AML regulatory review – what do recent AML obligations mean for banks?

Throughout 2023, we have seen several anti-money laundering (AML) regulations enacted around the world.

Due no doubt to various geo-political events, including the Russian invasion of Ukraine, along with the Pandora Papers scandal. These regulations are directed to the fight against financial crime, with the intent of curbing illegal money laundering activities. In this AML regulatory review we look at what the recent AML obligations mean for banks. Also, what they should consider when reviewing their current AML/know your customer (KYC) policies and procedures.

1. FATF and the multi-pronged approach

In March, the Financial Action Task Force (FATF) finalized changes to Recommendation 24. It explicitly recommends the use of multiple sources of information, (including technology-based solutions).

While Recommendation 24 updates were wide ranging, the multi-pronged approach to beneficial ownership information is particularly relevant to banks in setting up their KYC processes. The key here is to adopt a risk-based approach as part of the KYC customer due diligence (CDD) process. Banks should review this guidance closely as they update their policies and procedures. The increased number of sanctions against Russia means a greater volume of potential false positive matches. Subsequently, these need to be reviewed, further increasing the probability of non-compliance.

The benefits of a multi-pronged approach

• Multiple sources of information offer increased transparency and accuracy of beneficial ownership identification. If the corporate structure is complex and crosses jurisdictions, a single source of information may not be able to flag the cross-border ownership risks
• Efficiency can also be improved with a multi-pronged approach. Especially if the collection and reconciliation of information from multiple sources is automated
• The multi-pronged approach also means improved record keeping, with more accurate and complete information surrounding the beneficial owner

The benefits of multiple sources of information are clear. However, in my opinion, the challenge is ensuring the onboarding process is consistent and reliable. After all, the goal here is to demonstrate to outside auditors and regulators these processes can be counted on to detect money laundering. The way to achieve this satisfactorily is automation. By transforming the process, with integration to other elements of the KYC process, a bank can take advantage of the benefits outlined above. Creating a single digital KYC profile for each entity to evidence compliance and show the sources of information in a clear audit trail.

2. Lowering beneficial ownership thresholds

The EU is considering lowering the current beneficial ownership threshold of 25%. While the percentage has not been determined, any reduction of the threshold means a broader range of entities will need to be reviewed.

Effectively a wider net could be cast, leading to increased transparency and consequently improved risk assessments. Conversely for the bank, casting a wider net means greater effort (and costs) to comply with the lower threshold.

Banks would also need to review their current client book of business and remediate corporate structures to comply with the change. Process automation would certainly deliver against this challenge by creating complete digital KYC profiles of customers. There would also be the added benefit of improved, consistent risk assessment to achieve effective regulatory compliance.

Personally, I agree with civil society groups that advocate for more transparency. Even with some suggesting lowering the threshold to as little as 10%. Of course, banking trade associations are pushing back on any change in the threshold as the impact on their workload would be substantial. At this point in time, we have yet to see evidence that demonstrates lower thresholds would lead to increased detection of money laundering.

Having said that, any move lowering the threshold creates a timely point at which to review existing policies and processes. Irrespective of how much lower the threshold is changed, expediting the move to automation is a net positive. Technology is the way forward in my view. Banks should certainly be pushed further in their adoption of technology which has been a long time coming.

3. Extension of Russian sanctions to include immediate family members and close associates

In June 2023, the EU Council extended sanctions targeting Russian businesspersons to include immediate family members and close associates. This significantly increases the bank’s due diligence efforts. Now requiring them to review additional sources of information, including public and commercial lists. It has long been known that corrupt politicians and businesspersons tend to launder their ill-gotten gains through these extended networks. So, this action is a welcome update.

With the likelihood of continuing extensions of sanctions, banks need to revisit their current KYC processes. Certainly to incorporate these additional due diligence requirements. Banks should look to replace manual processes with automation that can scale. Running the risk of slow implementation, or manual remediation of back books of profiles as regulators look to higher levels of enforcement will present additional challenges of non-compliance.

Regulations around the globe

4. Enhanced enforcement powers for Companies House impacts firms acquiring UK property globally

In June, UK Companies House published new guidelines to clarify their approach in using newly granted enforcement powers in relation to the Register of Overseas Entities (ROE).

The ROE requires foreign companies looking to acquire UK property to reveal their true owners. Subsequently ensuring criminals cannot hide behind secretive shell companies. Any foreign company will have to identify the beneficial owners and provide verified information to Companies House before any application to the Land Registry can be made. Foreign companies that do not comply with the new obligations face criminal sanctions. This could include fines up to £2,500 per day or a prison sentence up to five years. These enhanced enforcement powers are another step in the right direction to weed out dirty money entering the UK property market.

5. Australia publishes latest version of AML/CTF rules

July saw the latest version of the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) (AML/CTF Rules), that detail obligations for reporting entities.

Chapters of the AML/CTF Rules cover exemptions and AML/CTF requirements for specified, sectors, persons, or transactions. The AML/CTF Rules also cover certain exemptions for reporting entities assisting specified law enforcement agencies with investigations. Additionally, the rules set forth matters that are considered by AUSTRAC when deciding to suspend registration or take other administrative actions for non-compliance. Further information can be found here.

6. USA – Potential delay of FinCEN Beneficial Ownership register launch (June 2023)

The chairman of the House Financial Services Committee introduced legislation in June that would indefinitely delay a federally administered U.S. beneficial ownership registry. More than 32 million legal entities will be required to report.

Speculation is already growing that the bureau may have difficulty launching the ownership registry by January 2024. However, delays will mean US banks will have to adjust their KYC onboarding processes to accommodate the new timeline. Delays however may be the appropriate step, given the complexity of setting up a federal level beneficial ownership register. Once the existing CDD rules are reconciled, we should see rapid progress towards a rollout of the register.

AML regulatory review in summary

The regulations described here represent positive steps in the fight against financial crime. While the war in Ukraine and the resulting sanctions on Russia, along with the Pandora Papers scandals have highlighted the need for more efficient KYC CDD processes, we should anticipate additional sanctions programs deployed globally, given the successful coordination of the existing programs. Understanding the specifics and implications will go a long way to ensure compliance with regulatory requirements leveraging KYC process automation technology from Encompass.