Innovation is critical in fight against money laundering, say Asian AML regulators

Asia’s most senior regulators have urged banks to invest in technology, innovation and public-private partnerships as part of an international effort to be more effective in the fight against financial crime. Officials from the central banks and financial intelligence units (FIUs) in Singapore and Hong Kong said businesses and regulators needed to adopt a more innovative approach to financial crime compliance.

The regulators’ comments come as the standard setter, the Financial Action Task Force (FATF), is increasing its calls for jurisdictions to improve the effectiveness of their financial crime controls. The officials were speaking at the two-day virtual summit organised by the Association of Certified Anti-Money Laundering Specialists (ACAMS) in the Asia-Pacific region.

Arthur Yuen, deputy chief executive of the Hong Kong Monetary Authority (HKMA), said the COVID-19 pandemic had driven fundamental changes to the way that financial services are delivered. Remote onboarding and relationship management had surged throughout the pandemic, he said.

“Digital and online offerings have accelerated, while at the same time a multitude of opportunities have opened up for those who would seek to abuse the global financial system,” Yuen said.

Banks were finally moving away from a “tick-box” approach to compliance, Yuen said. They were starting to view financial crime compliance as more of a “multi-dimensional activity”.

“There is a much broader acceptance that it is this understanding of the risks, which then determines which tools to use, and which tools to develop for possible future use, in order to tackle new and emerging threats,” he said.

“Transforming the ways in which we approach the identification and disruption of ML/TF risks goes beyond simply implementing the standards set by the FATF – although such standards remain very important. The key question now is how can we take advantage of the lessons that we have learned in the past few years?”

“We must not simply regard FATF standards as simply compliance-orientated or, in the case of mutual evaluations, static assessments that take place once every eight or nine years. Hong Kong received a good FATF scorecard in 2019, but that only means that we are capable of doing more, sharing more, and contributing to better outcomes globally in a continuous manner,” Yuen said.

Partnership approach

Loo Siew Yee, assistant managing director at the Monetary Authority of Singapore (MAS), said financial institutions and FIUs needed to continue to work smarter in the fight against money laundering and terrorism financing (ML/TF).

The financial sector needed to push further towards public-private collaboration and make better use of data analytics to prevent criminals from abusing the financial system, Loo said. Banks in the city state are investing heavily in automated systems to detect ML/TF risks and analyse complex transaction patterns.

“While we have come far on this journey collectively, there is more we can do to build on our early successes,” Loo said.

Hong Kong, Singapore and Malaysia are the flagbearers for AML/CTF partnerships in the Asian region.

Since its launch in 2017, the Hong Kong Fraud and Money Laundering Intelligence Taskforce (FMLIT) has contributed to HK$692 million being restrained or confiscated. The predicate crimes included investment scams, fraud and other serious crimes.

Asia’s first “triple P” AML/CTF partnership is continuing to expand. Hong Kong is increasing the number of banks in FMLIT from 10 to 15. This will increase the flow of data going into the system and help to reduce the “displacement risk” that is inherent in rolling out partnerships.

“I think this is the time for us to push to realise the full potential of information sharing in our AML efforts,” Yuen said.

“But I would also note that the global role of partnerships is still comparatively small relative to the scale of the threat from global financial crimes. There is therefore a collective need globally to increase the tempo in these partnerships.”

Singaporean expansion

Singapore’s AML/CFT Industry Partnership (ACIP) is pushing banks to make greater use of data analytics in the fight against financial crime. The partnership has come under criticism, however, for being limited to Singaporean banks. Critics have said the public private partnership needs to expand and bring in other trusted parties to be truly effective.

One of the successes of ACIP has the collective move to electronic delivery of “police production orders”, known as Project POET. The digitisation of this process has reduced the turnaround times on notices by up to 97%, and correspondingly freed up resources spent dealing with these production orders. The system has been co-developed by the Singapore Police Force and industry partners including OCBC, DBS and UOB.

Singaporean banks have also been using their new data analytics capabilities to identify suspicious networks of potential shell companies and pass-through transactions in their bank accounts. They have shared these findings with the ACIP partnership, which in turn released the findings and key indicators with the wider industry.

The ACIP partnership is also working on a “hub and spoke” model for developing new leads and conducting joint analytics. This more collaborative approach has led to the detection of around S$69 million in illicit transactions. Around S$19 million worth of transactions have been blocked by banks.

“It is indeed encouraging to see that our joint fight against illicit actors has evolved beyond their swift identification, to the upstream prevention of crime,” Loo said.

The trouble with data

Data governance is also a major challenge for regulated entities in the financial sector. MAS said it would work with the industry to provide more guidance on data governance issues.

“Good data is the bedrock of analysis. You should consider developing a data governance framework and robust infrastructure to ensure that your analytics tools run effectively, and in a scalable manner,” Loo said.

Yuen said data specialists need to work alongside experienced AML professionals to improve effectiveness.

“Data specialists are often not required until institutions begin experimenting with more advanced technologies,” he said. “This will help banks to identify fraud related accounts earlier – sleeper accounts before they are activated, for example.”

Looking forward: the risk outlook

Looking ahead, officials in Asia said some of the big challenges included data governance, new and emerging threats and the fight against de-risking.

Regulators will expect banks to be more proactive in identifying “trigger events” that warrant the filing of a suspicious activity report. Some examples of trigger events include changes in shareholding and beneficial ownership structure, sudden high-frequency or large unexplained transfers and changes in business profiles.

“Identifying and acting quickly on such triggers, whether from singular factors or a combination of multiple red flags, could make a critical difference in stopping criminals before the damage is done,” Loo said.

Regulators will also be focusing on virtual assets and digital payment tokens (or DPTs) in the years ahead.

“DPTs pose higher risks given the speed, anonymity and cross-border nature of the transactions they facilitate,” Loo said.

MAS will also be looking at the use of variable capital companies (VCCs). Fund vehicles with a separate legal personality could “potentially be misused as a conduit for illicit purposes”, Loo said.

MAS is running thematic inspections of financial institutions that perform AML/CFT checks for VCCs to “assess the robustness of their AML/CFT controls.”

The central bank would double down on industry as well as public-private collaboration, powered by data analytics, Loo said.

“These are the kinds of successes we need to replicate and scale up,” Loo said.

Other continuing target areas will include shell companies, trade-based money laundering and proliferation financing. MAS will also explore the potential for a bank-to-bank AML/CTF information sharing framework, similar to the models in the United States and UK.

About the author

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.

Thomson Reuters, a worldwide trusted provider of answers, helps professionals make confident decisions, run better businesses and gain competitive advantage in complex arenas – law, tax, compliance, government and media.

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