US anti-money laundering: Hot topics for 2019
22 Jan 2019

After a tumultuous 2018, which saw some eye-watering penalties, the rollout of new privacy laws and Europe’s ‘biggest banking scandal,’ anti-money laundering compliance officers may be ready for a fresh start.

But regulatory expectations, the promise of fintech solutions and money laundering issues linked to ongoing political corruption scandals, are set to loom large for bank compliance teams over the next 12 months, United States-based experts said to KYC360.

New AML rules – beneficial ownership, CDD

Among the biggest challenges for American banks will be navigating their first round of regulatory examinations since the finalisation of the U.S. Treasury Department’s customer due diligence rules, according to Alma Angotti, a managing director at Navigant Consulting.

The department’s Financial Crimes Enforcement Network (FinCEN) finalised its long-awaited anti-money laundering (AML) rule in May, requiring banks, credit unions and other financial institutions to identify individuals who own 25 percent or more of the corporate entities they provide services to as well as one individual who wields significant control of that client.

“A lot of banks thought of it as a documentation exercise, but if you read the rule, you have to do two things, really, besides obtaining ownership: create a customer profile based on risk and you have to use it,” said Angotti.

But some compliance teams may overly focus on identifying individual owners while neglecting to act on the data they obtain, she said.

In guidance published in April, FinCEN characterized use of beneficial ownership data as an “essential” factor in determining whether transactions merit filing suspicious activity reports, or SARs. Unusual wire transactions or deposits made in a given month, among other activity, could require financial institutions to update their beneficial ownership records, the bureau said.

“You’re not just collecting information,” said Angotti. “You’re creating a risk-based customer profile and then you have to use that to identify anomalies and activity outside of that customer profile.”

Artificial Intelligence

The year is also set to expand on the growth of fintech technology for compliance departments.

Earlier this month, the American Banker reported that investments in fintech firms jumped 38 percent in 2018, to nearly $11 billion.

Such firms are likely to increasingly focus on software that could better connect bank customer information and other data to better identify fraud and money laundering, according to Dennis Lormel, founder of DML Associates, LLC and the former chief of the Financial Crimes Section in the FBI’s Criminal Division.

“People are looking at, all across the board—from a law enforcement perspective, to a bank perspective, certainly from the compliance standpoint—artificial intelligence and innovation,” said Lormel, adding that the question will be whether AI firms can come up with effective behavioral patterns among individuals and transactions that are indicative of financial crime.

In May, global consultancy EY cited AI technology as a means to improve the efficacy of AML programs while curbing costs in due diligence and transaction monitoring controls, in part mitigating the number of false positive alerts compliance officers must review.

AI firms are also applying natural language processing and text mining to enhance CDD, the consultancy said.

“There’s apprehension in banks that this trend is going to cost jobs, but I’m of the school of thought that you still need people behind the technology,” Lormel said. “I don’t know how much that will actually impact the job market but clearly it’s going to have some impact.”

Political corruption probes and money laundering 

Broadly speaking, the U.S. investigation into Russia-linked illicit activities suggests that the year will see a greater focus on money laundering and enhanced steps to crack down on global corruption, according to Ross Delston, a Washington, D.C.-based attorney and expert witness in civil fraud cases.

“What [Special Counsel Robert] Mueller has done is to illuminate the area of money laundering crimes for prosecutors in a way that hasn’t been seen in a while—for example, extending the concept of money laundering to the predicate crime of failing to register under the Foreign Agents Registration Act (FARA),” said Delston.

“What it does is it tells prosecutors that they shouldn’t be limited to the traditional kinds of predicate crimes that are Specified Unlawful Activities.”

FARA, an American law that bars individuals from lobbying for foreign governments without first registering with the government, had until recently been cited in fewer than 10 indictments since its passage in 1938. Since the launch of the special counsel investigation in 2017, U.S. prosecutors have charged or cited the law in indictments of at least 13 individuals.

The U.S. focus on the ongoing Russia investigation dovetails with a growing global trend to fight financial abuses by heads of state, said Delston, adding that FARA-related money laundering cases would likely be limited to large-scale investigations of political corruption.

Ongoing criminal probes into Malaysian state-owned investment fund 1MDB could also impact what and how global financial institutions conduct AML programs over the next 12 months, according to compliance experts.

At least 10 countries have launched probes into 1MDB since the U.S. Justice Department accused the fund in 2016 of laundering more than $4.5 billion through a web of fraudulent shell companies and legitimate businesses. Proxies for the Malaysian government purportedly used the embezzled funds to invest in art, film production companies, a luxury yacht and real estate.

Last month, Malaysian officials filed criminal charges against Goldman Sachs Group for allegedly misleading investors by failing to disclose that the proceeds from 1MDB bond sales would be used as a conduit for embezzled funds. Goldman has attributed its role in the sales to rogue employees.

Regulatory gaps

Because property sales have been cited as money laundering conduits in both the 1MDB and Russia investigations, as well as in other high-profile probes, the real estate market could also see heightened scrutiny in 2019.

In May, FinCEN renewed and expanded temporary geographical targeting orders (GTOs) requiring title insurers to conduct AML checks on property purchased in New York, Miami, Los Angeles, San Diego, San Antonio and Honolulu.

But the GTOs fail to address the fact that financial crooks don’t necessarily need title insurance if their priority is to launder funds through property sales.

“The kinds of deals that are most likely to involve proceeds of corruption wouldn’t necessarily involve title insurance,” said Delston. “If the wrongdoer is the one who is buying the property, the seller doesn’t care about title insurance. The title insurance is to protect the purchaser, but there are other ways to do that.”

The problem isn’t limited to the United States.

Last month, the Paris-based Financial Action Task Force (FATF), which has repeatedly called on countries to tighten their AML oversight of the real estate market, criticized Israel in its first-ever mutual evaluation for failing to include real estate agents in its AML regime.

Depending on what investigators find, the Russia probe could also shift attention to other sectors highlighted in FATF recommendations.

“There may be renewed focus on requiring investment advisors and hedge funds to have money laundering regulations,” said Angotti. “I wrote a proposed rule in 2002, which [FinCEN] withdrew and reissued and they’ve never finalized it.”

Cryptocurrency and cybercrime

Representatives from banks and various law enforcement agencies have expressed growing concern about cybercrime, including business email compromises and data breaches, according to Lormel, who recently met with officials from the FBI and IRS.

“It continues to grow and bad guys are gravitating toward it more because it’s a lot easier and offers more anonymity to them,” he said.

“On these business email compromises, in particular, you could hit a grand slam in a heartbeat. There’s a lot of reward and little risk [for criminals].”

While AML experts continue to cite vulnerabilities linked to the virtual currency market, law enforcement officials have made significant headway in understanding the blockchain technology that underpins bitcoin and its competitors, Lormel said.

In guidance issued in October, FATF called on member-states to “urgently take legal and practical steps to prevent the misuse of virtual assets.”

The intergovernmental group, which intends to further elaborate on how countries should best oversee the industry, highlighted the need to apply risk-based controls to virtual currency exchanges and certain types of wallet providers.

But FATF failed to address the risks of cryptocurrencies comprehensively, according to Delston.

“They don’t specifically mention BTMs, Bitcoin Teller Machines, which are a great way to use cryptocurrency to launder money,” said Delston. “It tracks in many ways the U.S. approach, which is to regulate and license what FinCEN calls exchangers, and which FATF calls ‘virtual asset providers.’”

 

Read more:

Money laundering: Ex-Credit Suisse bankers arrested over $2 billion-loan fraud scheme

UK: HMRC announces Top 10 prosecutions of 2018

Barclays fined $15 million in US over whistleblowing scandal

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