In Anti-Money Laundering, KYC, Political Corruption, Sanctions

UK’S 4th AML Directive Causes an Overseas Stir

Following the UK’s vote to leave the European Union (EU) in the summer of 2016, many wondered what the potential consequences of this unprecedented move could manifest into, including the possible catastrophic effects that could be seen on the UK’s legal framework. With the UK’s membership to the EU came the implementation of legislation developed to aid in the global battle against money laundering and terror financing, as well as greater cross-border cooperation. Following Brexit a fair amount of the progress made in global financial security over the last several years was seemingly in jeopardy, but the UK is in fact obliged to implement the latest anti-money laundering directives. Fast forward to just over a year after the Brexit announcement where, following a short turnaround period which saw its final presentation to British Parliament and a deadline of incorporation occur in less than a week’s time (presented on June 22nd and officially enacted on June 26th), the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 are now in full effect in the United Kingdom. Although the initial draft of the Regulations was published in April of 2017, the final draft of the legislation has added several amendments that have left compliance officials working in the financial services sector, as well as those operating in the legal sector, scurrying to guarantee the preparation and overall compliance of their respective institutions. This is a significant task however, considering that this is the UK’s largest regulatory reorganization in over ten years. Although several of the mandates from the 2007 Money Laundering Regulations remain in place, the 2017 Money Laundering Regulations incorporate the Fourth European Anti-Money Laundering Directive (AMLD4), which is a notable upgrade to the EU’s previous anti-money laundering (AML) and counter-terrorism financing (CTF) initiatives. The update will reportedly address and incorporate several recommendations made by the Financial Action Task Force (FATF) in years past.

The article “Passed on Thursday, in force today – new AML regulations thrust on profession” cited in BSA News Now on June 28th, 2017, discusses several key aspects of the newly enacted legislation, including several of the more significant amendments that were put into play on Monday. The AMLD4 includes multiple amendments aimed at increasing the potency of the UK’s financial safeguards, and experts believe that they will greatly improve the overall quality of the checks made on sources of funds. The primary theme of the new regulations seems to be the need of financial institutions to continually monitor themselves and their own AML policies and practices through a risk-based approach. There will be a much greater emphasis being placed on more thorough risk-based assessments, which will be carried out and kept up to date at all levels, as well as an extension on scope of practice which is set to include a broader definition of “criminal activity”, among other measures. AMLD4 will affect those committing tax crimes, as well as individuals providing gambling services, as those performing these and other activities will now face harsher punishment for their wrongdoing. In regards to the “obliged” individuals or groups involved in the gambling services, it has been reported that “The Member States can remove these providers – with the exception of casinos – partially or completely from the list of obliged entities if a low money laundering risk is evidenced” (Kunz, 2015).

It is believed that AMLD4 will also “substantially tighten rules on customer due diligence including in the areas of carrying out simplified due diligence, enhanced due diligence, and the ability to rely on third parties to carry out due diligence” (Taylor, 2017). Customer Due Diligence (CDD) will be required by anyone trading goods in cash with a value over €10,000, a shift from the past level of €15,000. There will also be a monumental shift in the cooperation and the information exchanges seen between financial institutions and law enforcement/financial intelligence units as well. With the maintenance of up to date beneficial ownership information becoming a requirement of the new directive, this information will now be passed on to the central registrar to aid both local and federal authorities with their investigations. Additionally, the rules for politically-exposed persons (PEP’s) are no longer limited to persons outside the UK, as local PEP’s will become subjected to the same scrutiny as foreign PEP’s beginning on June 26th.

The one distinct area of the new regulations that has compliance officials shaking in their shoes however is the introduction of administrative sanctions that significantly trump those seen before. These include “a maximum fine of at least twice the amount of the benefit derived from the breach or at least €1 million” and now allows a maximum fine of €5 million or “10% of the total annual turnover in the case of the institution” for credit or financial institutions. There are also heightened duties regarding the maintenance of written records of employee training, perhaps in an effort to shift liability from the financial institution onto the individual assuming the compliance responsibilities. These records could then be reviewed and used to determine whether or not a respective employee received the appropriate training to sufficiently and properly complete the duties they are assigned. Similar measures have been hinted at being incorporated within financial institutions across the United States, with compliance officials being threatened with criminal charges and large monetary fines if they are found responsible for compliance errors within their institution. Unfortunately for many financial institutions within the U.S. however, a trend has emerged which has seen a steady flow of compliance officials abandoning their posts of late due to fear of the aforementioned repercussions potentially impacting their wallets and their livelihoods.

Overall, the new regulations present quite a challenge for compliance officials in the United Kingdom, and will likely require a period of rapid adjustment and profound on-the-fly changes in the regulatory controls of financial institutions and firms alike.

Weekly Roundup

Colombian Corruption Chief Arrested

On June 28th, Luis Gustavo Moreno Rivera, Colombia’s national director of corruption, was arrested on money laundering charges. The charges emerged following Rivera’s latest visit to the United States in June, where he ironically tendered an anti-corruption presentation to investigators from the Internal Revenue Service (IRS). In his downtime in Miami however, Moreno and a Colombian attorney accompanying him on his trip by the name of Leonardo Luis Pinilla Gomez are alleged to have privately met with a former-Colombian governor who had fled the country in wake of a corruption investigation against him. According to The Miami Herald, “Moreno and the attorney met the politician in a mall bathroom to collect $10,000 in cash stuffed in a large manila envelope — a bribe in exchange for giving him confidential information about the corruption probe back home, according to U.S. authorities” (Weaver, 2017). Little did Moreno know the Colombian politician he had just received the cash from was acting as a government informant for the United States. This ultimately led to the arrests of both Pinilla, who facilitated the meeting, and Moreno in Bogota on money laundering charges filed in Miami, Florida.

Moreno’s initial asking price for the information he provided to the Colombian governor, which has been revealed as copies of sworn witness statements from individuals who had testified against the man in Colombia, was 100 million Colombian pesos ($34,500 USD). This figure then increased to 400 million Colombian pesos ($132,000), with approximately $30,000 USD to be paid before Moreno and Pinella departed from Miami. The Colombian politician, whose anonymity has been maintained thus far, reportedly contacted U.S. authorities about the extortion scheme upon his arrival in the States in April. At the request of the Drug Enforcement Adminsitration (DEA), the politician recorded audio during the meet up. The tapes revealed that “Moreno and Pinilla discussed the anti-corruption official’s authority to control the probe of the Colombian politician, and that Moreno could inundate his prosecutors with work so that they would be unable to focus on the investigation” (Weaver, 2017). Both Rivera and Pinilla were charged with one count of conspiring to launder money to promote foreign bribery, thus furthering Colombia’s negative international reputation as a major corruption hub.

Inefficient KYC Costing UK Banks

 A report published by the prominent transaction technology company Consult Hyperion this week revealed how wasteful Know Your Customer (KYC) procedures are costing banks and other financial institutions in the United Kingdom millions of pounds on average each year. As if this approximation is not already startling enough in itself, many in Britain’s financial services sector believe that the introduction and incorporation of the Fourth European Anti-Money Laundering Directive (AMLD4) for FI’s could inflate compliance costs dramatically. In theory, this could draw KYC-related “financial waste” figures (currently sitting at approximately £5 million annually) to upwards of £10 million per year in the coming years due to the increased frequency of KYC checks required by the new initiative.

In compiling their findings, the report examined the “existing cost of manual and inefficient KYC checks for banks, the impact of new AMLD4 and AMLD5 directives, and the potential of electronic identity (eID) verification”, and also provided recommendations that banks could implement to potentially lower their compliance costs (FX-MM, 2017). With KYC processes becoming an integral part of the financial security movement across the globe, banks must place a premium on their ability to verify the identities and important financial details of their customers. Steve Pannifer, the author of the report, also gave his take on the outdated AML/KYC techniques found within many financial institutions in the UK following his review. Pannifer stated that “The message to all financial institutions is clear: The cost of KYC checks is much too high, placing too much reliance on inefficient and error-prone manual processes”, and suggested that FI’s should act quickly to shore up their inefficiencies or face the threat of hefty fines as a result of the new rules (FX-MM, 2017).

Iran Kept on Blacklist

 The Financial Action Task Force (FATF), an intergovernmental organization created to aid in the combat of money laundering and terrorism financing, concluded earlier this week that the sovereign state of Iran would be kept on its “Public Statement” – which is essentially an economic blacklist. The decision will prevent Iran from accessing banking and other aspects of the international financial system. A statement from the FATF on the ruling read “Until Iran implements the measures required to address the deficiencies identified in the Action Plan, the FATF will remain concerned with the terrorist financing risk emanating from Iran and the threat this poses to the international financial system” (Cohen, 2017).

While many are enthused over the ruling due to Iran’s ties to terrorism and human rights issues, the same cannot be said for Iranian politicians, as the ruling is a significant blow to the country’s economic climate. Time will tell if Iran, one of only two countries currently present on the Public Statement, will meet the demands of the FATF and be removed from the blacklist in the near future.

 

Citations

“Average UK Bank Wastes £5 Million a Year on Inefficient KYC Checks.” FX-MM. 26 June 2017. Web.

Cohen, Ben. “Global Anti-Financial Crime Agency FATF Keeps Iran on Economic Blacklist.” Algemeiner.com. 27 June 2017. Web.

“Key Elements of the 4th EU Anti-Money Laundering Directive.” Financier Worldwide. Financier Worldwide Magazine, Sept. 2015. Web.

Taylor, Patricia. “Fourth EU Anti-Money Laundering Directive’s Effective Date Looms – Are You Ready?” William Fry. 29 Mar. 2017. Web.

Weaver, Jay. “Colombia’s Anti-corruption Chief Arrested on Money Laundering Charges Filed in Miami.” MiamiHerald.com 27 June 2017. Web.

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