April marked the perfect occasion to celebrate here at kompany. If you’re a subscriber to our monthly digest then you already know the reason why. Our new Developer Portal is now live! This means that developers working with our API now have a centralized resource at their disposal to help them continue to build great KYB apps on top of our API. Supporting documentation, dashboards, service announcements, status checkers and other essential features can all be found inside the portal. You can learn more by reading our latest blog post - just click here!
And after you’ve read that, we suggest queuing up the latest KYC Decoded miniseries, covering all things sanctions. Start with the first episode in which host Alex Pillow “provides an overview of sanctions, the subsequent responsibilities organizations have for staying compliant – and the consequences for not.” You can listen to the first episode, entitled “The Pen is Mightier than the Sword” on Moody’s website.
And now let’s get started with the April edition of our RegTech Roundup! This month, we’re highlighting the reported inadequacies of digital banks’ financial crime defenses, the differences between AML in the EU and UK post-Brexit and finally a quick look into Australia's AML vulnerabilities.
At the end of last week, the Financial Conduct Authority, the UK’s regulatory body, published its findings from its review into financial crime controls at several of the country’s challenger banks. The National Crime Agency estimates that money laundering costs the country roughly £100bn annually, which is causing watchdogs like the FCA to turn their attention to weak spots in the financial system.
The executive director of the FCA, Sarah Pritchard, states that while challenge banks are a valuable element of the retail banking offering, “there cannot be a trade-off between quick and easy account opening and robust financial crime controls.”
The review took a look at six unnamed challenger banks with more than 8 million customers between them throughout 2021 and identified a number of problems ranging from the lack of details collected on customers to ineffective monitoring. A lot of these issues have been identified on the back of a digital-first approach by online banks and other payment service providers, which puts ease of use, functionality and speed ahead of many other parts of the banking puzzle.
Many challenger banks are now feeling the consequences of their anti-money laundering vulnerabilities. Monzo shared that it was under investigation by the FCA last July over potential breaches of anti-money laundering laws while Revolut faced questions in 2019 that the fintech had mistakenly “switched off an automated system for flagging potential money laundering for several months the previous year.”
Next on the agenda for the regulator is crypto. As reported by the Financial Times, “its three-year plan released at the start of April, the FCA said it would ensure that crypto companies complied with anti-money laundering regulations and promised to intervene “where firms pose harm to consumers or market integrity.”
Prior to the UK leaving the European Union, the country had maintained regulatory alignment with the Union but a post-Brexit world has proven to look a bit different. FinTech Global is exploring the ways the EU and the UK are beginning to diverge where anti-money laundering legislation is concerned.
As they explain in their recent story, “the EU has introduced several pieces of AML legislation that are then implemented by member states as part of their domestic regulation. In this area, the UK chose to opt out of the sixth AML directive – 6AMLD – and has implemented its own AML controls.”
However, they are not without their own AML legislation. “The Proceeds of Crime Act, which is the UK’s primary AML legislation, defines money laundering offenses. Under provisions of the Act, financial institutions are obligated to implement AML controls for detecting money laundering activities. These include transaction monitoring, CDD and mechanisms for reporting suspicious activity.”
The Financial Action Task Force (FATF)’s recommendations are also an interesting area for comparison. Although their recommendations are not EU law, the global financial watchdog does require participating countries to take certain actions against financial crime. Therefore the UK remains in basic AML alignment with existing FATF members, simply by default as a status of its membership.
And where sanctions are concerned, the key difference between each regime comes back to the UK’s Sanctions and Anti-Money Laundering Act (SAMLA). FinYech Global explains,
“The key difference between the EU’s sanctions regime and the UK’s sanctions regime is that SAMLA introduces a lower threshold for the imposition of sanctions and enables the UK to freeze assets.”
However the Ukraine-Russia conflict is showing the weaknesses in this new UK legislation, where it has failed to outpace the EU’s sanctions on Russia. In the end, there remains speculation that the UK plans to adopt a much tougher approach to AML.
Back in 2014, the Australian government agreed to meet the FATF recommendation to include Designated Non-Financial Businesses and Professions, such as lawyers, accountants and real estate agents, included in the country’s anti-money laundering and counterterrorism finance laws. As such roles are considered to be likely targets for criminals looking to launder money, they are considered to hold serious economic, social and reputational responsibilities. That being said, eight years later, the country has yet to do this.
Australia is only one of three countries who have failed to act on this specific recommendation, the other two being Haiti and Madagascar. Without action, Australia is at risk of being placed on FATF’s grey list, a designation that holds its own economic impacts. As reported by The Diplomat, “A report by The International Monetary Fund estimates that ‘capital inflows decline on average by 7.6 percent of GDP’ when on the FATF grey list.’”
According to the cited story, Australia stands to reduce the impact of foreign sanctions on its own citizens because “more entities will be subjected to vetting, excluding the corrupt and criminal. The Committee recommendation of the establishment of a beneficial ownership register would also be key.”
That's it for this month! But before you go…
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