Dr. Henry Balani: End of year AML regulatory review

The second half of 2023 was a busy period for regulators globally, given the ongoing geo-political challenges. Dr. Henry Balani shares his end of year anti-money laundering (AML) regulatory review as 2023 draws to a close.

Geopolitical challenges require KYC agility

Recent Russian, Ukrainian and Middle Eastern conflicts have emphasized the need for banks to identify terrorist groups from their know your customer (KYC) processes. Both in terms of anti-money laundering (AML) and terrorist financing. Given the political sensitivity of conflict, banks must now go beyond the named terrorist organizations. Additionally, they need to identify the entities involved within these groups. Otherwise, without doing so they risk the ire of the public and potential enforcement actions from regulators.

Throughout these geopolitical challenges, banks face unprecedented complexities in ensuring effective KYC and must bolster their processes. Automation emerges as a crucial solution in this context. A swift and reliable means of navigating the intricate web of regulatory requirements and risk management is paramount. Particularly when agility for deployment of new regulation or policies is key, such as increased focus during times of conflict.

Building an automated digital eco-system is a way forward for banks. To learn more read my paper to discover how to navigate the challenges of identification and how to unlock risk-based strategies by harnessing technology to build a build a digital eco-system.

Beneficial ownership and transparency of legal arrangements

Financial Action Task Force (FATF) issued a call for public consultation related to Recommendation 25. This is with reference to beneficial ownership and transparency of legal arrangements (aka Trusts). I agree this is an important area for consideration, especially with Trusts susceptible to abuse by criminals looking to circumvent AML measures.
Trusts, like companies, need to be assessed for potential risk. Encompass’ view is that beneficial ownership information and trust structures must be identified as part of a standard KYC onboarding process, irrespective of jurisdiction.

As part of several advocacy and consultation groups, I am fortunate to collaborate with various stakeholders including governments, policymakers, regulators, financial intelligence units and financial institutions. We collectively work towards improving the effectiveness of AML measures, limiting the abuse of legal entities. Further updates on this important area will be posted in future content.

Beneficial ownership across the globe

Regulations around beneficial ownership setup and transparency continues to be a major theme across multiple jurisdictions.

 1) United States

The United States Department of Treasury led by FinCEN has been actively progressing elements of the Corporate Transparency Act passed in 2021, with the development of a federal register of beneficial owners. This law requires beneficial ownership reporting requirements from US registered companies. The reporting requirements commence in Jan 1, 2024.

2) United Kingdom

In the UK, the Economic Crime and Transparency Act empowers Companies House to step up financial crime enforcement. It requires all new and existing corporate directors, beneficial owners, and anyone else filing information on behalf of UK legal entities to verify their identity to Companies House. It will also newly empower the agency to check corporate information. Additionally, remove false entries and penalize those responsible for making them. They will begin ‘proactively’ sharing intelligence on suspected money launderers, fraudsters, and other financial criminals with U.K. law enforcement agencies. There are also enhanced enforcement powers for Companies House impacting firms acquiring UK property.

We also see the UK Crown Dependencies commit to increasing transparency and accessibility to beneficial ownership held in their registries. The governments of Guernsey, Isle of Man and Jersey will extend access to financial services businesses, and those with legitimate interest, including media and civil society to combat financial crime. 

But transparency is key here, given the UK’s reputation as an open and established rule of law society.

3) Canada

In Canada, Parliament has passed a law to create a federal level public register to include beneficial ownership data. Like the UK, but unlike the USA, this database of beneficial ownership information of federally registered companies will be publicly available and transparent. However, the dates for making the register available are yet to be finalized.

4) European Union

The comprehensive AML package in the EU continues to be debated. The package includes three elements: the AML Directive; the AML Regulation; and the AML Authority. The Directive and Regulations are concerned with rule making. While the Authority focuses on the creation of a central EU authority to supervise 40 of the bloc’s highest risk banks and to serve as a hub for financial intelligence. The framework by which the site selection has been finalized, with the actual selection of the location to be announced in January 2024.

The full AML package promises multiple rules affecting bans on citizenship investment schemes. Additionally, access to registers and beneficial ownership thresholds amongst others. The EU has also been extending sanctions targeting Russian businesspersons. These extensions now include immediate family members and close associates. Furthermore, recognizing that Russian oligarchs commonly distribute their assets amongst family and friends.

As a result, banks must amend their existing KYC processes to include these additional names during their onboarding and refresh processes.

2023 draws to a close

In conclusion, as we approach the end of 2023, the global regulatory landscape of AML is evolving dynamically. Driven by geopolitical challenges and the imperative for enhanced transparency. The recent conflicts have underscored the critical need for banks to augment their KYC processes.

Automation stands out as a vital tool in navigating the intricate web of regulatory requirements efficiently. Collaboration among stakeholders and the proactive adoption of digital ecosystems become essential for financial institutions striving to build robust risk-based strategies. The international community is making strides in this direction. With jurisdictions like the US, UK, Canada, and the EU all actively implementing measures to enhance beneficial ownership reporting and transparency.

As we move forward, the commitment to transparency, collaboration, and adaptability will be instrumental in ensuring the effectiveness of AML measures across the globe.