests in the territory against new security legislation. The HKAA is designed to apply coercive pressure against Hong Kong officials that the United States believes are actively collaborating with the Chinese government to erode Hong Kong’s constitution, the Basic Law. The HKAA also provides for secondary sanctions against financial institutions deemed to be facilitating the activities of designated individuals.
Although the State Department report did not name any financial institutions, it specifically restated it would issue a list of those that it believed were involved in ‘significant transactions’ with the designated individuals within 60 days i.e. by mid-December. According to the United States Department of the Treasury, ‘significance’ is defined by a range of criteria including nature and frequency of transactions, as well as potential links to activities for which the individuals had been designated. If listed, the financial institutions would also be subject to sanctions and would be required to disengage from their relationship with the SDNs within a year. Any organizational designations could lead to the financial institutions’ facing restricted access to a dollar-denominated exchange, commerce, and trade, as well as the targeting of corporate executives.
Media speculation about which institutions might be the focus of the State Department’s concerns has focused on two leading UK based banks with dominant roles in the Hong Kong market, HSBC and Standard Chartered. HSBC in particular finds itself in the difficult position of being headquartered in the UK, while its most profitable market remains Hong Kong. The bank has also been focused on expansion in China’s Guangdong-Hong Kong-Macau Greater Bay Area, making a good relationship with the Chinese government essential. In June, HSBC’s Asia-Pacific CEO, Peter Wong, signed a petition supporting new security legislation, leading to criticism from both United States and United Kingdom politicians, including United States Secretary of State Mike Pompeo, who described it as a “corporate kowtow.”
However matters play out in the next two months, there can be little doubt that the United States will continue to use access to the dollar-driven international financial system as a key weapon in its coercive armory. Recent months have seen a significant deterioration in the rhetoric used by Trump Administration officials who have been highly critical of China with regard to Hong Kong, the status of Taiwan, trade, and a host of other issues, it seems likely the new incoming United States administration under Joe Biden will take a similarly hard line in Hong Kong, given his comments about the “death blows” to the city’s freedom in July.
You can read more content like this in our A Year in Review: 2020 AML & Anti-Financial Crime Highlights here.