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5MLD: How financial services firms can stay ahead of current and future money laundering regulations



5MLD: How financial services firms can stay ahead of current and future money laundering regulations

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:

  1. 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.

  1. 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.

  1. 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.

  1. 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.


Analysis: Wealth managers frustrated over bitcoin, anxious for piece of the action



Analysis: Wealth managers frustrated over bitcoin, anxious for piece of the action 1

By David Randall

NEW YORK (Reuters) – The rollercoster ride in bitcoin since the start of the year has not dampened wealth manager Jim Paulsen’s enthusiasm for the cryptocurrency.

Yet Paulsen, chief investment officer for Leuthold Group, which manages $1 billion, cannot own bitcoin in client portfolios due to regulatory constraints. This has left him on the sidelines watching the world’s most popular cyrptocurrency surge more than 900% since its March lows in volatile trading that also saw bitcoin lose more than 20% in the span of a few days.

“What I like about bitcoin is… its correlation to stocks and other assets is extraordinarily independent,” said Paulsen, who remains frustrated that he cannot own it for clients.

The promise of an asset class that behaves differently than stocks or bonds is leaving portfolio and wealth managers scrambling own cryptocurrencies if they can.

Many view bitcoin as a good inflation hedge. Nearly 20% of advisors are contemplating investing in cyryptocurrencies this year due to concerns about inflation, up from 6.3% in 2019, according to a report from Citi.

Still, a number of advisors say they are unable to own bitcoin for their clients until they can hold it in an exchange-traded fund or mutual fund that clears legal hurdles common for any investment.

Should that happen, institutional money could flow in and push the asset class higher, analysts said.

BlackRock Inc, the world’s largest asset manager, said on Jan. 21 it was adding bitcoin futures as eligible investments for certain funds. Fund experts expect other asset management firms to follow suit.

Yet the U.S. Securities and Exchange Commission does not yet recognize cryptocurrencies as a security like a stock or a bond, and has not ruled whether mutual funds can own them directly, said Robert Jenkins, global head of research at Refinitiv Lipper. So it remains unclear whether any mutual funds currently own bitcoin because they are not required to disclose it, he said.

In the United States, eight firms have tried without success since 2013 to create a bitcoin ETF, according to Todd Rosenbluth, director of ETF and mutual fund research at New York based CFRA.

The SEC did not respond to questions for this article.

Funds like the popular ARK Invest ETF line that have positions in bitcoin do it through shares of the Greyscale Bitcoin Trust, a publicly traded trust that holds a set number of bitcoin units and often trades at a premium to the value of its underlying portfolio.

Securities regulators in Canada approved the world’s first bitcoin ETF on Feb. 12, leading some investors to hope that U.S. regulators will shortly follow.

President Joe Biden’s nominee to head the SEC, Gary Gensler, spoke in broad terms about crytocurrencies in a confirmation hearing Tuesday, suggesting that the agency should provide more regulation on how it views the asset class. Some investors have taken his appointment as raising the likelihood that a bitcoin ETF will be approved for the U.S.

Gensler “seems more crypto-friendly than previous folks who had oversight,” said Viraj Patel, head of asset allocation at Fiduciary Trust International, who has not yet made investments in the asset class for clients but is waiting for a U.S.-based ETF. “We’re really looking at cryptocurrency through the lens of this could be gold 2.0,” said Patel.

Still, Rosenbluth said he was skeptical of a product being approved this year, saying there would be a high bar to clear tied to market manipulation and custody audit.

Even in the absence of an ETF, retail interest “remains strong with no signs of abating,” JP Morgan analysts wrote in a Feb 16 research note.

Overall, cyptocurrency funds and products that investors can buy direct brought in nearly $5.6 billion in assets in 2020, up more than 600% from the year before, according to asset manager CoinShares. Cryptocurrency funds have gathered $4.2 billion in flows for this year through March 1, Coinshares said.

“Not allowing the purchase of cyrpto is something that’s frustrating to many advisors, but it’s such a volatile asset that many investors end up doing it on their own,” said Jimmy Lee, chief executive of the Wealth Consulting Group.

(Reporting by David Randall; editing by Megan Davies, Ira Iosebashvili and David Gregorio)

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2020: the year mortgages went digital



2020: the year mortgages went digital 2

By Francesca Carlesi, co-founder and CEO, Molo

It’s safe to say that the past year has changed everything. With restrictions in place that limited almost every aspect of our lives, from work to socialising, it’s no surprise that some industries were decimated and others were left severely shaken. The mortgage sector was no exception, as it also underwent a vast transformation which may have changed the course of mortgages forever.

The industry saw a paradigm shift, which was driven by consumers being forced online. This was the case for everything from mortgage applications to online house viewings and property valuations. As expected, this resulted in an increased demand for digital mortgage solutions with more flexibility.

While the industry was already slowly shifting, the pandemic has accelerated this and now the traditional process of getting a mortgage is increasingly coming under threat. We’ve seen a number of somewhat surprising trends over the last year that support this argument and suggest that consumers are embracing the change. For example, compared to March last year, we’ve seen the number of people aged over 45 applying for a mortgage loan increase by 70%. This indicates that consumers who may have previously resisted applying for a digital mortgage saw no alternative option in lockdown.

It seems that this paid off, as our data suggests that overall consumers were more satisfied with the simpler and quicker process.

A shift in behaviour

It’s clear that the pandemic did nothing to discourage those seeking a mortgage from doing so and the industry continued to grow. For example, in October last year, the UK mortgage industry saw a 13-year high, where over 97,500 loans were approved – the highest figure since September 2007, the month at the start of the financial crisis. But what led to this and why?

In a post-pandemic world of financial uncertainty and instability, the idea of purchasing property is now being perceived by many as a safer bet than investing in the stock market or other investment options.

As a result, buy-to-let properties are becoming an increasingly appealing option and Google has now coined it as ‘breaking out’. Not only did Google trends observe a 5000% increase in the search term ‘how to get a buy-to-let mortgage’ last year, but at Molo, our own data also supported this and found a significant rise in the number of first-time buyers who were mortgage hunting.

Despite being introduced twenty years prior to buy-to-let mortgages, let-to-buy mortgages also saw huge growth in 2020. The pandemic has led to increased numbers of remote workers and commuting has become a thing of the past. UK cities are seeing somewhat of a mass exodus as the priorities of city dwellers are changing and many are going in search of more space. Let-to-buy mortgages offer the flexibility to facilitate this. Investing in this kind of mortgage means that families, for example, can afford to rent out their property in the city and move to locations that are more rural.

We’ve also seen the industry pivot slightly in terms of regional demands. While there is continued demand from London and the South East, for example, we’ve also seen growth in areas such as the North West and we predict this won’t slow any time soon. One of the cities with especially high demand was Blackpool, where growth in demand was twice the national average.

Future gazing: 2021 and beyond

We’re expecting that the changes seen across the industry over the past will stick. After all, if even the sceptical customers were happy with the ease and simplicity of the online mortgage application and approval process, why on earth would they go back?

It’s important that we learn from these observations and use them to draw insight into the future of the mortgage sector. For instance, while Coronavirus has certainly caused disruption for lenders and consumers alike, it’s also highlighted the need for a more advanced, digital offering. It’s shown that digital mortgages really have become the best option for customers. The pandemic has been a test run for businesses and has proved that, even after restrictions are lifted, there is no good reason for mortgage providers to return to the traditional but slower business-as-usual.

At least in the property world, 2020 could well be remembered as the year that mortgages went digital. While it’s true that the pandemic was the catalyst for this shift, it’s now gone beyond the virus. The changes we’ve seen over the past year are likely to shape the mortgage industry for years to come.

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EU finance chief says UK’s Northern Ireland move a breach of trust



EU finance chief says UK's Northern Ireland move a breach of trust 3

DUBLIN (Reuters) – The European Union’s finance chief said Britain’s decision to make unilateral changes to Northern Irish Brexit arrangements raised questions over whether it can be trusted in future trade negotiations with any partner.

“It does open a question mark about global Britain, if this is how global Britain will negotiate with other partners. Our experience has been not an easy one to put it mildly,” Mairead McGuinness, who is negotiating post-Brexit financial services terms with Britain, told Irish broadcaster RTE on Thursday.

“We have to be very clear that when something happens that is not appropriate and indeed in our view breaches both trust and an international agreement, then we have to call it out. It wasn’t a good day yesterday but this morning we have to work for practical solutions, with the UK, not separately.”

(Reporting by Padraic Halpin; editing by John Stonestreet)

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