Top 10 Anti-Money Laundering Stories in 2017 – Year End Review

 In Anti-Money Laundering, Bitcoin, Compliance, Risk

Global RADAR’s 2017 Year End Review – The Top 10 Anti-Money Laundering Stories in 2017

As we look back on what was undoubtedly a memorable, arguably historical year in both the financial services sector and the political realm internationally, the potential for sustainable growth and development across the finance industry in 2018 and beyond is undeniable. With profound advancements to regulatory technologies and the arrival of multiple successful crypto-currency platforms on the global stage this past year, one begins to wonder what other budding initiatives and subsequent opportunities could present themselves in the coming year. Before speculating on what could become the next tantalizing craze, shocking scandal or feel-good story of 2018 however, Global RADAR has formulated a comprehensive collection of the top 10 headline-grabbing stories from the world of Anti-Money Laundering (AML) and the financial sphere in 2017, a group that truly stood out above the rest. In the spirit of the new year, let’s count them down!

10. Trade Based Money Laundering: The Silent Killer

2017 will live in infamy due to the exponential increase in the usage of the term “Trade Based Money Laundering” (TBML) seen across the financial sector. Following several cases where antiquated manual screening techniques employed by financial institutions failed to detect this form of activity, various companies found in some of the world’s most powerful countries lost enormous sums of money. TBML becomes prevalent in the settlement, facilitation, or financing of international trade transactions, through relatively common means such as wire transfers and issuance of letters of credit and guarantees. These practices and the individuals using them to their advantage are often difficult to detect and apprehend, as the system capitalizes on key aspects of international trade, such as use of the enormous amount of trade flow to conceal individual transactions. This allows criminal organizations to transfer value across borders while remaining virtually undetected.

The most common method for laundering funds through TBML that financial institutions must be aware of is the over/under invoicing of goods and services, followed closely by the processing of “phantom” transactions and multiple invoices, tactics which FI’s are often unaware until the damage has been done. Customs agencies are particularly vulnerable in this regard, as they have limited detection resources to detect illegal trading transactions, which has placed an increased amount of pressure on the private sector to pick up the slack. Many institutions within the U.S. have now begun to utilize flexible, automated rules-based systems for the detection and deterrence of TBML, and have had great success with these initiatives thus far.

9. Potential Roots of Financial Crime in the US, UK Revealed

Management of the differences in transnational regulation and legislation between both well-developed and lesser-developed countries has been a constant issue for legislative bodies across the world, specifically in regards to continuously-updating AML requirements. Thus studies on legislative and ethical differences between the United States and the United Kingdom released in 2017 have shown that the lack of uniformity between financial systems and their regulations creates a lot of room for criminals to participate in illegal activities, capitalizing on areas of little legislative overlap in particular. These findings seem to supplement the long-standing belief that without a uniform or modified set of compliance and financial regulations for all of the world’s countries to follow, negating the threats of financial crime will be nearly impossible at the international level.

The study also discovered another negative trend emerging within the financial sector that has lead to an increase in financial crime rates recently, revealing that the tendency to look for short-term results is a contributing factor that often pushes people in influential positions to commit crimes, typically money laundering, bankruptcy fraud or the manipulation of financial statements in order to obtain positive reinforcement. This pressure for quick, positive results is often the driving force behind many of the major financial crimes seen today, and with greater pressure being placed on financial institutions than ever before by respective boards of directors, clientele, and federal regulators among others, it is difficult to foresee this detrimental trend drawing to a close any time in the near future

8. UK: There’s a New Watchdog in Town

With AML breaches remaining a pervasive issue in the United Kingdom, the Financial Conduct Authority (FCA), a regulatory body focused on regulation of conduct by both retail and wholesale financial services firms in the United Kingdom, has had its hands full with investigations into the subpar AML controls of multiple FI’s and related entities within their borders, most notably HSBC this past year. In a move made to further address some of the shortcomings seen in both legislation and enforcement of money laundering offenses, the FCA announced the creation of the Office for Professional Body Anti-Money Laundering Supervision (OPBAS), designed to check if anti-money laundering and terrorist financing rules are being applied properly by some 200,000 lawyers and accountants in the UK. The OPBAS, announced in March and scheduled to be fully operational at the start of 2018, was designed to close loopholes, and level any differences in how anti-money laundering guidelines are being applied by 22 legal and accounting professional bodies, while also improving coordination and information sharing between them.

One of the key concerns held by the Treasury that ultimately led to the creation of this new group was the sheer amount of regulatory guidelines held between the 20+ trade bodies with the power to issue AML rules in the U.K. Many believe that this alone has opened far too many loopholes that are being taken advantage of by clever financial criminals. The primary role of the new watchdog will reportedly be to “simplify the anti-money laundering rules that apply to different industries”, limiting the avenues that can be exploited by criminals. The Office is also expected to have the power to issue fines for AML failures as well.

 7. How Artificial Intelligence is Shaping Society, and Our Wallets

With the many benefits provided by automation and artificial intelligence (AI) when used in the financial realm, it is sad that this newfound reliance on robust technologies was not adopted sooner. 2017 saw banks and other financial institutions (FI’s) go to extreme efforts to reduce the amount of manpower and other physical resources required to complete compliance-related processes, as well as to achieve greater productivity and boost profits overall. These applications are not only proving to be worthwhile for banks, but also for customers who have been able to make and saving money at greater rates, while also improving their overall customer experience. By using highly developed AI platforms, banks now have the capability to link customer records and other data across multiple accounts (i.e. bank, credit, loans, and even social media). With this, predictive applications can suggest in real-time the “next best” offer to keep a client happy based on their spending, risk tolerance, investment history, and debt, among other factors – a truly powerful concept.

Financial institutions using these technologies can now also gauge and predict customer satisfaction & interest, or potential dissatisfaction, allowing the company to appease their client before they become unhappy, or develop ways to keep the positive experience from fading. These developments have also helped the cause in regards to the global war on money laundering, as AML and regulatory technologies (RegTech) have allowed organizations and government bodies to stay one step ahead of opportunistic financial criminals. These AI platforms are potent and “smart” with built-in processes that can find patterns that regular thresholds do not detect, and continuously learn and adapt with new data, reducing false positives immensely while also cutting operational costs dramatically. These technologies have already started to alter today’s compliance landscape, and as new advancements continue to be made, there will continue to be a gradual reduction in the amount of human judgment needed to analyze the financial data of bank customers, leading to increased accuracy and efficiency.

6. The United States of Tax Secrecy

Financial professionals and the general public alike were justifiably shocked upon the release of a report published by European Parliament earlier this year which found that the U.S. has emerged as a ‘leading tax and secrecy haven for rich foreigners’ because of its resistance to global tax disclosure standards and the array of tax-free facilities available for non-residents. Yes, it seems that with current laws permitting beneficial owners of companies to remain anonymous, an influx of illicit international money has hit several markets within the U.S., especially the real estate market. The report accentuated the fact that, unlike many other developed countries around the world, the U.S. has yet to agree to implement the Organization for Economic Cooperation and Development’s (OECD) common reporting standard for the automatic exchange of bank and tax data between tax authorities. The rationale behind the uncompromising stance of the U.S. in this regard is the belief that FATCA reporting is sufficient and fulfills all of their needs. This decision to not conform has left the U.S. as a “non-participating jurisdiction” under the CRS regulations.

Another issue raised in the report was the double standard for reporting requirements between the European Union and the United States under the U.S. Foreign Tax Compliance Act. In this act, EU governments are required to provide the United States with tax/income data about all U.S. citizens living in Europe. The issue is that this reporting is one-sided, as the U.S. does not provide information to the EU about European citizens living within the United States. While cooperation and communication between the world powers has increased in the months since the report was published, the allegations against the U.S. remain one of the most captivating stories of 2017.

5. FinCEN Continues, Expands Crackdown on Real Estate Money Laundering

Over the past several years, the U.S. real estate market has developed into a hotbed for money laundering by foreign nationals and other notable international figures and criminals. As a result, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) set out to investigate unknown buyers who were potentially using shell companies to hide their identities when making real estate purchases with illicit funds in these high profile markets through a series of trial investigations in South Florida and New York City. These trials yielded results significant enough to prompt FinCEN to continue the program for two consecutive six-month periods, while also extending their reach to a total of seven distinguished metro areas across the United States. In the initial investigation, title insurance companies of Miami-Dade County and Manhattan were required to reveal the identity of the actual figure(s) behind the shell companies being used to make real estate purchases. Known as Geographic Targeting Order’s (GTO’S), FinCEN has found that these requirements have led to an increase in the effectiveness of the data provided to law enforcement in cracking down on money laundering through real estate within the United States. The U.S. Treasury Department stated that roughly 30% of high-end real estate deals that were subject under the new watchdog program involved “suspicious activity” and potential money-laundering, making the decision to continue the program something of a no-brainer.

The revised GTO’s extended onto Bexar County, Texas, San Diego County, California, San Mateo & Santa Clara counties of California, Los Angeles & San Francisco counties of California, and Broward & Palm Beach counties of Florida, as well as each of the boroughs of New York City in February, and the city and county of Honolulu, Hawaii in August. The monetary thresholds for revealing the individuals behind each transaction will differ for each area, reflecting current market values found within those specific regions. The thresholds for the original two areas, Manhattan and Miami-Dade will remain at $1 million & $1.5 million, respectively). Each of the mentioned counties of California will have a reporting threshold of $2 million, and Bexar County will have the lowest threshold of the group at $500,000. Honolulu closes out the list with the highest threshold of $3 million for its residential properties.

4. HSBC’s Record-Setting Year

All-in-all, 2017 was a year that HSBC, Europe’s largest bank by total assets, and its investors won’t soon forget. The group seemed to be mired in scandal after scandal, starting with the $175 million fine it received from the U.S. Federal Reserve in September for unsafe practices and oversight failures in its foreign exchange trading business. An investigation into its foreign exchange market valued at $5 trillion a day found that HSBC failed to adequately monitor chat rooms where traders exchanged information on investment positions and other valuable information. Investigators also accused HSBC dealers of sharing confidential information about orders from clients and coordinating trades to boost their own profits. This goes in hand in hand with the next impropriety tied to the company this year, as in October, HSBC’s former head of foreign exchange trading was convicted on eight counts of wire fraud and one count of conspiracy to commit wire fraud in relation to the use of client information for personal profit. Mark Johnson reportedly used “front-running” techniques to exploit confidential information provided by a client of the bank to execute trades that were intended to generate millions of dollars in profits for him and the bank at the expense of their client. Johnson faces up to 20 years in prison.

It did not end there however, as November saw the company pay €300 million ($353 million USD) to settle a tax evasion investigation into French clients of its private bank in Switzerland in order to avoid admittance of guilt in the case. While proceedings against HSBC were terminated upon receipt of the payment, two former directors of said private bank may still face legal action for their respective roles. Only a few days after this settlement, the company’s private banking unit was then fined a record HK$400 million ($51 million USD) over the sale of Lehman notes and products in Hong Kong in years past. The ultimate collapse of the high-risk Lehman investment products sold to consumers in Hong Kong had a significant impact on the financial system in China altogether, leading to complete overhauls of sales procedures in a number of banks and major losses for thousands of investors throughout the country. Here’s to HSBC hopefully bouncing back in 2018!

3. To Risk or De-Risk, That Is the Question

Much like Trade Based Money Laundering, the term “De-Risking” too became synonymous with the year 2017. Defined as a situation where financial institutions terminate or restrict business relationships with certain categories of customer, the trend is not necessarily new, but became a practice increasingly employed by a large number of financial institutions in developed countries for a variety reasons, including profitability concerns and potential reputational risks involved. This past year saw banks reject and/or shed their clients located in “high risk” regions such as the Caribbean, Central Europe and South America, as well as those dealing in risky areas, such as the casino industry, at an unprecedented rate due to the increasing pressures being placed on them by government regulators and private litigants. Hundreds of thousands of accounts considered risky for money laundering at financial institutions of all sizes continue to be dropped due to the fact that they cannot offset the costs and risks involved, causing entire regional economies to suffer as a result. De-risking has formed what has been coined a “parallel economy”, one that has seen the number of “underbanked” individuals worldwide rise to 2.5 billion according to the World Bank Data released in 2017.

Areas that rely on funds from tourism for economic stability have suffered and may continue to suffer for some time, due in large part to credit card transactions potentially being rendered impotent except with respect to local credit cards and local banks. Many believe this will force travelers to have to carry large amounts of cash on hand, increasing their own personal risk and potentially increasing crime rates, which will undoubtedly have a negative effect on tourism to said countries.   The concept of de-risking is highly controversial for several reasons. It has stretched law enforcement resources thin, setting the U.S. banks back in their ability to control terrorist financing and crime-created money laundering. It has also led high-risk clients being shunned by the larger financial institutions to banking with smaller FI’s that may not have adequate AML/CTF processes in place, leaving these institutions vulnerable financial crime, as well as possible sanctions and fines as a result of improper practices. While the practice has already begun to deteriorate international relations between countries involved, efforts are being made to correct some of the major issues with this tactic, although significant efforts will be needed to reverse the damage that has already been done.

2. Compliance Officer: The World’s Riskiest Job?

Historically, the compliance realm has shown a tendency to be rather unforgiving to corporations of all sizes. Even the smallest of regulatory breaches can and have led to major fines and sanctions, as well as reputational losses that have been difficult for these organizations to recover from. For years we have heard the stories of countless compliance casualties – businesses being forced to shut their doors due to severe compliance failures that have left their customers at risk, or have allowed for illicit activity to occur right beneath their noses. However, from the perspective of those operating in a bank’s compliance department, effects of this extent have never truly been felt at the level of a singular employee…until 2017. Beginning earlier this year, many in the political realm began to push for the power to criminally charge individual compliance officers for their personal on-the-job failures. This trend has already begun to completely transform the occupation of “Compliance Officer” into one of the highest-risk occupations on the job market today, leading industry experts to believe that this heightened accountability has driven experienced candidates to be more cautious about the profession, making it difficult for banks to fill open positions or find capable replacements.

For the first time in history, multiple court cases emerged in the United States this year where compliance officers faced civil penalties and potential jail time for compliance failures that occurred under their respective watch. One case saw the chief compliance officer (CCO) of the money transfer services company

MoneyGram International pay a civil penalty of $250,000 USD – far exceeding his annual salary – in addition to being prohibited from acting in any role related to compliance for any money transmitting companies for the next three years. These cases have already forced the hand of compliance officials from multiple banks, whose responsibilities included overseeing anti-money laundering activities. These individuals have begun to abandon their posts and seek new areas of “safe” employment, something not seen before the threat of these personal penalties emerged within the last three years. The need for potent and ethical practices to be maintained within compliance departments is evident, thus the call for stricter penalties is warranted. However, time will tell if the effects of these penalties will ultimately have a more significant impact on financial security in the U.S. and abroad than the infractions themselves.

1. Bitcoin Mania!

Can anyone recall any phenomenon in recent memory that took the world by storm in just a matter of weeks the way Bitcoin did in 2017? Evolving from its infancy as an obscure idea with great potential, but surrounded by countless question marks, Bitcoin and crypto-currencies altogether were perhaps the most widely talked about subject of the last decade amongst the masses, and for good reason. Slowly but surely, crypto-currencies have risen to unfathomable heights, and still have untapped potential that will likely drive their future growth. They have become an undeniable part of the global financial industry, with individuals from various regions of the world continuing the race to get in on what has been dubbed “the future of money.” We were awe-struck by the unprecedented rise of the world’s most valuable digital currency in such a limited amount of time; at inception in 2010 available for just 6 cents per coin, beginning 2017 valued at a modest $1,000 per coin and at one point rising to an unbelievable $19,783 before years end. Few had predicted a rise of this extent, and skeptics continued to voice their concerns with its potential volatility as well as the relative uncertainty that still surrounds the coins today. Bitcoin critics continued to maintain that its rise had been driven by speculation alone and that it is a financial bubble on the verge of bursting. These same cynics laughed when Bitcoin briefly plunged nearly 45% in December to $11,000 per coin, but were again quieted once it rebounded to over $14,500 in the final week of the year.

Nevertheless, cyber-security experts continue to worry about the risks posed by the currencies, due in large part to the lack of regulation in place to protect consumers and investors from financial criminals and hackers. Additionally, the anonymity provided by crypto-currencies has also been a cause for concern for financial entities across the globe that are seeking ways to hinder criminal activity and terrorist financing, not promote it. Thus financial institutions are now faced with complex challenges and potentially catastrophic risks that have never before been encountered, a byproduct of today’s tech-centered society. Adoption of Bitcoin across the globe is still in its early stages, so it will be interesting to see how the coming year will impact its global presence, growth, and price altogether.

There you have it, our top 10 most memorable story lines from 2017! We truly hope you have enjoyed our weekly segments, as well as our BSA News Now newsletter this year. Global RADAR wishes you a happy, prosperous, and secure New Year!

 

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  • Carion Corsino

    what is the most kind modus operandi of ML in ASIA PACIFIC

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