Expert analysis by Brian Burke, Mathew Orr and Rishikeesh Wijaya, Shearman & Sterling LLP
This article was originally published on Thomson Reuters Regulatory Intelligence.
Effective enforcement of anti-money laundering (AML) laws has long been a priority for governments. Recent developments, including high-profile investigations, record-breaking fines and the enactment of the U.S. Anti-Money Laundering Act of 2020 — the biggest overhaul of U.S. AML laws in a generation — confirm that effective AML enforcement remains high on the agenda of regulators and law enforcement agencies.
Asia is no exception. In 2020, authorities based in the Asia-Pacific region issued fines totaling $5.1 billion for breaches of AML laws and related misconduct, which represented a seven-fold increase from 2019 and relegated the United States to second place in AML enforcement penalties for the first time since 2015. As just one example, in the first half of 2020 alone, the People’s Bank of China (PBOC), the country’s central bank, imposed penalties of more than 370 million yuan ($52 million) for money laundering violations, surpassing the total AML fines imposed by the PBOC for the whole of 2019.
Behind the attention-grabbing headlines and massive fines, a combination of factors is contributing to a sharper focus on AML enforcement in the region. The first is the impressive growth experienced by most Asian economies in recent years. It should come as no surprise that the rate of financial crime correlates directly the volume of financial transactions. Like those seeking legitimate profits, criminals are predictably attracted to areas of rapid economic growth. Another factor is the growing recognition by regulators in Asia that money laundering tends to be a hallmark of broader misconduct, such as terrorism, drug trafficking, illegal arms dealing and corruption.
If a government intends to combat such conduct, it must address the means by which it is funded. A third, and unprecedented, factor is the emergence of blockchain technologies and decentralised finance, often referred to as “DeFi”, such as Bitcoin and other crypto-assets. Digital currency is particularly popular in Asia, where a relatively large portion of the population remains “unbanked” and currency controls are more restrictive than in Europe and the Americas.
Meanwhile, AML authorities rely heavily on banks and other traditional financial institutions that serve as centralised — and closely regulated — conduits of capital. The prospect of these institutions being entirely sidelined by cryptocurrency has motivated AML regulators to get ahead of DeFi, or at least to try.
In Asia, these factors are converging to create an environment where the risk of money laundering itself, and of aggressive AML enforcement, are at an all-time high. Businesses operating in the region would be wise to take note of these developments and redouble their vigilance and compliance efforts.
Expanding the scope of AML laws
At the end of 2020, the PBOC announced a public consultation on draft revisions to its 2014 AML regulations. It is widely thought that this was a response to a 2019 report issued by the Financial Action Task Force (FATF), which pointed to “fundamental deficiencies” in China’s AML regime. China’s existing AML regulations already apply to certain financial institutions and designated non-financial institutions, but the draft revisions would expand the scope to include institutions such as internet micro-loan and consumer financing companies.
The draft revisions not only illustrate evolving AML risks posed by non-traditional financial institutions but also exemplify steps being taken by regulators and policy makers to ensure appropriate supervision and regulation.
In a similar fashion, in November 2020 Singapore introduced the Payment Services (Amendment) Bill to expand the financial supervisory regime to cover virtual asset providers that deal in digital payment tokens (e.g., cryptocurrencies). Under the new law, which was passed by parliament in January 2021, the Monetary Authority of Singapore will regulate service providers that facilitate the use of cryptocurrencies even if they do not “hold” the assets in question. The new law also requires digital payment token service providers to undertake proper customer due diligence and transaction monitoring, in recognition of the “higher inherent money laundering and terrorism financing risks” associated with these assets.
Customer due diligence
Earlier this year, the Philippines Securities and Exchange Commission introduced measures aimed at promoting more transparency in corporate ownership structures, in response to a FATF recommendation. The reforms were aimed at shedding light on the otherwise dark and opaque realm of beneficial ownerships and shell companies. Notably, the reforms even have a mechanism for financial penalties to be imposed on companies that fail to comply.
Other jurisdictions are closing perceived loopholes and tightening existing AML laws in terms of customer due diligence. Proposed amendments to AML rules by Hong Kong’s Joint Financial Intelligence Unit would amend the definition of “politically exposed persons” (PEPs) to apply to individuals outside the territory, rather than just those outside mainland China.
As it stands, businesses in Hong Kong only apply greater scrutiny to PEPs outside mainland China. In 2019, FATF identified this as a “technical gap”, highlighting the heightened money laundering risks posed by PEPs generally, regardless of their location.
Enhanced enforcement powers
The FATF has long criticised jurisdictions, including several in Asia, for failing to investigate and take action against those believed to have contravened AML laws. In response, governments in Asia have taken steps to enhance the enforcement powers of their AML regulators and law enforcement agencies.
In the Philippines, for example, a law passed in January 2021 to strengthen the Anti-Money Laundering Act of 2001 expanded the powers of the Anti-Money Laundering Council. The body will now be able to apply to competent courts for search and seizure warrants, as well as subpoenas, to investigate suspected wrongdoing. Many commentators view this move by the Philippines as an attempt to avoid being placed on FATF’s list of countries in need of “increased monitoring”, otherwise known as the “grey list”.
In the next few years, several more countries in Asia are likely to upgrade their AML laws, as well as the enforcement of those laws. There is no doubt that a favourable rating from FATF can attract more foreign capital than a negative assessment. Indeed, this incentive applies equally to the more developed economies in the region; for example, FATF noted in April 2020 that South Korea made “policy and operational changes” that had a positive impact on the number of prosecutions against money laundering offences.
What does the future hold?
From an enforcement perspective, it remains to be seen whether the record-breaking fines of 2020 were an anomaly. Either way, businesses operating in the region, particularly those in the financial services sector, would be wise to keep a close eye on the AML enforcement landscape in Asia in the coming months.