Anti-Money Laundering. Where to Next ? A View On Both Sides of the Atlantic

Significant changes to the AML regulatory framework are being introduced on both sides of the Atlantic, raising the question of what to expect in 2018….

A European Perspective

In June 2015 European Directive (Eu) 2015/849 was introduced. This amended Regulation (EU) 2012/648 and is designed to address flows of illicit money that “can damage the integrity, stability and reputation of the financial sector…”

The new Directive, commonly referred to as the Fourth EU Money Laundering Directive or MLD4, is specifically aimed at transaction flows that may relate to terrorism financing and organised crime. It is to be encapsulated into national law across all member states in June 2017.

As with all European Directives, a cascade of changes is introduced. For the banking sector the most relevant are:

  • Each member stare will be required to publish a National Risk Assessment (NRA) report, identifying key terrorist financing risks. Banks and financial institutions are required to update their Anti-Money Laundering (AML) systems to capture and monitor any information relevant to the NRA report. This will require modification to existing systems, procedures and software including the continuous monitoring of all transaction activity. The United Kingdom has already published its NRA making this an immediate requirement in this jurisdiction.
  • AML methodologies must now be documented and made available to regulators on demand. This documentation must be current and must reflect changes to AML monitoring systems and software
  • A centralised register of corporate beneficial ownership is to be compiled and maintained by each member state. In the UK legislation implementing this register has already been enacted and requires all companies to report beneficial ownership information to the registering authority
  • Suspicious transaction activity, whether successful or attempted, must be reported. As with NRA, reporting such activity will, in most cases, require modification to existing software including the introduction of continuous system monitoring.

Although MLD4 has yet to be implemented at the national level, it has already been modified by the introduced of the mis-named MLD5 – mis-named as MLD5 is not really a new directive as such but a series of modifications to MLD4.

These modifications were introduced as a direct result of increased terrorism activity in Europe in 2016.

MLD5:

  • Bans the use of anonymous prepaid credit cards
  • Introduces transaction controls on virtual currencies
  • Enhances the reach and influence of the centralised financial intelligence units
  • Increases the due diligence obligations relating to high risk countries

Together MLD4 and MLD5 indicate a toughening of European the regulatory position relating to terrorism and organised crime financing, and almost certainly will be underpinned by a significantly more aggressive stance from national regulatory authorities on enforcement.

A Perspective from the USA

As with Europe, the USA is introducing additional and far reaching regulatory enhancements and controls specifically aimed at terrorism and organised crime financial activities.

The first of these is the new Customer Due Diligence (CDD) rules. As with MLD4, these rules relate to the identification and verification of the beneficial ownership of legal entities.

Unlike Europe and certainly unlike the UK, the CDD rule imposes an obligation on the financial intermediary at the time a new account is opened to identify beneficial ownership.

This requires extensive changes to existing AML practices, procedures and IT programs. Although the CDD rule has an applicability date of 11th May 2018, the Office of the Comptroller of the Currency (OCC) is already imposing the CDD rule on the banks.

Separately in New York, the Department of Financial Services (DFS) has introduced new risk-based anti-terrorism AML regulations. These new regulations[1] significantly raise the compliance obligations imposed on New York based financial intermediaries. These new obligations are being vigorously enforced. The DFS has imposed four enforcement actions since August 2016 resulting in penalties ranging from US$180m to US$425m.

Whilst the popular positioning in the press, particularly from the lobbyists working for the banks, is that the regulatory burden on banks will be relaxed, the reality is that AML enforcement is going to become more aggressive and the regulatory burden more extensive.

This has been specifically stated by the OCC which declared AML scrutiny, supervision and enforcement will be “an examination priority for 2017”.

All agencies in the USA are now expected to take a rigorous approach to AML compliance, particularly with regard to suspicious transactional activity whether successful or attempted. This includes the SEC’s Office of Compliance Inspection and Examinations and the Federal Deposit Insurance Corporation.

When these changes are added to the Trump Administration’s declared heightened focus on fighting terrorism, the only result in the USA, as in Europe, will be increased AML supervision and enforcement throughout 2018 and beyond.

 

[1] Introduced January 2017

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