Global ‘recalibration’ needed for AML/CTF regime in wake of pandemic

The gradual phasing out of COVID-19 restrictions will present an unprecedented opportunity to recalibrate and potentially even “reset” the global financial crime compliance framework. The lessons from the pandemic have given regulators and organisations an opportunity to finally move from a compliance-based regime to an effectiveness and outcomes-driven model.

Speakers on a recent Thomson Reuters webinar said the rate of interception of criminal funds was still hovering at around 1%. They said during an hour-long panel discussion that this represented a disappointing return on the estimated $1.28 trillion that banks and other businesses spend collectively on financial crime compliance each year, according to figures from Deloitte.

Malcolm Wright, Chief Compliance Officer at Diginex in Hong Kong, said the global pandemic had shone a spotlight on the best and worst aspects of the anti-money laundering and counter-financing of terrorism (AML/CTF) framework. Wright said that once the pandemic had subsided there would be an opportunity for a sweeping “retrospective review” of whether the regime was achieving its primary goals.

“There needs to be a major retrospective [in the wake of COVID-19] and that should take place with the regulators and the financial services industry. What did go well during this period of time? What did we learn from it?”

“Equally, we need to ask what didn’t go so well and what should be improved upon the next time.”

The webinar heard that the pandemic would present an opportunity for the Financial Action Task Force (FATF) to bring together regulators and the industry in a type of “thematic review” into effectiveness. The suspension of mutual evaluations and other on-site work would give the global standard setter a chance to reset its objectives and conduct a genuine cost-benefit analysis on the AML/CTF regime.

“With the lessons from COVID-19 fresh in our minds, this is an opportunity to really reflect and to learn,” Wright said.

Coordinated approach

More than 2,000 delegates who registered for the webinar heard that the globally coordinated approach to managing the pandemic had demonstrated what is possible when countries come together with a common goal.

“COVID-19 has been a global problem and it’s requiring unprecedented cooperation. The same applies with how we can mitigate financial crime. It’s an opportunity for us to come together to collaborate — between law enforcement, government and industry — to realise that we can work together to get better outcomes as we go forwards,” said Oonagh van den Berg, Managing Director at Virtual Risk Solutions in Hong Kong.

Speakers on the webinar said innovation was more acceptable in times of disruption.

“COVID-19 has allowed for this global research to happen. It’s almost like the tide has gone out and suddenly things are exposed,” Wright said

“We’ve also got this acceleration in tech adoption. Probably the most obvious example here is non-face-to-face onboarding. As we moved towards selfie onboarding and things like that with COVID-19 and lockdown, there really needs to be a new way to be able to prove your identity.”

The webinar also reflected on the fact that regulators are facing similar challenges to reporting entities, with remote workforces and disrupted operations. This may act as a catalyst to remind businesses and regulators in the AML/CTF space that they are working towards a common goal.

“Regulators face exactly the same challenges that a company would. In other words, how to keep functioning and to maintain business as usual. So, within that, we have to look at what are the most critical things that we should be worried about as an industry,” Wright said.

“Lighting up” financial crime

Law enforcement experts have told Thomson Reuters Regulatory Intelligence that the disruption amid COVID-19 may expose money laundering in a way that was not possible previously. The freezing of international movements of money and people has caused organised crime groups to get desperate and use unorthodox methods. This has caused illicit transactions to “light up like a Christmas tree ” in a way that was not possible when the system was full of “noise” from the vast majority of legitimate transactions.

Researchers believe that 95% to 98% of transactions involve legitimate funds, which makes it difficult to identify outliers. The immediate disruption of cash transactions during COVID-19 has given banks and financial intelligence agencies a unique ability to spot outliers.

Wright said this type of information would be invaluable if a global review of effectiveness takes place.

“For example, we might have commingling of funds in a restaurant. You have your legitimate funds and illicit funds that have been commingled. All of a sudden these might be exposed,” he said.

“In this situation it would be easier for financial institutions to adjust their monitoring rules and filters to allow things to be exposed in a way that would not have been seen before.”

Sharing across borders

Speakers on the webinar also observed that greater data sharing would be essential for the global AML/CTF project to succeed. In the same way that tracking apps are being accepted in the midst of COVID-19, so too might a more cooperative approach to handling personal data to fight financial crime threats.

Van den Berg said public-private partnerships were needed between FIUs and reporting entities not just nationally but also across borders.

 “We’ve been speaking about this need for greater information sharing for the past 15 years, between institutions and law enforcement. What actually causes a challenge for us here is the fact that there are data privacy restrictions between countries that limit the cross-border sharing ability with data,” she said.

“So we need to step back in the post-COVID world and reconsider how regulators and the private sector can come together to address these issues.”

To watch the webinar on demand, click here.

You can also access the infographic compiled from data from the webinar. View the infographic here.

Nathan Lynch is an experienced writer, public speaker, manager and technology enthusiast in the field of financial regulation and risk management. At Thomson Reuters, Nathan leads a team of experts who provide breaking news, deep analysis and practical guidance to risk practitioners in the global financial services sector.
Nathan manages Thomson Reuters’ award-winning Regulatory Intelligence team across the Asia-Pacific region, tracking developments in financial services law, regulation, financial crime and risk management.
Nathan has been involved in building innovative, tech-based businesses in the financial services “regtech” sector — including Complinet Australia and the Thomson Reuters Risk business.

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