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Written by Jackie Whiting
on August 31, 2020

As summer winds down in Europe many of us are reflecting on perhaps one of the stranger summers in recent memory. But while quarantine restrictions fluctuate, and a lucky minority return from their holidays, there’s been no slow down in the world of regulatory compliance. 

On the enforcement side, things are not slowing down in the least. In fact, as we recently shared on LinkedIn, AML related fines have exceeded more than $700 million USD in the first half of 2020 - that’s double the amount of fines imposed in all of 2019. This is owed in part to a few factors, including increasing powers of European authorities to the failure of regulated entities in updating their AML initiatives. 

But the one piece of the puzzle that remains unchanged is the demand for ready-made solutions. It also explains why the global regtech market size is expected to reach USD USD $55.28 billion by 2025. Regulatory technology exists in part to not only solve pain points of regulated entities, but aid in the global fight against money laundering and it is one of the reasons why we’re proud to do what we do! 

But now, let’s get on to the news! Here are three stories we think you should know before heading into September. 

Financial crime: Banks being attacked on all fronts

Financial crime teams across the United Kingdom and Ireland are expressing concern about the vulnerability of their financial institutions. Of particular concern is the “increasing volume and variety of more established financial crimes that aren’t new, but are incredibly hard to detect, such as mule activity; the proceeds of trafficking; the abuse of corporate structure and the criminal use of third parties.”

Currently banks in the UK and Ireland are spending, in total, roughly 60 million per year (3% of their annual revenue) on financial crime compliance. But it’s doing little to ease concerns about their exposure to money laundering related crime. In fact, Finextra reports that many financial institutions are woefully insecure about their ability to detect the most common crimes. Here’s a breakdown by detection confidence level:

  • Identifying the proceeds of trafficking - 55%
  • Identifying trade-based money laundering schemes - 49%
  • Identifying the misuse of corporate structures - 52%
  • Identifying the misuse of digital currencies - 43%

Also concerning is that the survey results indicate that the majority of compliance professionals “expect exposure to these types of financial crime to increase or remain the same over the next 18-24 months”.

Unsurprisingly, institutions attribute their ineffective response to bad tools, IT gaps and legacy infrastructure. But as described by Finextra businesses will require a much higher volume of sophisticated data attributes to “provide better insight on the individuals and transactions involved in the complex, inter-connected and evolving financial crime ecosystem…Although data and technology can be costly, the costs of not getting it right are far higher.”

Not a pretty picture: Money laundering and America's art market

For our next story, we move things over to the United States where The Hill contributor Deborah Lehr discusses her take on the state of the country’s art market, commenting on the 150-page report from the Permanent Subcommittee on Investigations (PSI).  As Lehr describes, “Bad actors are exploiting the $28.3 billion American art market — with serious consequences for the United States and our national security.”  

Details in the report include the story of a pair of Russian oligarchs that “allegedly laundered at least $18 million through the American art market in recent years, evading U.S. sanctions imposed in March 2014 on Vladimir Putin’s inner circle following his invasion of Ukraine.”

Senators Rob Portman (R-Ohio) and Tom Carper (D-Del.) led the inquiry with the goal of discovering why the sanctions have failed to be more effective. After two years spent compiling a staggering amount of documents and conducting dozens of interviews, the investigators have reached at least one conclusion, “The art market’s continuing exemption from standard laws and regulations, which now cover all other sectors of comparable risk and size, gifted these sanctioned Russians with an easy backdoor into the world’s biggest economy.”

As Lehr points out in her story, the EU already requires entities handling art transactions valued at €10,000 or more to comply with anti-money laundering requirements, including things like verification of the identity of the seller, buyer and ultimate beneficial owner (referring to the person or persons who ultimately benefit from its sale). The United Kingdom has similar legislation in place as well, meaning that the United States - which makes up 44% of the global art market - could easily see itself becoming a safe haven for those looking to use artwork to accomplish their illegal activity. 

“Increased transparency is in everyone’s interest — including that of the market itself. Scandals, prosecutions and 150-page PSI reports rightfully erode faith in the art world and that, in turn, will affect the bottom line. Building trust, by conducting due diligence and other best practices, and staying within not only the letter but the spirit of the law and ethical guidelines, will help legitimate business to grow and remain competitive internationally.”

Czech Republic strengthens anti-money laundering measures, but shortcomings remain

Over in Europe, one country in particular is taking large strides to catch up with its fellow EU members where anti-money laundering is concerned. “In a follow up report on the Czech Republic, the Council of Europe’s anti-money laundering body MONEYVAL concludes that the country has improved measures to combat money laundering and terrorist financing, but still needs to make progress in certain areas.”

MONEYVAL - a monitoring body of the Council of Europe entrusted with the task of assessing compliance with international standards to counter money laundering and terrorist financing - has announced progress and awarded the Czech Republic higher international compliance ratings in three key areas, including: 

  • “the improvement of mechanisms for national cooperation and coordination to tackle money laundering and terrorism financing (ML/TF) 
  • the strengthening of countermeasures against countries and jurisdictions which represent a high ML/TF risk
  • the removal of regulatory gaps for correspondent banking relationships, which will ensure greater transparency for bank-to-bank transactions.”

"The follow-up report also finds that Czech Republic has achieved some progress in the implementation of new international requirements for virtual assets, which includes virtual currencies (e.g. Bitcoin, Ethereum) and the providers of these assets."

But MONEYVAL also noted that the Czech Republic had failed to make "sufficient efforts to upgrade its ratings in two areas: financial sanctions related to terrorism, and mechanisms to track the movement of cash across borders."

"To date, the Czech Republic has reached a level of full compliance with five of the 40 Financial Action Task Force (FATF) Recommendations, which constitute the international AML/CFT standard. The country still has minor deficiencies in the implementation of another 24 Recommendations, and larger-scale deficiencies for the remaining 11."

As of recently, MONEYVAL decided that the country will stay in the enhanced follow-up process, continuing for now to report back to MONEYVAL on "further progress to strengthen its implementation of AML/CFT measures" - certainly presenting an optimistic outlook on the future! 

That’s it for this month! But before you go…

Our CEO Russell E. Perry joined the guys over at Fintech Newscast to discuss all things KYC, compliance and the application of machine learning. You can listen to the episode by clicking here.

We also recently shared our insights on leveraging artificial intelligence for UBO disclosure requirements with The AI Journal. If you’re passionate or simply curious about AI then read the story and discover how we’re applying the technology to revolutionise UBO discovery for our clients.

And finally, if you enjoyed the read, why not follow us on LinkedIn and Twitter? You’ll receive next month’s news round up and stay informed on the latest happenings in all things RegTech, compliance and regulatory news. Interested in knowing us even better? Learn more about the kompany difference by visiting our website. And until next month, stay safe!

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