Launching AI-driven Fraud Detection
Iain Armstrong, Regulatory Affairs Specialist at ComplyAdvantage
When asked which area of their compliance function would be at risk in an audit, 48 percent – the highest proportion – told us it would be their knowledge of regulations. This blog explores the evolving anti-money laundering regulatory landscape, examining several global trends and themes in major economies. Be sure to download our regulatory trends report to explore in more detail!
The Financial Action Task Force (FATF)
Singapore took over the FATF Presidency on July 1, 2022, establishing the global AML/CFT standard setter’s priorities for the next two years. These include:
- Strengthening asset recovery – As less than one percent of illicit assets are recovered, FATF will seek to enhance collaborative frameworks and focus on cyber-enabled crimes such as fraud, scams, and ransomware using data analytics and enhanced work through public-private partnerships. The first FATF-INTERPOL Roundtable Engagement (FIRE) was held in Singapore in September.
- Countering illicit finance associated with cyber-enabled crime – A new initiative will look to understand the money laundering and terrorist financing related to online fraud, ransomware, phishing attacks & scams and document best practices.
- Increasing the effectiveness of global AML measures – The FATF will organize thematic sharing sessions and focus on identifying new ML/TF risks linked to VASPs and sharing best practices, completing guidance on the beneficial ownership of legal persons, and amending FATF regulation 25 on beneficial ownership of trusts and legal arrangements by February 2023. It will also encourage the adoption of data analytics for better AML/CFT outcomes and work to develop a regular review of TF risks with Al Qaeda, ISIL & affiliates. Finally, it will aim to generate awareness of the ML/TF risks related to environmental crime, the international wildlife trade, and grand corruption.
- Reinforcing FATF Partnerships with FATF-style regional bodies (FSRBs) – The FATF will look to build capabilities and capacity to strengthen the Global Network to more effectively tackle money laundering, terrorist financing & proliferation financing.
The United States
Under the Biden administration, the US will continue focusing on three core themes:
- Strengthening laws and regulations to tackle illicit financial flows
- Modernizing, building, and enhancing regulatory and enforcement frameworks, particularly in the crypto space
- Targeting wrongdoers who seek access to the US financial system to launder the proceeds of crime
The US published its 2022 National Illicit Finance Strategy, providing a roadmap to “close loopholes exploited by criminals and illicit actors.” This is designed to address threats and vulnerabilities identified in its National Risk Assessment (NRA) that have resulted from increased levels of fraud, corruption, and the digitization of finance. Particular emphasis was placed on addressing Russian aggression in Ukraine and the global network of corrupt Russian elites.
The strategy set four priority recommendations. These are listed below and include 14 supporting actions.
- Priority One: Increased Transparency & Close Legal and Regulatory Gaps
- Priority Two: Make the AML/CFT Regulatory Framework for Financial Institutions More Efficient and Effective
- Priority Three: Enhance Operational Effectiveness in Combating Illicit Finance
- Priority Four: Support Technological Innovation and Harness Technology to Mitigate Illicit Finance Risks
Following an Executive Order from President Biden on Ensuring Responsible Development of Digital Assets and the proposed Lummis-Gillibrand bill, expect to see much more about crypto regulation. Given the size of the US market and the clear benefits of regulatory alignment, firms should expect other countries to study the US proposals as a template for their own markets.
The European Union
Progress will continue with the overhaul of the EU’s AML/CFT regulations as the AML package moves through the EU governance process. The proposal was launched in 2021 and consisted of four separate pieces of legislation, including:
- Regulation to establish a supranational Authority for Anti-Money Laundering and Countering the Financing of Terrorism (AMLA)
- A new AML/CFT Directive, the “new” 6AMLD* for countries to implement domestic AML/CFT frameworks
- Regulation establishing a single AML/CFT rulebook with greater clarity and guidance for firms required to meet AML/CFT obligations (‘obliged entities’)
- Updated transfer of funds regulation to cover changes to processing transaction requirements and bring into scope virtual assets service providers (VASPs)/crypto asset service providers (CASPs)
The European Commission will also continue to name countries that have not yet fully complied with the transposition of 6AMLD, which sets out predicate offenses for money laundering. In February 2022, it launched infringement proceedings against Latvia, Lithuania, Malta & Portugal for not sufficiently explaining how they have defined predicate offenses in domestic legislation. 6AMLD became effective on December 3, 2020, and needed to be implemented by regulated entities by June 3, 2021.
Additional initiatives from the European Union will include new measures targeting environmental crime, a strategy to address de-risking, and action on rising numbers of cross-border money laundering cases.
*A note on definitions: The EU Directive 2018/1673, issued in November 2018, created a new foundation for the EU’s criminal law on money laundering. EU member states were required to transpose it into national law by 3 December 2020, with the private sector required to make any necessary changes by 3 June 2022. This directive is widely known in the financial services industry as the 6th Anti-Money Laundering Directive (6AMLD). However, the European Commission now sees this directive as a standalone regulation. As a result, we are calling the proposed directive referenced here the “new” 6AMLD.
China has issued a “Three-Year Action Plan for Combating Money Laundering Violations and Crimes (2022-2024)” to clamp down on money laundering, which runs from January 2022 until December 2024. The plan was drafted to “truly safeguard national security, social stability, economic development, and the interests of the people.” It was issued by 11 Chinese authorities and obliged them to:
- Increase publicity and training
- Amend the Anti-Money Laundering Law and legal interpretations related to handling criminal money laundering cases
- Strengthen intelligence-led research for judgment and cases
- Improve the analysis of money laundering typologies and anti-money laundering investigations
- Boost the ability of obliged firms to prevent and control money laundering risks
China also amended its rules to strengthen the ability of firms to fight money laundering. The rules define CDD requirements, including how regulated firms should store identity and trading data. The requirements were also extended to non-bank payment companies and wealth management firms.
In November 2022, the FATF issued an update on progress made by China to address identified deficiencies in its 2019 MER. China remains non-compliant with requirements around DFNBPs, including effective supervision and the need to carry out due diligence. It is also deficient in measures, including submitting suspicious activity reports, transparency, and beneficial ownership of legal arrangements.
Designated Non-Financial Businesses & Professions (DNFBPs) regulation and enforcement will continue to be a major inflection point in Australia. The Legal and Constitutional Affairs References Committee published its report in March 2022 at the request of the Senate on the effectiveness of the AML/CFT regime in Australia. The report focuses on the failure to bring DNFBPs, such as lawyers, real estate agents, casinos, and other gambling service providers, auditors, and dealers in precious metals and stones, into the scope of AML regulation. Loopholes in Australia’s AML/CFT regime have been blamed for allowing billions of dollars to be laundered through Australia’s real estate sector and for “serious and systemic non-compliance” by casino operators. In 2021, out of AUS$187m in assets seized, AUS$116m accounted for real estate assets. AUSTRAC estimated that in 2020, AUS$ 1 billion was laundered by Chinese interests via Australian real estate.
The Senate report provides an overview of the regulation of gatekeepers, current and emerging challenges in AML, and various recommendations for improvement. These include regulating DNFBPs and making improvements to the AML/CFT framework, such as:
- Simplifying AML/CFT rules
- Supporting the use of technologies to meet KYC obligations
- Applying a risk-based approach to regulation
- Increasing penalties for ML/TF
- Boosting resourcing in AUSTRAC
The report further found that delays in implementing Tranche 2 reforms continue to expose Australia to economic harm and risk its credibility as it is one of only 3 FATF countries that does not have DNFBPs in the scope of AML/CFT legislation. The committee also recommended establishing a beneficial ownership registry.
Explore more by downloading our Regional Regulatory Trends report today
Originally published 18 January 2023, updated 23 January 2023
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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