The past year saw a series of money laundering cases all over the world involving high-profile and politically exposed persons, cryptocurrency frauds and terror attacks across Europe, which raised regulators’ concerns about significant failures in anti-money laundering and counter-terrorist financing (AML/CTF) controls and confirmed the necessity for regulatory reform. The investigations of financial scandals revealed the enormous scale of criminal wrongdoing, deficiencies in AML regulations and many years of constant failures of the bank’s internal controls. The consequence of these events were substantial fines for the banks, which hit new height.
Examples include Commonwealth Bank of Australia, which is set to pay a record AUD700 million in fines for breaching AML and counter-terrorist financing laws. The bank failed to provide threshold transaction reports to Australia's financial intelligence agency and AML/CTF regulator (AUSTRAC) on time (for cash transactions of AUD 10,000 or more) and to report suspicious transactions on time, or at all, involving tens of millions of dollars. This shows how important for banks it is to have a proper and efficient transaction monitoring process in place in order to comply with AML laws.
Moreover, Europe witnessed the largest money laundering scandal in its history involving the Estonian branch of Danske Bank, Denmark’s largest bank, which has been revealed as the center of an enormous money laundering vehicle. The investigation has shown that EUR 200 billion (USD 229 billion) of suspicious payments were conducted through Danske Bank's Estonian branch from Russia and other ex-Soviet states. The scandal has led to resignations of bank’s chief executive and chairman as well as criminal investigations in the United States, Denmark and Estonia.
Dutch bank ING Groep NV is another financial institution which had to face huge fine due to violation of laws on preventing money laundering and financing terrorism by failing to properly identify the beneficial owners of client accounts and spot unusual transactions through them. The bank has admitted that clients had been able to launder money through their accounts due to many shortcomings in banks internal controls and agreed to pay EUR 775 million (USD 900 million) fine imposed by Dutch public prosecution service on ING Groep NV, which is one of the biggest fines ever given to one of the country’s banks in a criminal case.
The failure in anti-money laundering and terrorist financing controls has led to tragic end for some of the big players in the financial industry.
Latvia’s third largest lender, ABLV, liquidated itself after the notice issued by the US Treasury Department’s Financial Crimes Enforcement Network accusing the bank of money laundering and violating sanctions. Even though the notice was just a draft, due to the risks it posed other banks denied US dollar funding of ABLV and depositors were rapidly removing their funds from ABLV’s accounts. Taking into consideration that FinCEN’s intended “to prohibit the opening or maintaining of a correspondent account in the United States for, or on behalf of, ABLV Bank, AS”, ABLV would not have survived shutting it out of the global financial market dominated by US dollar transactions.
Malta's Pilatus Bank is another example of financial institution that no longer exists due to regulatory actions. The European Central Bank withdrew Pilatus Bank’s licence, after the bank’s Iranian chairman was charged in the US over money laundering and bank fraud.
The string of money laundering cases raised concerns about supervision and efficient enforcement of AML rules around the world. In regard to these issues regulators are strengthening rules to prevent money laundering and terrorist financing, which is the global trend for 2019.
In July 2018 European Union brought into force the 5th Anti-Money Laundering Directive (5AMLD). 5AMLD sets out additional measures to ensure increased transparency of financial transactions and legal entities by establishing a centralized and public register of companies and their ultimate beneficial owners. Due to greater public scrutiny this kind of transparency is expected to reduce the use of shell companies which are often created by money launderers in order to transform illegal assets to seemingly legitimate funds.
Moreover, EU members are obligated to ensure systematic enhanced controls on the financial transactions from and to high risk third countries, based on the harmonized list of checks that need to be performed.
The past year 2018 was partly defined by the increasing regulators’ scrutiny of the virtual currencies, which became a new method used for settlement by money launderers and terrorists due to certain level of traders’ anonymity.
In 2019 the Financial Action Task Force (FATF) is “prioritizing actions to ensure that countries properly regulate and supervise financial activities involving virtual assets”. As per the FATF’s updated guidelines “virtual asset service providers are subject to AML/CFT regulations”, as well as “should be licensed or registered and subject to monitoring to ensure compliance”. With no control over virtual assets and - what is more important - without knowledge about the beneficial owners of virtual units, authorities are left with no tool to combat these burning threats.
Taking into account G20 members’ commitment to “regulate crypto-assets for anti-money laundering and countering the financing of terrorism” (as declared on Buenos Aires Leaders’ Summit in December 2018) and FATF’s commitment to “review its standards as they apply to the virtual asset sector in 12 months” (as the outcome of Outcomes FATF Plenary, 17-19 October 2018), one can expect a string of AML guidelines issued by regulators across the world.
In the last quarter of 2018 alone, the United States Department of the Treasury, the Canadian Parliament and the Russian Parliament all announced the introduction of Anti-Money Laundering (AML) laws for cryptocurrencies; EU’s 5AMLD, Japan and Australia extended Anti-Money Laundering and Counter Terrorism financing rules to cryptocurrency sector, including initial coin offerings (ICO).
The year 2019 will be a milestone in regulation of crypto market, as countries are finally acknowledging the potential of virtual assets in the financial system. Cryptocurrency exchanges, custodian wallet providers and ICOs might become new subjects of AML rules, obliged to identify their customers and report any suspicious activity to the Financial Intelligence Units. They might become obliged to perform risk assessment specific for their industry and design efficient transaction monitoring processes, as well as to execute them by the team trained and experienced in activities involving virtual assets - in order for these institutions to comply with AML regulations.
Another challenge for 2019 is an international cooperation and sharing informationbeyond big banks. It is a well-known fact that criminals take advantage of the lack of cross border communication. As per the Financial Action Task Force’s (FATF’s) Guidance on Private Sector Information Sharing: “A continuous dialogue between private and public sectors, will improve the quality of the information shared and its usefulness to authorities charged with investigating financial crime”.
The importance of collaboration between European banks and their respective Financial Intelligence Units is also emphasized in 5AMLD. The banks should cooperate on an international level in order to prevent the exploitation of vulnerabilities of specific countries.
The exchange of information between the EU member countries about beneficial ownership and identity of natural or legal persons holding or controlling payment accounts, bank accounts and safe-deposit boxes is a significant component of the international cooperation. Sharing information on international level should improve the quality of data and have a positive impact on transaction monitoring investigations.
Moreover, as per 5AMLD all Member States are obligated to connect their central registers, which have to include data mentioned above, via the European Central Platform. This action is a step in the right direction, however there is still a lot to do in the field of international cooperation and information exchange.
The trend of developing AML automation continues in 2019. Nowadays financial institutions have to record, process and analyze enormous amounts of data, which creates inefficiency in their due diligence and investigation processes. It is essential for the transaction monitoring process to be able to process big data in real time, if needed.
The solution for these issues is automation of significant portion of activities, including populating transaction monitoring case files, populating suspicious transactions forms and excluding obvious false positives. Data analytics solutions can significantly decrease caseload and the investigation time by reducing false positives in both name screening and transaction monitoring. Financial institutions are currently exploring data analytics applications designed to automatically determine recommendation for alerted transactions.
There are still many technology innovation opportunities which might become reality in the near future. However, financial institutions should ensure that staff involved in the new technology implementation projects consist of “the appropriate mixture of data scientists and analysts as well as AML/CFT subject matter specialists”.
Recent years show the increased focus on the transaction monitoring as a key AML/CTF tool, which trend should continue into 2019 and onward. Enormous amounts of data which have to be processed by financial institutions and constant changes in the financial markets, including new services (such as adoption of virtual assets and development of crypto market) create new risks related to money laundering and terrorist financing which have to be addressed and mitigated. Recognition of these new risks and changes should result in further strengthening AML/CTF rules and extending them to new actors in the financial market. Continuous development of new technologies as well as international cooperation and information sharing between financial institutions are expected in the following years, which hopefully will result in the increased efficiency of the transaction monitoring process.
Magdalena Kowalska, Maciej Janas, Alicja Zysnarska, Joanna Borkowska, Aparna Chandrasekar and Jack Holder
European Parliament, Economic Governance Support Unit (EGOV) Authors: J. Deslandes and M. Magnus Directorate-General for Internal Policies (October 2018), “ In-depth analysis, Money laundering - Recent cases from a EU banking supervisory perspective”