By Michael Harris, Director of Financial Crime Compliance and Reputational Risk at LexisNexis® Risk Solutions
The financial services industry faces challenges on almost every front in the fight against money laundering and terrorist financing; it’s estimated that only 1% of all money laundered in the UK is detected.The global nature of the UK’s finance sector means it reaps the benefits of inbound investment from all over the world, however this leaves the sector open to a multitude of hard-to-track transactions. Unsurprisingly, according to HM Treasury’s latest National Risk Assessment of Money Laundering and Terrorist Financing, both high street and private banks are deemed high risk to money laundering; the former due to the sheer volume of transactions taking place daily, and the latter due to their potential exposure to the proceeds of political corruption and tax evasion when managing wealth for high-net-worth individuals.
Another pressure for financial services firms is the changing regulatory landscape. As one of the most heavily regulated sectors, finance firms not only have to keep abreast of current regulations, but also those on the horizon. With this in mind, business leaders must reduce their vulnerability to money laundering, and potential eye-watering fines for non-compliance, by ensuring compliance with regulations ahead of time.
One regulatory change firms should already be aware of is the 5th Money Laundering Directive (5MLD), the requirements of which regulated entities will need to have implemented by 10th January 2020. There are a few simple, protective measures finance firms should consider implementing now to ensure they are compliant ahead of the deadline:
- Evaluate exposure to new ‘obliged entities’
All businesses in the financial services sector are ‘obliged entities’ – regulated organisations that must meet anti-money laundering (AML) obligations – and have been for some time. However, additional entities will now have this status, including Virtual Assets companies, which encompass cryptocurrencies, digital tokens and other forms of digital value representation; Virtual Asset Service Providers, such as crypto-exchanges and digital wallet providers; and art traders where the value of a transaction exceeds €10,000.
Though many in the sector may not wish to hear it, given the potential risks surrounding their use, virtual assets are here to stay and are now subject to money laundering regulation. The best advice is to treat virtual asset companies and virtual asset service providers as potentially high-risk customers and carry out continuous monitoring.
- Apply enhanced due diligence measures
5MLD aims to create a common interpretation of what enhanced due diligence (EDD) measures are, in order to reduce differing interpretations between jurisdictions. When obliged entities are dealing with transactions in countries where AML controls are weak, EDD checks should be applied. However, relying on internal resources to conduct EDD checks can be time consuming without the correct tools, and if not performed correctly, can leave businesses exposed to unnecessary risk.
Some businesses choose to rely on the main search engines available to conduct checks but doing so provides only half the picture, omitting information that is buried in the deep web or only accessible via subscription – as checks on breaches of regulation, litigation matters and insolvency orders often are. Instead, it’s vital that firms acquire software designed specifically to support EDD, and minimise risk and waste.
Furthermore, having access to local experts for each jurisdiction you deal with is invaluable. This gives you the ability to gauge the local market and its culture, potentially uncovering information which might otherwise be missed, particularly when other languages are involved.
- Prepare to share customer account data on demand
Under 5MLD, Financial Intelligence Units (FIUs) will have the authority to obtain payment transaction registers and electronic data, even if a Suspicious Activity Report (SAR) has not been filed. It’s therefore advisable to anticipate that such a request could be made at any time, and that in such a scenario, information must be given in a timely manner.
Member state entities will be required to periodically file or upload company and customer data to central mechanisms, such as central registries or central electronic data retrieval systems, which will also be accessible to FIUs and national competent authorities.
- Incorporate specialist RegTech solutions
Integrating regulatory technology, or ‘RegTech’, solutions into AML processes can significantly help in avoiding penalties and protecting reputations. RegTech solutions harness data to produce information in real time, and this technology can support financial services firms in preparing for 5MLD by making their monitoring and onboarding processes automated, without losing the human contribution needed in risk control.
RegTech products comprising machine learning and natural language processing, as well as advanced augmented intelligence, can make meeting AML demands much easier for businesses. By searching international databases for accurate and up-to-date customer information they can provide compliance professionals with the information they need to adopt a true risk-based approach. This is central to the effective implementation of the standards prescribed by the EU’s money laundering directives, which in turn are based on the Financial Action Task Force’s (FATF) recommendations for international anti-money laundering and combating the financing of terrorism and proliferation.
Such insight will also prove invaluable in preparing for the EU’s Sixth Money Laundering Directive (6MLD) in 2020, when monitoring requirements will become even tighter, and a number of new predicate offences will come into force. Despite withdrawing from the EU, the UK is likely to adopt at least some, if not all, of the 6th Directive. RegTech solutions can very quickly and easily identify potential money laundering risk, ensuring full transparency in business relationships and giving peace of mind in time for both 5MLD and 6MLD implementation.
Whilst at times, keeping up with money laundering regulations can feel like swimming against the tide, it’s crucial to bear in mind why it is so important to curb flows of illicit money which are, after all, generated by heinous crimes. Whether its children exposed to drugs and county line gangs, women trafficked for sexual exploitation, or vulnerable individuals targeted by cybercriminals, often it’s innocent people who have been callously exploited in the process of creating the dirty cash.
As well as helping businesses do the right thing, these amendments can bring wider benefits to all obliged entities, by actually making life easier. Greater transparency means clearer knowledge of who you’re working with, and reassurance that you’re properly armed in the fight against illicit funds.