New Risks, New Rules – The Weekly Round-Up

May 17, 2019 5 minute read

Head of Financial Crime, Livia Benisty shares her financial crime highlights from the week that’s passed.

US supervisors issue guidance on virtual assets, broker dealers

FinCEN has issued guidance on virtual currencies, interestingly timed after FATF held its Private Sector Consultative Forum (PSCF) in April and before it releases its official policy in June.

The guidance reiterates how BSA regulation applies to money transmitters, and where convertible virtual currency (CVC) activity makes someone or a company a money transmitter. It’s important to realize that the regulation applies to those doing business “in substantial part” within the US, which doesn’t exempt companies or exchanges that don’t have a physical presence or aren’t based there; i.e. wherever you are based, if dealing with virtual currencies, take note.

A point of controversy, especially in light of the FATF forum, is the application of the Funds Travel Rule. The Rule requires regulated institutions to pass on certain information in a funds transfer to the next financial institution. In the context of virtual currencies, if an exchange is sending value on behalf of a user to another exchange they may need to record who the sending and receiving account holders are and share that information.

For FATF this concerns paragraph 7(b) of the Interpretive Note to Recommendation 15. At the PSCF debate arose as to how workable this was, and whether a proven industry led technical solution needed to be established before the requirement could be mandated. While FATF is debating the global impact of this, FinCEN seems to be making clear that for the US at least, this is expected. Note this remains the case for entities involved in CVC services which incorporate anonymity; whilst these services were not prohibited by the guidance, it was made clear that all the required regulation applied equally in these cases.

Also in the mood for establishing clarify, FINRA released guidance for broker dealers. The guidance is the first detailed description of potential red flags since 2002. In a sign of the times, and related to the FinCEN guidance outlined above, the red flags include risks involving virtual assets and cybersecurity.

Nordics publicise KYC initiative as questions are asked around bank privacy and data sharing

There a couple of stories which came up this week which can be confused with one another so I’ll try to add a little clarity here.

The first is that the Nordic region’s six major banks have publicised efforts to establish a KYC utility. This is not the first initiative of its kind. Efforts have tried and failed before, such as a similar venture in Singapore which was eventually shelved due to cost and incentive issues. What’s interesting about the Nordic version is the suggestion of creating a standardised KYC process. Despite being subject to the same broad regulation, practical application can often vary between institutions; this standardisation would create a common base. Beyond that, the utility would mean coordinating identity tracking, reduce KYC failures, and cut inhouse compliance costs. The utility is expected to provide services from 2020 and could sell services to other banks.

Separately, financial regulators in Nordic and Baltic countries have agreed to share information about money laundering threats. This could mean sharing information from onsite inspections. This is also slightly different from the discussion Bloomberg has highlighted which focuses more on information sharing between banks to prevent criminals blacklisted by one institution easily being able to go elsewhere. The balance between bank secrecy, data privacy, and the need for information sharing to prevent financial crime is a difficult one to strike, but it is great news for AML that these discussions are being raised more and more.

NCA highlights resource shortage when it comes to fighting financial crime

The Director of the National Crime Agency, Lynne Owens, has lobbied for a doubling of the agency’s budget due to the mounting threat of organised crime. The NCA’s threat assessment estimates Organised Crime costs the UK at least £37 billion and kills more people than terrorism, war and natural disasters combined. The new face of organised crime is smaller, “dynamic” groups leveraging technology, in the place of more traditional gangs.

These groups are engaged in multiple offences including drugs trafficking, money laundering sexual exploitation, and modern slavery. The NCA also noted the increased prevalence of “professional enablers” such as accountants and lawyers whose services are helping the criminals. They also highlighted the use of crypto assets to launder funds.

Whilst the NCA’s annual budget is currently £424 million, Ms. Owens argued the agency would need an amount closer to £1 billion to tackle organised crime. This speaks to the broader issue of whether the UK will realise its commitment to fight financial crime by putting the required resources behind the relevant initiatives, recent examples including OPBAS, or proposed reform to Companies House, for example.

I remember clearly listening to an interesting talk by the Metropolitan Police’s counter-terrorism team, with a couple of hundred people, all in the AML department of the global bank I worked for, and hearing for the first time how few people were employed by the government / public sector for supervision and law enforcement for AML. It was about a 10th of how many people that one bank employed to deal with the problem. In the wake of the UK’s FATF Mutual Evaluation Report I will be watching with interest the extent to which resources committed match the rhetoric.