Head of Financial Crime, Livia Benisty shares her financial crime highlights from the week of 1st July, 2019

The Current State of Crypto

The UK’s Financial Conduct Authority has proposed a ban on the sale of crypto-based derivatives. Trading platforms would be banned from selling, marketing or distributing all derivatives linked to “unregulated transferable crypto-assets”. The proposal is due to there being no reliable basis for the valuation of the currency, its extreme volatility, and the secondary market being open for abuse and financial crime.

Meanwhile, Chris Woolard at the FCA said this week providers of financial services must “get it right the first time around”, warning against Facebook’s traditional approach of “move fast and break things”. The FCA has already discussed Facebook’s plans to launch Libra with the social media company and has held talks with the Bank of England.

On Tuesday a letter from a congressional subcommittee asking Facebook to “immediately agree to a moratorium on any movement forward on Libra” was made public. Maxine Waters, chairwoman of the Committee on Financial Services stated that the potential for the currency to rival the dollar “raises serious privacy, trading, national security, and monetary policy concerns for…investors, consumers, and the broader global economy”.

The Japanese FSA, however, has stated it sees no legal obstacles with Libra, as it does not technically consider it to be a cryptocurrency. The reasoning behind their position is that Libra is a stable coin, backed by various currencies, exhibiting low volatility and not being a tool for speculation. Russia’s Deputy Finance Minister commented: “nobody is going to ban it”.

American Bar Association Fighting for a Different Legal Privilege

The American Bar Association (ABA) is lobbying against legislation going through Washington which forces owners of US companies to disclose their identities.

As written about in previous round-ups, the Corporate Transparency Act 2019 has been approved by the House Financial Services Committee. A bipartisan sister bill (the ILLICIT CASH Act – the acronym competing only with USA PATRIOT), is working its way through the Senate.

The ABA has consistently opposed such legislation, which has been brought to the House before. A 2017 version failed to gain sufficient traction, largely because it included ‘formation agents’ under a BSA definition of a financial institution – it would have subjected certain attorneys to the legislation itself.

The ABA argues the regulation places a burden on small businesses and poses privacy concerns for entrepreneurs. An alternative explanation is that lawyers make a lot of money from setting up anonymous companies, which is probably harder to do than send relevant details to FinCEN.

The role of ‘gatekeepers’ such as lawyers, accountants and company service providers has led to them being labeled as ‘enablers’ when talking about money laundering. FATF requires “designated non-financial businesses and professions (DNFBPs) to identify, assess and take effective action to mitigate their money laundering and terrorist financing risks”.

However, a key finding of the US’ Mutual Evaluation Report in 2016 was that the regulatory framework has some significant gaps including minimal coverage of certain institutions and businesses. “In the US context, the vulnerability of these minimally covered DNFBP sectors is significant”.

Last week, FATF issued new guidance for the legal profession, accountants and company service providers, clarifying obligations to identify and verify beneficial ownership and establish a risk-based approach. The documents replace guidance issued in 2008.

There is a particularly high level of focus right now on certain key AML issues. Two particularly hot topics within this are corporate transparency and the role of the real estate: consider arguments around corporate registries in the EU, as well as geographic targeting orders in the US, unexplained wealth orders in the UK and the property market in British Columbia for example. It’s particularly surprising that the ABA continues along this line of argument given the context. As stated by Harvard law professor Matthew Stephenson while describing the ABA’s case earlier this year, “I’m trying to find a polite euphemism for ‘self-serving and intellectually bankrupt,’ but I’m having trouble”.

Crimes Collide

UK police were planning raids on currency transfer businesses in a week-long crackdown on suspected drugs money laundering. Over 50 businesses were due to be raided this week.

Detectives said that whilst most operate legitimately, a “significant number” of these companies were launderettes involved in illegal activity. Drug dealers take holdalls of cash which is then transferred abroad “without leaving a paper trail”. It is believed that some of the laundered money is airlifted out to Dubai.

Reports on the raid point out how drugs are linked to street violence, a reference to the increase in violence and in particular knife crime in London in recent months. Detective Chief superintendent Mick Gallagher said “it doesn’t take too much of a leap of faith to understand the causal link between what goes on with young men stabbing each other, and some of the bigger serious organised crime syndicates. The cash is the lifeblood of this. What we hope to do, if you choke off the ability to trade effectively, then you disrupt the network.”

Out of Control Transactions

Finally, Norway’s FSA has fined Santander $1 million for anti-money laundering failures. Violations were found at the consumer bank in Norway. A failure of the bank’s electronic monitoring system meant 1.6 million transactions, affecting around 300,000 customers, were not ‘controlled for money laundering’. The IT error was connected to the integration of old and new IT systems.

The cases raise some pertinent points around the integration of new technology. At a time where banks are increasingly looking to regtech for greater detection ability and operational efficiency, the operational ecosystem is incredibly important.

I had further questions – it’s not clear what it means that these transactions were not controlled for money laundering, which is to be expected and in line with other recent articles on similar themes (see Deutsche’s ‘filtering gap’ for example). However, if we assume it is behavioral monitoring and not sanctions, which likely would have been stated more explicitly and garnered more attention, a number of questions come to (my) mind.

The article states that all transactions where backchecked and no violations found. Does this demonstrate that monitoring systems, even when applied retrospectively, rarely find anything of value? Does it highlight the issue of false positives in transaction monitoring? Does this mean we are ineffective at finding suspicious activity or that it isn’t going through mainstream consumer retail accounts anymore?

In all likelihood, it could be all of the above or none of them. It’s a relatively small sample size, and we know there are issues with detecting the activity. But at the very least, it’s food for thought.

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