Financial crimes are a global epidemic, serving as a constant reminder that crime does not discriminate and cannot be contained at the border. If you recall from our last article, 'Threat Finance Spotlight on the Democratic People's Republic of Korea', illicit actors are rapidly unearthing new tactics, techniques, and procedures (“TTPs”) to gain access to and exploit the financial system. How is the world responding, as a result? Surprisingly, in unison. There has been a broad global consensus pertaining to the necessity of anti-money laundering (AML) laws and regulations.
The Financial Action Task Force (FATF)—the organization responsible for establishing standards and promoting implementation of measures to combat money laundering, terrorist financing, and other financial crimes—has been very influential in generating awareness of the reality of cross-border financial crimes around the world. In recent months, there has been a wave of new AML legislation, with countries, including the US, incorporating FATF guidelines as part of their legislative framework.
If financial institutions (FI) stay apprised of global AML legislative trends that have emerged over the past few years and learn where AML reform is headed, they’ll be far ahead of the compliance mandate and need not worry about regulatory examinations gone wrong. In this post, we delve into recent AML legislative reform occurring globally, the trends we’re seeing, and how they can benefit your FI to implement proactive measures accordingly.
Scope of AML Laws
Applicability to Non-Bank Financial Institutions (NBFI)
One of the AML trends that can be seen is the expansion of the scope of AML laws, accomplished using two methods. AML requirements are no longer limited to FIs. It is becoming more and more common for countries to require NBFIs to comply with AML laws.
The Philippines recently amended the Anti-Money Laundering Act of 2001 (AMLA), in which a casino is now a “covered person,” required to report individual cash transactions greater than P5 million, or the equivalent in foreign currency, to the Anti-Money Laundering Council. This amendment was in response to the Bangladesh Bank robbery in February 2016, where hackers withdrew money from a bank account held by the Central Bank of Bangladesh at the Federal Reserve in New York. Some of the stolen funds were transferred to a Filipino FI, disguised as legitimate transactions at casinos.
In the Dominican Republic, the Executive Power of the Dominican Republic recently promulgated the new Anti-Money Laundering and Terrorist Financing Act 155-17 (New Law) in an effort to keep pace with new international standards and stay on a path of international cooperation. The New Law spans AML compliance to NBFIs, such as trust companies, savings and loan cooperatives, reinsurance companies, investment funds, securitization companies, broker/dealers, depository trust corporations, issuers of public offerings that distribute securities directly to the public, lotteries and sports betting companies, factoring companies, pawn houses, and construction companies. Even many lawyers, notaries, and accountants must comply with the mandate.
Let’s switch gears and talk about your FI and the safeguards you have in place for NBFIs. If you have very few mechanisms in place to monitor for financial activity pertaining to NBFIs, why is that the case? It is essential to go beyond the bare minimum and follow the examples of the Philippines or the Dominican Republic. It is essential that you are consistently revisiting your policies and procedures and revising the AML standards and requirements established by your FI. Every month and every year, illicit actors are abusing new and unique NBFIs to move and obfuscate their ill-gotten gains, and different types of NBFIs will appeal to criminals across different countries. This is why it is very important to remain apprised of current legislation in other countries pertaining to NBFIs. Chances are that if criminals are starting to exploit a different NBFI in one country, they will perpetuate their conduct across the border.
Expansion of Underlying Crimes that Constitute Money Laundering
The expansion of the scope of AML laws has also reached the underlying crimes which constitute money laundering, thereby broadening the definition of money laundering. The US and European Union are shifting their focus to tax evasion, evident in their recent and/or proposed AML legislation. In May 2017, a group of US Senators proposed a new bill, the Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017. The proposed bill has bipartisan support and if effective, would include tax evasion as an underlying offense for international money laundering under 18 U.S.C. §1956(a)(2). Similarly, the EU’s Fourth Anti-Money Laundering Directive (Fourth Directive) lists serious tax offenses as predicate offenses of money laundering.
With the US and EU leading the way, other countries are following suit. The Dominican Republic’s New Law expanded the predicate offenses to include child pornography; traffic of influences; crimes committed by public officials while in office; transnational bribes; tax evasion; aggravated fraud; smuggling; counterfeiting; copyright infringement; crimes against intellectual property; forgery of public documents; medicine, food, and beverage falsification and adulteration; illicit traffic of merchandise, arts, jewelry, and sculptures; aggravated robbery; financial crimes; technological crimes and felonies; improper use of confidential or privileged information; and market manipulation.
To ensure that your FI is not being used as a conduit for tax evasion and other related financial crimes, it’s a good idea to start establishing standards for and training AML staff on the type of activity that would constitute tax evasion. What patterns of tax evasion are FIs seeing in other countries? Which appear to be most common? AML professionals should be afforded the appropriate training for the detection of this type of activity by management, whether or not the US Senate bill gets passed. It should be evident that tax crimes are on the minds of legislators, primarily due to their disguised nature and ease of commission. And you should not stop here. As more and more underlying crimes in other countries become recognized by AML legislation as money laundering, pay attention to similar suspicious activity at your FI.
The second AML legislative trend that appears to be sweeping the world is the concept of beneficial ownership. Following last year’s firestorm surrounding the Panama Papers and the potential for shell companies to be used for illicit purposes, beneficial owners are becoming increasingly scrutinized. FATF established the standard when it released guidance on transparency and beneficial ownership in October 2014. FATF recognized the potential abuse of corporate vehicles to disguise criminal intentions. Following these recommendations, countries have implemented legislation that requires covered institutions to identify the beneficial owners of entities holding accounts at their institutions.
Last year, FinCEN released the beneficial ownership rule, which requires FIs to identify beneficial owners with greater than 25% interest in the entity. The proposed US Senate bill includes a provision to criminalize the failure to provide a FI with beneficial ownership information or if a person attempts to disguise the beneficial owners of the entity. South Africa recently amended its Financial Intelligence Centre Act, 2001 with the Financial Intelligence Centre Amendment Act, 2017 that functions in a similar manner and closely mirrors the beneficial ownership guidance set forth by the FATF.
The European Union has taken the beneficial ownership rule one step further by requiring each Member state to establish a corporate registry of beneficial owners, under the Fourth Directive. Countries such as Germany have started to pass legislation to implement this rule and create a registry. In June 2017, Germany begin to mandate its beneficial ownership register for all companies, including multinationals. Negotiations for a potential Fifth Anti-Money Laundering Directive involve discussions pertaining to registry access being restricted to individuals with a legitimate interest.
As significant as the beneficial ownership rule is, it is daunting how many FIs still do not have a comprehensive Know Your Customer (KYC) program to implement the mandate. Surprisingly, many FIs still allow for customer accounts to be opened without identifying the beneficial owners. The US may seem like it’s a little behind the EU, in terms of the measures taken to effectuate the beneficial ownership mandate. However, a closer look at US and EU AML legislation will indicate multiple parallels. There may come a day when we have our own corporate registry of beneficial owners, but until that day comes, it might be a good idea for US FIs to adopt some implementation practices of other countries in order to strengthen and distinguish its own KYC Program.
Changes to the Currency Reporting Threshold
Another trend in AML legislation involves the modification of currency transaction reporting (CTR) thresholds. The currency reporting threshold in the US is currently anything above $10,000. Although some may argue the threshold should increase because cash transactions of $10,000 are more common, the proposed Senate bill did not propose changing the threshold. However, other countries appear anxious at following the US example and are cognizant that lower CTR thresholds may pose a greater risk of money laundering, especially in countries where cash activity is common. The Dominican Republic recently increase its CTR threshold from $10,000 to $15,000.
Conversely, the European Union lowered its CTR threshold from 15,000€ to 7,500€. Member states are permitted to set thresholds even lower than 7,500€, but doing so may increase the regulatory burden on FIs, and the effectiveness of a lower threshold is uncertain. Mexico also lowered its CTR threshold on from $10,000 to $7,500. With this being the case, we can expect to see an increase in the number of annual Suspicious Transaction Reports filed in Europe and Mexico, as a result of the lower threshold. Following the same logic, the Dominican Republic would experience a decrease in annual Suspicious Transaction Reports filed.
CTR thresholds can be a bit tricky. Criminals don’t just try to evade real reporting requirements. They also try to evade any perceived reporting requirements. That’s why it makes sense for countries to lower/increase their thresholds continuously. But just because it doesn’t appear as if criminals are trying to avoid real cash thresholds that would necessitate filing a CTR, doesn’t necessarily mean that illicit conduct isn’t occurring that would warrant a Suspicious Activity Report (SAR). AML professionals should be trained on various types of cash patterns that would require a SAR filing, including a focus on unusual activity involving lowered thresholds and increased thresholds.
At AML RightSource, a Gabriel Partners Company, our Financial Crimes Advisory practice is well-informed of the global AML legislative landscape and can show you how to better leverage global trends and patterns. Let us help you build a distinct and comprehensive program.
Ms. Mucha is an Associate in the Financial Crimes Advisory Practice. She has experience with transaction monitoring, alert resolution, case investigation, Enhanced Due Diligence ("EDD") reviews, Suspicious Activity Reports ("SAR"), and other AML/BSA projects.
Ms. Mucha has participated in multiple projects where she conducted periodic reviews for financial institutions with assets ranging from $1billion to $134 billion. She has also been an integral part of developing AML/BSA transaction monitoring procedures, enterprise-wide BSA/AML risk assessments, and tuning/optimization exercises for BSA/AML software.
Ms. Mucha holds a Bachelor of Arts in International Studies, Spanish, and Political Science from Baldwin Wallace University and obtained her Juris Doctor from Cleveland-Marshall College of Law at Cleveland State University. Ms. Mucha is a licensed attorney in the state of Ohio, is a Certified Anti-Money Laundering Specialist (CAMS), and a Certified Financial Crime Specialist (CFCS).