The fight against money laundering
4 key areas banks need to address

The 10th Public Edition of the Basel AML Index was released this month, measuring the risk of money laundering and terrorist financing in jurisdictions around the world. There were some interesting – and concerning – trends identified. So what were they and what do they mean for Financial Institutions in the UK?

The areas of focus
Action required

1.       A stronger response to threats from virtual assets is required

In January 2021 alone there were an estimated 106 million cryptocurrency users globally. While there’s limited information on how these cryptocurrencies are being used for criminal purposes, it is estimated that of the $21.4bn cryptocurrency transactions in 2019, criminal activity represented around 2.1% (USD 450 million).

Beyond comment: Increasingly, traditional financial service providers are exposed to virtual assets, through either direct or indirect exposure to VASPs. Understanding your customers’ customer in respect to VASPs as well as their AML approach is critical. There will be further requirement for correspondent banking relationships to understand their counterparties exposure to virtual assets.

2.       Effective prevention is just as important as enforcement

Based on the latest FATF data, the average score for effectiveness across all assessed jurisdictions is only 30%. Globally, average effectiveness for prevention was 27%, compared to 31% for enforcement. Nineteen jurisdictions out of 112, scored zero for effectiveness of their preventive measures, compared to 12 jurisdictions for enforcement. Interestingly, the UK and Spain are the only jurisdictions assessed so far to achieve scores of 67% or above for both prevention and effectiveness criteria.

Beyond comment: The statistics for effectiveness and enforcement are fairly damning and paint a fairly negative picture of money-laundering prevention efforts from a global perspective. Critically, the global nature of financial services means that criminal activity will always target weaknesses in the overall system. The success of AML activities will ultimately be based on the ability to obtain global consensus across prevention and enforcement.

3.       Beneficial ownership transparency is critical to effective AML/CFT systems

Beneficial ownership transparency is directly related to the effectiveness of a jurisdiction’s AML systems and the essential role of these systems in identifying, preventing, and punishing financial crimes. The Basel AML Index report highlights how slow and ineffective implementation of beneficial ownership transparency measures continues to provide safe havens for dirty money. Even in the EU, while 5AMLD set out the framework for transparency, there still remains gaps in the implementation of these standards on a national level.

Beyond comment: As highlighted by the report, beneficial ownership transparency sits at the heart of AML and other financial crime prevention e.g. tax evasion efforts. There has been significant progress in the last 10 years with regulations like the EU’s 5th AML Directive, but progress and implementation is slow. Meanwhile other developed countries, including the US and Canada score zero in terms of beneficial ownership transparency. While there are jurisdictions with lower levels of transparency, criminals will continue to utilise these to hide true ownership or control.

4.       The risks are not contained to the Financial Services sector

The final issue highlighted by the Basel AML Index data analysis is the generally weak application of AML/CFT preventive measures by lawyers, accountants, real estate agents and other designated non-financial businesses and professions non-financial entities (DNFBPs). This means that there is a significant risk that such businesses and professions remain open to financial crime. At a minimum, more supervision over DNFBPs is urgently needed. Certain jurisdictions should also tighten their regulatory framework – and ensure that it is effectively enforced – over selected groups of DNFBPs in line with their risk exposure.

Beyond comment: Financial institutions have generally been the focus for enforcement action over the last 10 years by regulators, ensuring that there has been huge focus by these institutions in addressing AML. It is clear that DNFBPs have potentially ‘slipped’ under the radar and this paper makes clear that more supervision is needed.

Conclusion

In all these trends identified, the message for financial institutions is that they need to be extremely aware of the continually evolving risks to which their institution is exposed. They need to be aware of their institution’s exposure to virtual assets, changing risks of jurisdiction based on beneficial ownership transparency and effectiveness, and exposure to DNFBPs. Understanding the risks is paramount but they also need to ensure they have the ability (from both a process, governance, and technology point of view) to quickly and simply update their risk models.

 

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