2020 was a rough year for the financial services industry. Between the Covid-19 pandemic and the FinCEN files leak, several shortcomings within the sector were exposed, while global regulators continued to slap Financial Institutions around the world with hefty fines.
By December 2020, global FIs were fined a total of $10.6 billion for non-compliance with Anti-Money Laundering (AML), Know your Customer (KYC), data privacy and MiFID (Markets in Financial Instruments Directive) regulations. A total of 212 fines were levied on financial institutions for these breaches, which is a year-on-year increase of almost 120 per cent.
In the aftermath of the pandemic, the industry has no choice but to start working better together to tackle the industry-side issue of financial crime. Here’s what to expect throughout 2021.
Increase in AML reforms across the globe
Global: Several countries and regions across the globe are in the process of introducing AML reform to improve the industry’s response to financial crime. Over the next few years, we can expect to see sweeping change in the Americas, Europe and the APAC region. Although financial institutions have been subject to AML/CTF (counter terrorist financing) legislation for many years now, a large number of key industry stakeholders have not been held to account for their roles in some of the biggest money laundering scandals in recent years. As such, the legislative environment has evolved in many regions, with legal, auditing and other professional services firms under the spotlight. Regimes are also keeping up with emerging technologies, with many countries introducing AML/CTF requirements for cryptocurrency and digital asset exchanges.
United States: Filed as an amendment to the National Defense Authorization Act, the Anti-Money Laundering Act (AMLA) of 2020 seeks to address issues relating to the use of anonymous companies by improving corporate transparency. Amongst a number of other proposals, the AMLA will introduce new reporting requirements relating to beneficial ownership. Both new and existing companies will be required to report information on the beneficial owner with limited exceptions and existing companies will have two years to file such information. Financial institutions will only be permitted to obtain such information with consent from the company, meaning the ability to utilize the database for fulfilling due diligence requirements may be limited. FinCEN is required to publish regulations by the end of 2021.
European Union: In the EU, the last 30 years have seen the adoption of six AML Directives, with further reform proposals under consideration. In May 2020, the EU Commission published a six-point action plan aimed at improving the response to financial crime. This included a public consultation that sought industry feedback across a number of topics and is intended to inform a proposed AML Regulation.
Currently, there are concerns regarding the use of AML Directives to consistently enhance the regime across all EU Member States, largely due to the delayed or incomplete transposition status of some countries. The expectation is that an EU AML Regulation will be published in the early half of this year that would become directly applicable to all Member States on the effective date.
The EU also conducted a public consultation on the digital finance strategy, as well as an industry survey on the RegTech environment. This activity, combined with the guidance issued across the EU in response to the coronavirus pandemic, speaks to the role that technology will continue to play in enhancing the industry’s response to financial crime in a robust, innovative and more effective way.
United Kingdom (Brexit): Much like Norway, Switzerland, Iceland and Liechtenstein, the UK is no longer subject to EU Directives or Regulations post-Brexit. However, it is expected that the UK will continue to align with the EU’s approach to addressing financial crime. As such, the UK transposed the 5th EU AML Directive in January 2020, giving full effect to the relevant measures. The UK Money Laundering Regulations were further updated with minor amendments at the end of the transition period by way of the Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020.
The UK Companies House will also introduce a number of changes early in 2021 as it seeks to close what has long been considered a significant gap in effectively addressing financial crime risk. Currently, there is no obligation to verify information when registering a company in the UK. Although, New Year’s Day 2021 saw the most significant changes to Companies House rules—directors and other individuals associated with UK companies were required to verify their identity for the first time in 150 years.
Ubiquitous endorsement of technology
Although financial regulators have acknowledged the use of technology for some time, the pandemic has resulted in an increased focus on digital operational resilience and continuity in the provision of financial services. In response to the pandemic and the resulting social distancing measures introduced across the globe, many prominent financial regulators including the Financial Conduct Authority (FCA) in the UK, the Hong Kong Monetary Authority (HKMA), the Monetary Authority of Singapore (MAS) and the Australian Transaction Reports and Analysis Centre (AUSTRAC) have endorsed the use of technology solutions to ensure business continuity throughout the pandemic.
In 2021, we expect the financial services technology industry to continue to grow rapidly as financial institutions focus on digital transformation and boost their approach to both compliance obligations and effectively addressing financial crime risk.
More focus on effectiveness than compliance
Since 2008, over USD $40 billion in penalties has been issued to global financial institutions for non-compliance with Anti-Money Laundering (AML), sanctions and other financial crime compliance obligations, with $10.6 billion issued in 2020 alone. However, the true cost of non-compliance is more than the financial penalty paid by financial institutions, with global industry bodies continuing to highlight concerns on areas such as human trafficking and the drug industry. This begs the question: is compliance helping fight financial crime? Simply meeting minimum standards or mere “compliance” isn’t, in fact, an effective mitigant to financial crime.
The industry as a whole is reflecting on the response needed to bolster our approach to the prevention of financial crime, including enhancing the legislative, regulatory and supervisory activities, as well as adopting an outcome, rather than a prescriptive rules-based approach.
In order to meet the objective of enhancing the response to financial crime, the industry will need to consider the role played by technology, particularly with regards to automation, robust risk assessment processes and appropriate risk management measures. Collaboration is also key, and a more synergized approach with key stakeholders, along with robust guidelines, can only help in our approach to combatting money laundering, terrorism financing and other financial crimes.