The EU shows caution about AML risks for a digital Euro, Australia pursues AML reform on several fronts, and a corrupt bank manager is caught money laundering in Arizona.

We share our financial crime regulatory highlights from the week of 16 November 2020.

AML Risks Affect Digital Euro Prospects

Christine Lagarde, the President of the European Central Bank (ECB), has signalled that a digital version of the Euro is likely to come within the next two to four years. Speaking at an ECB-hosted virtual panel meeting last week, she said that the decision had not yet been made, but that her own “hunch” was “that we might well go in that direction.”

The comments come as the ECB holds a public consultation about the potential for a digital Euro, which opened in October and is scheduled to close in mid-January 2021. The ECB is likely to take an official view later in the year, but Lagarde’s comments will increase optimism about the probable outcome.  

She commented, “if it’s cheaper, faster, more secure for the users then we should explore it. If it’s going to contribute to a better monetary sovereignty, a better autonomy for the euro area, I think we should explore it.”

However, Lagarde was cautious about the process of implementation, highlighting a range of risks that need to be addressed, including “anti-money laundering, financing of terrorism, privacy of users and all the information [about] the appropriate technology that will carry the digital currency.” 

Jerome Powell, the Chair of the US Federal Reserve, and Andrew Bailey, Governor of the Bank of England, were also on the panel, and they too struck some notes of caution. Bailey remarked that it would take “a lot of hard work to think through the implications.”

Although the central bankers referenced the growth of Virtual Assets (VAs), the digital Euro as currently conceived by the ECB would be a digital representation of the pre-existing fiat currency, not a separate cryptocurrency like Bitcoin, or a virtual ‘stablecoin’, pegged to other assets. One digital Euro would always equal the value of the ‘physical’ Euro. 

Unlike the ‘physical’ version of the Euro, however, the digital currency would share some similarities with VAs, being stored purely electronically in encrypted wallets that could be carried on mobile devices. The oversight of transactions could either be centralised or decentralised, but it is likely that the ECB would have a much clearer view of the ledger than with physical Euros, which are currently processed by intra-institutional clearing houses. 

This of course would create the potential for faster and cheaper payments between individuals and businesses and would be extremely helpful in keeping the economy moving at a time of crisis such as a pandemic. But as Lagarde hinted, this increasing fluidity brings risks as well as benefits. The potential to move large amounts of funds quickly across the international financial system would make such a currency an attractive target for fraudsters, money launderers, and other financial criminals, who often rely on making a ‘fast getaway’ with funds to avoid detection. 

It is just these kinds of characteristics that has recently led the Financial Action Task Force (FATF), the international standard-setter for AML/CFT, to make VAs and Virtual Asset Service Providers (VASPs) subject to their 40 Recommendations. Many governments and regulatory authorities have, or are about to, follow suit across North America, Europe and Asia-Pacific.

Digital fiat currencies will therefore be as rigorously regulated as the physical alternative, meaning that those dealing in digital Euros will need to have effective AML/CFT protections in place, especially when it comes to Identification and Verification (ID&V), Client Due Diligence (CDD) and Know Your Customer (KYC) requirements. Although they will offer an exciting new commercial opportunity for payments services providers, the development of new services will have to take place with an eye to compliance and security. Anonymity will not be an option.

Australia Revives AML Reform Momentum

The Australian Federal Parliament last week revived the government’s AML/CFT legal reform program, when the House of Representatives passed the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill and referred it to the Senate for further deliberation. The bill has languished in the lower house of the Parliament for over a year since its initial introduction in October 2019. 

The bill is part of a series of reforms triggered by FATF’s critical Mutual Evaluation Report (MER) of Australia in 2015, and the Australian Attorney General’s (AG) review of AML/CFT legislation in 2016. Following previous amendments to the AML/CFT Act in 2017, known as ‘Phase 1’, the new bill – dubbed ‘Phase 1.5’ – will cover:

  • ID&V – the bill will expand the ability of Financial Institutions (FIs) and other obligated entities to use third party providers for identification and verification procedures;
  • Sharing Intelligence – the bill will provide more instances where obligated entities can share financial intelligence and Suspicious Matter Reports (SMRs) with auditors, other parts of a wider financial group, and competitors, without becoming subject to the ‘tipping off’ offence. The bill will also streamline the process of information sharing, currently managed under ‘Section 167 notices’; and
  • Reporting Arrangements – the bill will integrate reporting requirements for all cross-border movements of financial instruments, bringing in pre-paid cards and travellers’ cheques as well as cash. 

Although there is considerable support for the bill in the Senate, some critics in the chamber have suggested that it does not go far enough. Key missing elements, according to the Australian Greens Party, are so-called ‘Tranche 2’ changes, which would bring Designated Non-Financial Business and Professions (DNFBPs) such as lawyers, accountants and real estate agents inside the AML/CFT framework. 

These gaps remain a major international issue for Australia, as the professional sectors have been obligated under FATF’s 40 Recommendations for nearly two decades, and their  absence from Australian AML/CFT regulatory oversight has brought sustained criticism from the international standard setters. The group was scheduled to undertake a follow-up assessment of the country in late 2019, but this was cancelled due to an internal ‘strategic review’ and further delayed by the impact of the COVID-19 pandemic this year. 

Despite ongoing debates about ‘Tranche 2’, the Australian authorities nonetheless appear determined to show other forms of progress for when the FATF visit eventually occurs. The Australian Transaction Reports and Analysis Centre (AUSTRAC), the country’s Financial Intelligence Unit (FIU), has been increasingly aggressive in identifying and punishing AML/CFT failures over the last year, with a fines of $1.3 billion (Australian dollars) for domestic giant Westpac in July, and $1.24 billion for US FI State Street in September. Investigations of the casino operator Crown Resorts and payment services provider Paypal are reported to be ongoing. 

The agency is also looking to find better ways to work with obligated sectors. The Australian Financial Review recently reported that AUSTRAC has created a new department for industry engagement, and is looking to provide a selection of risk-based guidance documents on AML/CFT for banks and those providing international remittance and gambling services. The agency has also been considering a range of reforms, including a revamp of its SMR system, the key element of reporting between obligated entities and the government. 

Speaking at a recent industry panel, AUSTRAC’s national manager of intelligence partnerships, David Hawkins, noted that there were challenges with both the quality and volume of SMRs that needed to be addressed. He reported that the agency had received a 258 per cent increase in SMR numbers over a four-year period: “That’s quite an exponential lift there, and of course some of that would be defensive.” These comments come after other remarks made last month by Dr Nathan Newman, the agency’s national manager of regulatory operations, who said that AUSTRAC was looking at reforming the current reporting system to make it more efficient and user-friendly. 

Considered in combination, these developments suggest that there is an increasing sense of AML/CFT ‘momentum’ in Australia at the moment, which has not yet run its course. For those firms already obligated under AML/CFT legislation, this will mean taking a renewed look at the adequacy of their own policies, procedures and controls. Meanwhile, for those likely to do so at some point in the near future – those professions that have so far escaped regulatory attention – the question is whether it might be time to think ahead about how they might take early action to fight financial crime.  

Arizona Bank Official Involved in Massive Laundering Scheme

US federal prosecutors in the state of Arizona have recently revealed the details of a major money laundering scheme that involved the collusion of a local bank manager with a Mexican drug cartel. Carlos Vasquez, who managed the Wells Fargo branch in Rio Rico, was indicted in September 2019 and pled not guilty to federal bank fraud charges.

The details of the scheme came to public light following the recent trial in Tucson of another of its participants, Enrique Monarque Orozco. Orozco acted on the behalf of a Mexican drug cartel as one of several local handlers of ‘smurfs’,  a colloquial term for stooges used to deposit structured deposits of illicit cash. Orozco pleaded guilty to helping manage the money laundering scheme between January 2017 and April 2019. 

According to US district court documents, handlers including Orozco would pick up the smurfs in the border city of Nogales, Arizona, and then drive them to the branch in Rio Rico, where they would be tasked with opening new accounts and depositing funds. The branch manager, Vasquez, would escort the smurf and their handler to a desk where he would open an account and provide guidance on how to evade AML/CFT checks. Vasquez would also ensure that any account documentation or cards were supplied directly to the handler. 

After the account was opened, the handler would pass cash to the new ‘account owner’ for deposit, which Vasquez would then electronically transfer to accounts in Mexico controlled by the Cartel. The majority of the deposits to these ‘funnel accounts’ were just below the $10,000 threshold for reporting of cash deposits to the Financial Crimes Enforcement Network (FinCEN), the US’s FIU. The accounts also received “large incoming cash deposits from various locations across the United States,” according to court documents. 

At least 18 people were recruited to open 89 fraudulent bank accounts at the branch over the period under investigation. Most are believed to have been Mexican citizens recruited by another handler, Francisco Sanchez Moreno. Sanchez has said that he was not paid to undertake this role, but was provided with help to open his own account, which he used to send both illicit funds, as well as remittances to family members in Mexico.

The scheme has parallels with a number of other recent cases in the US involving Mexican organised crime, where funds have been funnelled through bank branches in border states, sometimes in collusion with members of bank staff. Examples include the disruption in 2018 of a human trafficking ring that that funnelled $1 million from 31 states, also through bank accounts in Arizona, and the indictment in July 2020 of a Wells Fargo bank manager in Harlingen, Texas, for helping arrange the withdrawal of funds generated by drugs sales.

One of the other notable aspects of all of these schemes is the similar deployment of ‘classic’ money laundering techniques such as structured payments through key bank branches. Despite being extremely well-known to law enforcement agencies – and to the compliance industry – these methods continue to be used by organized crime, and, for a time, can appear to be successful. They provide salutary reminders that significant illicit flows still move in cash, through apparently innocent retail bank accounts, even as the AML/CFT world increasingly turns its attention toward newer channels for money laundering.

The lesson thus seems to be that the key players in the AML/CFT ecosystem need to keep a close eye on well-worn laundering techniques, as much as criminal innovation. Criminals will try whatever they can to succeed, and so from an AML/CFT perspective, Financial Institutions have to ensure they have flexible and easily configurable controls in place that can protect them against all risks – both old and new. 

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