4th February 2021

Philippines and AML/CFT Reform, Germany and Regulatory Change, US and Enforcement Actions

The Philippines strengthens its AML/CFT regulations, Germany’s leading financial regulator departs after scandal, and a New York bank faces AML/CFT fines. 

We share our financial crime regulatory highlights from the week of February 1, 2021.

President Duterte Signs New AML/CFT Law

On January 28, Rodrigo Duterte, the president of the Philippines, signed a new law designed to enhance the country’s Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regulations. The signature was timed to meet a deadline placed by the Financial Action Task Force (FATF), the global standard-setter for AML/CFT, who had requested changes to Philippines law by February 1.  

Under the new law, the country’s Anti Money Laundering Council (AMLC) has been given a range of new powers designed to meet deficiencies FATF’s examiners had previously identified in their October 2019 Mutual Evaluation Report (MER). The centerpiece of the changes gives the AMLC the right to impose financial sanctions on individuals and firms involved in financially facilitating the proliferation of Weapons of Mass Destruction (WMD), the absence of which had been a key FATF criticism.  

However, the new law also allows the AMLC more granular investigative and judicial powers, such as the right to apply for court summons’ and warrants to search and seize illicit assets. Additional powers have also been provided to enable the Council to scrutinize transactions activity in high-risk sectors such as Philippines-based online casino platforms –  an area of long term AMLC concern – as well as real estate agents and brokers engaging in single cash transactions worth more than 7.5 million pesos (equivalent to $160,000).

A final area of change is a legally enshrined commitment that the country will improve its current levels of cooperation with overseas law enforcement agencies in international cases. “Consistent with its foreign policy,” the law states, the Philippines will “extend cooperation in transnational investigations and prosecutions of persons involved in money laundering activities wherever committed.” 

In separate but related developments, the Philippines central bank, Bangko Sentral ng Pilipinas (BSP), has also recently published new AML/CFT guidelines for Virtual Asset Service Providers (VASPs), aligning the country with relevant FATF standards published in June 2019.  Under the new guidelines, VASPs now need to apply to BSP for a license to operate and must follow AML/CFT rules as other financial institutions. VASPs will therefore be required to conduct Customer Due Diligence (CDD) and maintain records on transactions worth over 50,000 pesos ($1,000), and conduct Enhanced Due Diligence (EDD) on suspicious activity or single transactions of 500,000 pesos (US$10,000). 

Both the new AML/CFT law and VASP guidelines will signal to the international community that the Philippines is committed to taking action to improve its anti-financial crime performance. Most significantly, it will avert the country’s return to FATF’s list of ‘Jurisdictions Under Increased Monitoring’ (unofficially known as the ‘grey list’), where it had previously been placed between 2000 and 2005. As the Philippines found at that time, being on the grey list was a substantial barrier to economic development, delaying inward investment and access to the wider international financial system.  

The changes will also send a message to the obligated financial sectors operating in the Philippines that the current administration places a strong emphasis on both growth and compliance. In a written statement, the Governor of the BPS, Benjamin Diokno, said that the changes would create “an environment that encourages financial innovation while safeguarding the integrity and stability of the financial system.” In this fast-growing region, few countries are now willing to undertake a ‘race to the bottom.’ 

BaFin Head Leaves After Wirecard

The German federal government has recently announced that Felix Hufeld, the President of the country’s main financial services regulator, BaFin, will be leaving his role. Finance Minister Olaf Scholz said he and Hufeld had agreed on the departure together, although the German media has largely interpreted the change as a dismissal.  

The departure of Hufeld is one of the consequences of the ongoing scandal around the leading Financial Technology (FinTech) firm, electronic payment services provider Wirecard AG, which went out of business in June 2020 with a reported debt of €3.5 billion. It was subsequently revealed that €1.9billion was missing the company’s accounts, which auditor Ernst & Young (EY) assessed had been siphoned off in an “elaborate and sophisticated fraud.” Wirecard’s former Chief Executive Officer, Markus Braun, and former Chief Operating Officer, Jan Marsalek, have been subject to a criminal investigation, and Marsalek has become a fugitive from justice. 

EY has said that the fraud would have been difficult to detect prior to the company’s collapse, but a subsequent review by KPMG, another professional services provider, has suggested that indications of potentially nefarious activity had been present since 2016.

BaFin too has come under attack from politicians, the media, and investors for failures of regulatory oversight. A report from the European and Securities Market Authority (ESMA), published  in November 2020, suggested that both BaFin and Germany’s Financial Reporting Enforcement Panel had failed to pay attention to early warning signs at Wirecard, and had in the first instance targeted whistleblowers and external critics of the firm, rather than investigating accusations of criminality. 

BaFin was further alleged to have turned a ‘blind eye’ to improper trading by their own staff in Wirecard shares. BaFin initially rejected the allegations, but following an internal investigation, the agency has recently filed a criminal complaint against one employee in its Securities Supervision Sector for insider dealing of Wirecard shares in the summer of 2020. 

The departure of Mr Hufeld is expected to lead to extensive structural changes at BaFin. According to Mr. Scholz, “the Wirecard scandal has revealed the need to reorganize German financial supervision so that it can fulfill its oversight role more effectively.” What that means in terms of leadership is not yet clear; as of this writing, no successor to Mr. Hufeld has been announced, and his deputy, Elisabeth Roegele has also departed.

However, BaFin’s institutional direction of travel is already clearer. In recent days, the Finance Ministry has published a ‘seven-point plan’, devised by the consultancy Roland Berger, to create a more integrated and focused oversight body able to supervise large and complex firms. The plan further proposes the creation of a forensic task force that can be deployed into companies when irregularities are suspected. 

Coming in the wake of investigations into major German banks’ potential involvement in a Baltic-Nordic money laundering scheme, the Wirecard scandal suggests a period of more aggressive financial crime supervision is likely to follow, especially in the Financial Technology (FinTech) sector. German firms will thus need to prepare themselves now to meet the challenge.

Apple Bank Faces AML/CFT Fine

Apple Bank for Savings, based in New York, has recently been revealed by The Wall Street Journal to have paid a $12.5 million civil penalty to settle a claim from the Federal Deposit Insurance Corporation (FDIC). According to the agency, the bank had failed to meet its AML/CFT obligations under the Bank Secrecy Act (BSA) between April 2014 and September 2018. 

FDIC, a federal agency tasked to maintain public confidence and stability in the financial system, announced that Apple Bank paid the fine in December 2020. In the judgment of the FDIC, the bank had failed to make good on AML/CFT deficiencies that had already been highlighted to the bank in a prior order from December 2015. This previous order had noted a lack of qualified compliance staff, effective risk management policies and procedures, and vulnerabilities in the bank’s controls, which it directed the bank to rectify. 

The FDIC’s latest move is reported to reflect its view that Apple Bank failed to make satisfactory improvements with appropriate speed after the issue of the original consent order. The recent order states that the size of the penalty has been intended to reflect the bank’s previous failure to take appropriate actions, as well as the nature of the seriousness of the regulatory failures themselves.  

The bank, focused on retail and small business customers, consented to the order without commenting on the substance of the FDIC’s allegations. Responding to inquiries from PYMNTS.com, the bank said that it was “committed to strong and transparent relationships with its regulators” and that it had “invested considerable resources to address the FDIC’s comments.” It further stated that “enhancements to its compliance program have been acknowledged by the FDIC,” and that the bank would seek to provide “superior service…while maintaining a compliance program that complies with applicable statutory and regulatory requirements.” 

The experience of Apple Bank suggests that US regulators remain as focused as ever on identifying AML/CFT failings, even below the top tier of international banks that have been the target of many of the largest fines of the last decade. The US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has also recently leveled a fine of $390 million on credit card company Capital One, for failing to engage with federal authorities on what FinCEN called “willful and negligent violations” of the BSA. According to FinCEN, the firm had failed to submit “thousands of suspicious activity reports” between 2008 and 2014, a breach which FinCEN director Kenneth Blanco described as “egregious.” 

The proactive stance of US regulators looks likely to continue and grow under the new administration, with new Treasury Secretary Janet Yellen saying that AML/CFT reforms resulting from the passing of the National Defence Authorization Act (NDAA) would be one of her early priorities (see our recent regulatory highlights).  US financial institutions of all sizes and types will thus need to ensure that they both understand and meet the AML/CFT expectations of the authorities, which are likely to be tougher than ever.