Singapore and Virtual Assets; UK, Illicit Finance and Sanctions; US and Broker-Dealers

April 1, 2021 8 minute read

Singapore tells crypto firms to get a license; the UK security review focuses on illicit finance and sanctions; US authorities highlight laundering through broker-dealer platforms.

We share our financial crime regulatory highlights from the week of March 29, 2021.

Singapore Regulator Encourages Crypto Compliance

The Monetary Authority of Singapore (MAS) has once again encouraged Virtual Asset Service Providers (VASPs) operating or seeking business in the country both to apply for a license to trade, and to follow Anti-Money Laundering/Countering the Financing (AML/CFT) regulations. 

The regulatory requirements for VASPs – known as Digital Payment Token Services Providers (DPTSPs) in the jurisdiction – were originally set out in regulator notice PS-N02  in December 2019 and the Payment Services Act (PSA) of January 2020, but as MAS has noted in a new guidance document, ‘Strengthening AML/CFT Controls of Digital Payment Token Service Providers’, the regulations have not yet seen full compliance in the industry. 

The guidance comes in the form of a series of infographics that explain why and how Virtual Assets (VA) need to be regulated. The document stresses the heightened money laundering and terrorist financing risks around VAs, noting their role in the movement and concealment of funds fraudulently generated in online scams throughout the COVID-19 pandemic. There has been a significant rise in the volume of VA-related Suspicious Transactions Reports (STRs) filed with the Financial Intelligence Unit (FIU) during the pandemic, including transactions relating to fraud, hacks and ransomware, and illegal purchases on Dark Web marketplaces. 

The guidance also includes background on the VA-focused advice of the international standard-setter, the Financial Action Task Force (FATF), and the translation of those standards into Singapore’s regulations and laws, including the amendment of the PSA in January 2021 to widen coverage on custodial wallets and funds transfers (see our Regulatory Highlights, January 11, 2021).

For firms looking for direct help, the guidance provides broad outlines on the implementation of key elements of a robust AML/CFT program, including Client Due Diligence (CDD), Know Your Customer (KYC) requirements, and monitoring and STR filing. The guidance also highlights the importance of Enhanced Due Diligence (EDD) on Politically Exposed Persons (PEPs) seeking to trade in VAs. 

Overall, the tone on VASPs coming from MAS remains relatively ‘light touch’, with the guidance stressing the need “to raise industry awareness…of sectoral money laundering and terrorism financing (ML/TF) risks, and provide additional information to support their implementation of effective controls.” However, the document also features hints of a tougher enforcement approach to come. MAS’s surveillance of the sector has already identified several VASPs that have not complied with the requirements to submit a request for a license by 28 June 2020, and action has been taken against – including posting of business names on the MAS Investor Alert List, and referrals to law enforcement. 

Constructive although the document is, therefore, it is clearly intended to put the VASP sector on notice that it needs to embrace the regulatory changes of the last two years, and soon. For those firms that have not fully come to terms with the requirements, the guidance provides a further opportunity to take action now to find flexible and cost-efficient solutions on AML/CFT, which – as MAS itself has suggested – can increasingly be found through the use of innovative Regulatory Technology. 

UK Sees Illicit Finance as National Security Issue

The UK government’s Integrated Review (IR) of Security, Defence, Development and Foreign Policy, published in March, has stressed the strategic importance to the UK of the threats from financial and economic crime, and the value of sanctions and AML/CFT measures in the fight against international illicit finance. 

The review argues that economic crimes such as fraud have played a significant role in the funding of Organised Crime Groups (OCGs), terrorists “and other malicious actors,” and had been used as a tool “to undermine good governance and faith” in the UK economy, as well as “tarnish…[the UK’s]…global reputation.” 

The review thus recommits the UK to its 2019 Economic Crime Plan, which looks to increase public sector investment in the fight against financial and economic crimes, especially through the expansion of the National Crime Agency’s (NCA) National Economic Crime Centre (NECC), and overhauls the current Suspicious Activity Reports (SARs) regime, to ensure that better intelligence from Financial Institutions (FIs) and other obligated entities is available for law enforcement investigations. The review further states that the UK will introduce legislation in due course to target the abuse of UK corporate structures in high-end money laundering, especially the purchase of property by overseas corporate entities.

Alongside the threat of illicit finance, the review also highlights the importance of the UK’s sanctions regime as a tool against national security threats. The UK introduced a “Magnitsky-style” sanctions regime in July 2020 to target human rights violations, and the review states that the UK will launch an additional global sanctions regime later in 2021 to focus on corruption. The review states that although the UK regime will retain distinct features, the UK will continue to work with its allies in the US, Canada, and the EU on appropriate coordination where there are shared interests.  

In a recent commentary on the review, Tom Keatinge, the Director of the Centre for Financial Crime and Security Studies (CFCS) at the Royal United Services Institute (RUSI), a major UK-based think tank, noted that there continued to be substantial weaknesses in the UK government’s approach. There is an ongoing lack of explicit recognition of the role the UK plays as a center for international money laundering, as well as under-investment in agencies such as the NCA. Nonetheless, Keatinge admitted to being “pleasantly surprised” by the strength of much of the language on both tackling illicit finance and the wider use of economic and financial sanctions. 

As Keatinge notes, the review does not immediately change the UK’s stated approach on financial and economic crime, and as such, the private sector should continue to take the same diligent approach to both AML/CFT and sanctions-related compliance as before. However, the tone of the review does suggest that the government is seeking to put extra energy and resources into the execution of its strategy, and signals that further reforms might develop in the future. As ever, this should encourage businesses to consider how best to undertake their obligations, and whether they have the most effective solutions in place to achieve good AML/CFT outcomes. 

At the same time, the more expansive use of sanctions by the UK is also likely to generate more potential risks for UK businesses with interests in high-risk emerging markets. For those businesses, it will be imperative to have access to comprehensive risk data, and agile controls in place to respond to what is likely to be regular updates of the UK regime.  

US Fraudsters Laundering Through Online Broker-Dealers

According to a recent report by US media outlet CNBC, fraudsters who have stolen public funds during the COVID-19 pandemic have been seeking new ways to launder their illicit proceeds through online broker-dealer platforms. 

Law enforcement officials estimate that more than $100 million have been laundered via the platforms since March 2020, when Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to support those financially affected by the pandemic. Roy Dotson, an assistant Special Agent-in-Charge with the Secret Service, told CNBC that there was clear evidence of the trend, and that “there are all types of investment platforms being utilized doing this.” 

According to the report, a common criminal modus operandi involves applying for an Economic Injury Disaster Loan (EIDL) or to the Paycheck Protection Program (PPP) using a stolen ID and having the funds paid into a linked current account under criminal control. Once in the current account, the funds are then transferred on to an online broker-dealer account, from which they are then transferred to other accounts and products in the laundering chain. The broker-dealer account is also typically opened using stolen or synthetic IDs, and according to Dotson, fraudsters use multiple fake IDs to open accounts across several platforms.  

Although Dotson did not identify specific platforms to CNBC, interviews with other investigators suggested that four in particular – Robinhood, TD Ameritrade, E-Trade and Fidelity – were being abused by criminals, and featured in ongoing law enforcement investigations. Robinhood has been of substantial media interest in the last few months because of its decision to halt trading in GameStop, a video games company the share value of which had been hyped on social media (a so-called ‘meme stock.’). 

According to Detective Ricardo Pena, a Florida law enforcement officer working in a federal anti-fraud task force, the platforms have become particularly attractive to a generation of younger fraudsters who are ‘tech savvy’ and aware of variations in levels of due diligence between different institutions. “A lot of people that are doing these frauds are younger,” he said. “They understand electronic banking. Platforms like Robinhood are just easier to get these accounts in order to push money in and out. And they know there’s not that much oversight.”

CNBC managed to contact three of the investment platforms mentioned, and all three stated that they have robust anti-fraud controls in place. Only E-Trade did not respond. A Robinhood spokesperson told CNBC that the firm was “ laser-focused on preventing fraud before it happens and our fraud and security teams have been working with law enforcement to mitigate and address this industry-wide problem.”

In light of the scale of laundering believed to be taking place through online broker-dealer platforms in the US, therefore there is an undeniable incentive for those in the sector to take concerted action to deal with the problem. Not only for legal, regulatory, and reputational reasons but because of firms’ social responsibility to prevent the misuse of public funds intended to mitigate one of the major public health and economic crises of modern times. 

This invariably means broker-dealers taking a more proactive risk-based approach to AML/CFT than has been the case in the past. As we argue in our recently published ‘Practical Guide for Broker-Dealers to Create and Enhance an AML Program,‘ even without the pressures of the pandemic, broker-dealers operating in the US have had to face rapidly changing regulations and challenges from increasing digitization and the democratization of finance over recent years. Now, more than ever, the sector needs to invest effort into ensuring they have the most effective and efficient controls in place to deal with the evolving risks of our time.  

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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