At Accuity’s recent Asia Regulatory & Financial Crime Compliance Conference in Singapore, panel participants showed a strong interest in how technology can help them tackle the increasingly-complex landscape of anti-money laundering and counter terrorist financing regulations, particularly in Asia. More than ever before, banks and non-banking financial institutions now need to ensure that they are on top of their compliance requirements – and able to demonstrate this to regulators. Asia’s diversity of geography, legal systems and cultures poses challenges for businesses operating intra-regionally and globally which are required to ensure their activities don’t enable money laundering and the many crimes it facilitates.
As if to emphasise this Asian challenge, the Financial Action Task Force on Money Laundering (FATF) will check compliance with its requirements in seven Asian countries this year. Established in 1989 to combat money laundering, FATF examines money laundering techniques and trends, reviewing existing preventative actions both nationally and internationally and recommending new anti-money laundering measures. Now, the key question is, ‘are you regulator-ready?’
Going beyond the banks
Under FATF, anti-money laundering (AML) due diligence must be conducted by ‘designated non-financial businesses and professions (DNFBPs) – non-banking entities which could potentially be used to launder funds. Although definitions differ by jurisdiction, DNFBPs can include auditors, external accountants and tax advisors; company service providers; lawyers and notaries; real estate agents; and trusts. These organisations may not be as familiar with due diligence and compliance as their financial counterparts, but their participation in AML activities is essential to ensure wrongdoers are discouraged from using them to further their criminal ends.
In Singapore, the last FATF mutual evaluation showed inadequate measures in place for non-financial businesses. This is hardly surprising: there are numerous ways non-financial companies’ services can be used by wrongdoers to try to dodge AML regulations. For example, in the past they have tried to rely on the privileged nature of communications with their lawyers to get around the regulations; in response, regulations have been updated with a privilege carve-out where privilege attaches to advice only.
Similarly, because buying and selling property has long been a popular way of laundering money, conveyancing services are now on the AML front line. Traditionally, such providers tended to be guided by the banks financing the transaction: if the bank cleared the customer, conveyancers were not obligated to check further. Also, nominee services can be used to conceal identities for money-laundering purposes, imposing a requirement to seek out the beneficial owner when transacting business on their behalf. It’s understood that shell companies and trusts can be legitimate but they should be examined to ensure their purpose is legal. DNFBPs are becoming aware that while compliance challenges differ, the overall responsibility lies with the firm.
And now, a new guidance paper from the Monetary Authority of Singapore (MAS) is proposing ‘guidelines on individual accountability and conduct’ to reinforce FIs’ responsibilities in three key areas:
- Promoting senior managers’ individual accountability
- Strengthening employee oversight in material risk functions
- Embedding standards of proper conduct among all employees
It’s no longer enough to show you didn’t know or didn’t intend to breach a rule. For company leaders, the peril of personal liability has raised awareness of the importance of compliance. On top of this, a firm’s reputation is its licence to do business; it takes years to build but can be lost through one unfortunate incident – and directors’ personal reputations are also on the line. This is in line with the MAS’s approach toward fostering sound culture and conduct in the financial sector.
Asia’s unique challenge
Our panellists agreed that Asia’s geographic and cultural complexity poses particular challenges for non-financial companies. In Asia they face:
- Divergent regulatory standards
- Differing legal systems
- Differences in privacy law
- Cash transactions and other remittance methods
- Developing markets with less sophisticated systems
- Numerous sources of adverse news to be monitored
In addition, the landscape is dynamic, with new rules introduced frequently. For example, in pursuit of more transparency to tackle complicated structures like shell companies and trusts, some territories propose public beneficial ownership registers, while others mandate locating the ‘natural person’ – as opposed to a corporate entity – who benefits from the structure. This can make due diligence time-consuming and expensive.
Asia’s heterogeneity also raises the danger of jurisdictional arbitrage: risk concentrates in the weaker jurisdictions where wrongdoers have a better chance of going unchallenged. Raising standards across the board via better information sharing can substantially reduce these loopholes.
At our conference, the panellists spelt out the ways non-financials can ensure they and their people are regulator-ready:
- Make compliance a priority
- Establish the ‘why’ behind a proposed transaction, structure or arrangement
- Raise competency standards
- Understand your risks
- Learn from financial firms – have a compliance officer
- Document all client transactions thoroughly.
The technological edge
One way all regulated entities can tackle abuses effectively is by creating a tech-enabled regulatory ecosystem. Up-to-date, comprehensive and intelligent systems are a key link in the compliance chain, making due diligence as efficient as possible. As technology advances, new tools such as big data, artificial intelligence, and cloud hosting have the potential to make our due diligence systems more powerful, more intelligent – and to foster easier information sharing.
Because legislation, regulations and sanctions directives are frequently updated across multiple territories, lists must be constantly amended in good time and KYC processes are ever more complex. And knowing your client is just the first step – now it’s KYCC (know your clients’ clients) because the ultimate source of funds needs to be confirmed as legitimate. Making up-to-date real-time information available is therefore critical – as our COO David Wilson pointed out in his keynote address, the need for speed is growing.
For their part, regulators understand fintech’s enabling power and are supportive of its use. In Singapore, the MAS is pragmatic: technology such as digital onboarding solves numerous issues but may also raise new challenges. Dialogue between the regulators, banks and DNFBPs should be ongoing, open and constructive; the regulators’ input into systems development is as critical as the potential users’, leading to a stronger and more effective ecosystem.
At our Singapore summit, one of our panellists rightly pointed out that AML measures are helping to combat dreadful crimes: terrorism, human trafficking and drug smuggling, among others. The fundamental principle is transparency: as the great US Supreme Court Justice, Judge Louis Brandeis, said, ‘sunlight is the best disinfectant’ – and the way to shine a cleansing light on money launderers, sanctions-busters and other miscreants is to leverage the combined power of new technology, up-to-date market intelligence, and co-operation among all participants from banks to DNFBPs to the regulators themselves.