The Basel Committee recognizes the importance of climate-related financial risk, Japan appoints crypto regulators and AMEX risks weapons proliferation.

We share our financial regulatory highlights from the week of 4 May 2020.

Climate Financial Risks Recognised by Basel Committee

Climate-related financial risks have received recognition from the Basel Committee with a stocktake of the work its members are doing on the issue. The stocktake is being undertaken by a high-level Task Force on Climate-related Financial Risks (TFCR) across the Committee’s 27 members.

The central banks and regulators that make up the majority of the Basel Committee’s membership are all conducting their own research into climate-related financial risks. But the research is varied. Some are simply ensuring that the banks they regulate are aware of the risks, others are pushing for disclosure of measures taken to combat the risks by banks.

Some Basel Committee members have pushed further than these introductory measures. Principles-based guidance is either being drawn up or created by some members for the relevant businesses they regulate.

While this is a good move for a pressing issue, there’s potentially an opportunity here to ensure that an acceptable standard of regulation is agreed across all Basel Committee members first so as to avoid regulatory divergence. If this can be agreed then businesses would be far better equipped to roll out regulatory reforms globally and at pace.

This is a more likely outcome as the TFCR is starting to work on a series of reports and analyses on climate-related financial risks and how they could affect the banking system as a whole. Once these are published they could act as a framework for agreed regulatory controls and procedures for the oncoming crises that the financial industry is preparing for.

Japan Embraces Crypto Regulation

Japan’s Financial Service Authority (FSA) has shown the nation’s increased affinity for cryptocurrencies by recognizing two bodies for crypto regulation. The FSA has certified two Japanese organizations as Certified Financial Instruments and Exchange Associations.

The Japan Security Token Offering (JSTO) Association and the Japan Crypto Asset Trading Business Association (JCATBA), formerly known as the Japan Virtual Currency Exchange Business Association (JVCEA), are notable as they’re self-regulatory groups which grew from the crypto industry itself.

Recognition for the new regulatory bodies was a necessity. Japan had begun to enforce the revised Financial Instruments and Exchange Law (FIEL). Meaning that every business that offered crypto derivatives trading is now required to be registered as a Financial Instrument Business.

This move should hopefully curb some money laundering activities through the crypto market as crypto businesses in the region are compelled to follow regulatory standards.

Some may fall by the wayside as was seen in the US when the Travel Rule was enforced. But plenty of crypto-focused businesses should thrive as they are drawn closer to the fiat financial system and can interact with markets in a more legitimate way.

Amex Hit with WMD Sanctions Violation

An American Express subsidiary was found to have inadvertently violated the Weapons of Mass Destruction Proliferators Sanctions Regulations due to failures in their screening process, the US Treasury confirmed Thursday, April 30.

In 2015, the subsidiary, American Express Travel Related Services Company, issued a prepaid card to Gerard Wisser, a German national who had been placed on the SDN (Specially Designated Nationals) list in 2009. US authorities suspect Wisser was involved in a nuclear proliferation network led by Abdul Qadeer Khan — a key member of Pakistan’s nuclear program who confessed to illegally providing nuclear weapons technology to Iran, Libya and North Korea.

The misstep was blamed on both a screening system failure and human error. When the authorized issuer ran Wisser’s name through Amex’s compliance system, the risk engine initially declined the request. But additional attempts to apply for approval timed the system out, which ultimately resulted in an automatic approval message. Unfortunately, the subsequent manual review process didn’t catch that the applicant and SDN were the same.

The card was loaded with just over $17,600, and Wisser was able to withdraw via ATMs nearly the entire amount over 39 transactions between late-March and mid-May 2015.

Upon discovering the error, Amex voluntarily notified OFAC (Office of Foreign Assets Control) and took steps to shore up their compliance processes. As a result, the regulator declined to attach a monetary penalty to the violation.

Even so, it stands as a reminder that not all automated screening systems are created equal. Configurations should be checked and rechecked. Further, care should be taken to implement proper internal audit procedures and ensure compliance officers receive proper and regular training.


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