A UK survey finds differing views on cryptocurrency crime risks, Hong Kong regulators release a report on supervision in the digital age, and the stalled US Corporate Transparency Act is revived.

We share our financial regulatory highlights from the week of 5 October 2020.

Divided Views on Cryptocurrencies

The cryptocurrency industry and governments continue to have very different views of the perceived financial crime risks in the industry, according to a recently released survey from the UK think tank the Royal United Services Institute (RUSI) and the Association of Certified Anti-Money Laundering Specialists (ACAMS), conducted by the polling company YouGov. 

The RUSI-ACAMS Cryptocurrency Risk & Compliance Survey received 566 responses from across government and relevant regulatory and law enforcement agencies, financial institutions and the cryptocurrency industry itself. The top level finding was that while cryptocurrency providers were extremely confident about the effectiveness of their AML/CFT controls, the public sector and the legacy financial services sector were far more circumspect. 

All respondents agreed that cryptocurrencies could be a target of criminal abuse, chiefly as a tool for money laundering (according to 84%), for criminal purchases on the Dark Web (84%), but also for sanctions evasion, terrorist finance, human trafficking and scams. 

However, only 9% of cryptocurrency professionals saw financial crime as a major risk to the industry, as opposed to 56% of governments and 63% of legacy financial institutions. Unsurprisingly, the vast majority of cryptocurrency industry respondents – 80% – saw the sector as ripe with opportunity, but only 19% of legacy financial institutions and 23% of governments agreed.

On the whole, the survey did not find major variations between respondents from different regions, although those working in the financial sector in Asia-Pacific were broadly more friendly to the use of cryptocurrencies than those in Europe or North America. Perceived risk or not, however, all respondents believed that the use of cryptocurrency for day-to-day payments would rise in the medium to long term. 

Kayla Izenman, a research analyst at RUSI and one of the co-authors of the report, commented that “the crypto industry appears to have a great amount of confidence in its own abilities to counter and detect risk, whereas Government doesn’t have nearly as much faith…bridging this gap is essential as all sectors agree that the use of cryptocurrency is on the rise, but we know there’s no clear consensus on domestic regulatory action.”

The survey is a further indication of the substantial work that needs to take place to ensure that further regulatory actions on cryptocurrencies are based on a shared view of the risks and a common understanding of the reality of how cryptocurrencies work. Last year, FATF adopted a ‘Travel Rule’ for Virtual Assets that required cryptocurrency providers to collect the identities of both senders and receivers, causing major problems for a sector which lacked an appropriate infrastructure to do so. If the gaps that the survey has identified remain, more problems such as the Travel Rule debacle are likely to arise. 

The message remains that it is essential for cryptocurrency firms to use all the opportunities they can – through partnerships, regulatory innovation schemes and working together – to stay part of the conversation. 

Hong Kong Embraces Digital Supervision

The Hong Kong Monetary Authority (HKMA), the territory’s financial services regulator, has recently released a report in collaboration with professional services provider Deloitte on taking AML/CFT supervision forward in a digital age. The report is one element within the agency’s AML/CFT Surveillance Capability Enhancement Project (AMLS), which is itself part of HKMA’s wider Digitalisation Programme.  

The report focuses on answering two key questions: what could be learned from the use of Supervisory Technology (SupTech) by leading regulators beyond Hong Kong, and how far AML/CFT obligated firms in the territory had gone in deploying Regulatory Technology  (RegTech) to deliver their obligations. 

Within the sphere of SupTech, HKMA identifies data analytic environments as a major tool for the analysis of market-level trends and financial crime activity, using a range of techniques including varieties of Machine Learning, Natural Language Processing (NLP) and web scraping. The report suggests that by using these techniques, regulators could get ahead of the threats and take a more targeted and risk-focused approach to supervision. It also indicates that regulators need to ensure such capabilities can be readily used to enhance public-private partnership, including through the use of Application Programming Interface (APIs) and Cloud-based data storage solutions.

However, HKMA are also clear that pursuing these approaches is not without challenge when it comes to training staff with the right technical skills. According to the report, “it means equipping individuals with knowledge and skills specifically tailored to themselves and their roles, encouraging them through appropriate motivators and incentives, and providing meaningful opportunities to put their newfound skills to use.”

Although the report does not provide a detailed agenda for change, it clearly signals HKMA’s intentions over the medium term. In light of the positive findings in the report, the agency states its intention to explore data-driven SupTech approaches further, by seeking an increased technical capability “to source, capture, store and process data across the full spectrum of its AML/CFT supervisory activities, bolstered by analytics tools, technologies, enhanced data governance and structured data storage.” 

In the field of RegTech, the report found significant indications of early adoption of remote onboarding in banks, driven in part by the pandemic, and increasing use of Machine Learning in core AML/CFT controls such as Transaction Monitoring (TM) and Screening. RegTech solutions were also being rolled out to support public-private intelligence sharing on COVID-19 criminal threats such as face mask scams. The report strongly endorses these examples, and states that HKMA will encourage ongoing RegTech adoption. 

The HKMA – so often one of the most progressive global regulators – is continuing to lead the field in technological change in AML/CFT, and has not only set a challenge to itself, but to the private sector of the territory too. Now is the time for firms to be thinking about how best to deploy new technologies if they are going to keep up.

The Return of the US Corporate Transparency Act?

In the last week, online news outlet Buzzfeed reported a new appetite in the US Congress to make progress on the issue of corporate transparency, following revelations in the FinCEN Files that show the ubiquity of anonymous shell companies in complex money laundering schemes. 

According to Buzzfeed, Senators Mike Crapo and Sherrod Brown – chairman and ranking member of the Senate Banking Committee respectively – are seeking to add corporate transparency requirements as an amendment to the National Defense Authorization Act (NDAA), an annual act required to fund the military. 

The text of the amendment is based on the ‘Corporate Transparency Act’, which previously passed the House of Representatives in June 2019, but thereafter stalled in Senate Banking Committee hearings. The House of Representatives passed the Act again in July 2020, as an amendment to the NDAA, but an attempt to do the same in the Senate failed at that time. 

The Act is targeted at US tax paying corporations and limited liability companies with 20 US-based employees or fewer and $5 million in revenue or less, or those without physical offices in the US. Under the clauses of the Act, such businesses would be obligated to report their true beneficial owners – natural persons who own 25% or more of the business – to FinCEN at the point of company formation. The firms would also be required to file annual updates. This data would be retained by FinCEN until five years after the corporation’s termination date, and could be accessed by law enforcement agencies without a court order. Attempts to cheat, or failure to meet these requirements could lead to 3 years in prison and/or civil fines of $10,000. 

Opposition continues from lobbies such as the National Federation of Independent Business (NFIB), who see the obligation as a further bureaucratic burden for small businesses. Although there is reported to be strong Republican support for such views in both houses of Congress, both Crapo and Brown are more confident about getting a version of the Act through following the FinCEN leaks. The matter will be decided in the near future behind closed doors in a conference reconciliation process. 

If the Act does pass, it will be a notable step forward for the US, where more than two million anonymous corporations are created each year, and some states, notably Delaware and Nevada, have become notorious havens for such firms due to limited company registration law. It is also broadly in line with global efforts to improve corporate transparency. 

Nonetheless, even if the Act does pass, the data will neither be comprehensive or publicly accessible. For the moment, the concept of transparency will only go so far. It will still be very much on the AML/CFT obligated sectors’ shoulders to do their own due diligence during onboarding, making access to globally relevant AML data as vital as ever. 

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