Revisiting the Past: Global AML

Anti-Money Laundering Surveillance: A Regulatory Perennial

February 09, 2022
  • Investor Services
Global asset managers and policymakers remain engaged on the eternal areas of anti-money laundering regulatory policymaking. Adrian Whelan reviews the latest developments.
Perennial
/pəˈrɛnɪəl/
Lasting or existing for a long or apparently infinite time; enduring or continually recurring.

As global asset managers and policymakers are engaged in the nascent areas of societal and technological change such as environmental, social and governance (ESG) in­vesting, cryptocurrency and artificial intelligence, there remains some perennial areas of regulatory policymaking which still de­mand our continued focus and attention.

These topics are, in fact, the ones that have the greatest influence on the proper functioning of the asset management industry on a day-to-day basis. Anti-money laundering (AML) practices fall into this underrepresented bucket, yet they are a cornerstone of cross-border fund distribution.

It is a crucial “regulatory perennial” which undergoes iterative change year-on-year, is a crucial consideration for every asset man­ager, yet often is left solely to the Risk, Compliance, and Legal community to discuss amongst themselves. Despite its often low-profile, a momentous amount of time, energy, and resource are expended by a broad range of stakeholders across the asset man­agement ecosystem to stay up to date and on the right side of the ever-evolving and increasingly challenging compliance requirements relating to AML.

All the while, bad actors find more sophisticated ways of penetrat­ing the system. For decades now, AML practices have been a thorn in the side of global regulators and an area of consistent policy focus across the globe. However, despite the relentless supervisory rigor, sizeable regulatory fines, increased sanctions, and a litany of regula­tory rollouts, policymakers continue to struggle to keep pace with the bad actors, who themselves continue to evolve and become more sophisticated and efficient than ever before.

Redrawing AML Lines

In the absence of a truly globally coordinated approach, with per­sistent national and regional divergences, regulatory fragmen­tation creates complexity for global firms operating in multiple jurisdictions.

AML therefore remains a hot topic and continued area of regula­tory focus across the globe. The U.S. and the EU are both moving to re-draw lines and add more granular and stringent control ex­pectations. This is in reaction to the fact that despite the continu­ous resources expended to curb illicit global transactions, there continues to be a steady stream of scandals, revelations and from time to time successfully executed enforcement actions on high profile failures within the global finance industry. As such, banks and asset managers need to stay attuned to this crucial area of policymaking.

U.S. National Security

In the United States, in December 2021 the Biden-Harris admin­istration published the United States Strategy for Countering Corruption, a wide-ranging policy document explicitly highlighting “the fight against corruption as a core national security interest of the United States”. To curb corruption, the U.S. Government has committed to organizing itself around “five mutually reinforcing pil­lars of work” namely:

  1. Modernizing, coordinating, and resourcing U.S. Government efforts to fight corruption.
  2. Curbing illicit finance.
  3. Holding corrupt actors accountable.
  4. Preserving and strengthening the multilateral anti-corruption architecture; and
  5. Improving diplomatic engagement and leveraging foreign assistance resources to advance policy goals.

This policy document demands a significant increase in resources in support of Financial Crimes Enforcement Network (FinCEN), an arm of the U.S. Treasury. It allows the build out of a new beneficial ownership data system for use by U.S. law enforcement agencies to identify, investigate, and take enforcement actions against fraud, money laundering, terrorist financing, and proliferation financing.

Also, in December 2021, FinCEN published proposed regulations to implement the beneficial ownership information (BOI) report­ing requirements of the Corporate Transparency Act (CTA). These bolster the Anti-Money Laundering Act, 2020 which was originally drawn up to modernize the U.S. government’s efforts to deter money laundering, tax evasion, fraud and other financial crimes.

FinCEN is now tasked with:

  1. Implementing beneficial ownership rules for legal entities who conduct business in the U.S.;
  2. Developing protocols for access to and sharing of BOI; and
  3. Amending the existing customer due diligence (CDD) rule ap-plicable to financial institutions to account for the CTA

A public consultation on the complex and detailed proposals closes in early February 2022, and there is no clear timeline for fi­nal implementation of these proposed rules. However, there is no doubt that the U.S. is taking financial crime very seriously and that the ripple effect will have practical consequence for all banks and asset managers who transact with the country.

EU Ambition

The EU also sees the curbing of illicit payments as core to its future financial viability and success. In October 2021, Mairead McGuinness, the European Commissioner for Financial Stability, Financial Services and the Capital Markets Union, delivered a statement to the European Parliament on increased efforts to fight money laundering by the European Commission. She urged EU authorities to pursue any EU Member States lagging on the trans­position of the Fourth and Fifth Anti-Money Laundering Directives into their national laws, citing the fact that such delays inevitably lead to the “cracks and loopholes” being exploited by bad actors wishing to conceal their activity to make illicit payments. In a con­nected multi-national system such as the EU, the system is literally only as strong as its weakest link given the interdependence and interconnectedness of its markets.

There are plans to conduct to national assessments of wheth­er supervisors and Financial Intelligence Units are sufficiently staffed and resourced. The EU Commission already has a process where they issue Country Specific Recommendations (CSRs). The Commission is determined to follow up on these to ensure that the recommendations are followed through on by Member States through concrete action and their implementation will be moni­tored through milestones and targets.

The EU is focused on implementing a harmonized AML frame­work across its member states. It has plans which include a move to a directly effective regulation, proposed enhancements of the existing beneficial ownership regime under the Single Rulebook and, perhaps most significantly, the creation of the new EU AML supervisory authority, AMLA, expected to commence its activities in 2024.

Anti-Money Laundering Authority (AMLA)

In Europe, the European Commission has decided that it needs a single overseer to eradicate recurring regulatory arbitrage and dis­jointed implementation timelines. AMLA is a direct policy reaction to a string of revelations in recent years that showed that despite much progress there remained some cracks and loopholes in the EU banking system. The EU AMLA should be established by 2024 with direct supervision scheduled to begin in 2026.

However, there remain many questions around how and where it will operate, financing, and particularly its interactions with na­tional regulators, legal systems and judiciaries, and financial intel­ligence units (FIU). In its current guise, AMLA will have powers to make binding decisions applying to the entire bloc and sanction and fine directly supervised entities. Its powers to directly fine en­tities are extensive and may run to 10% of annual turnover or €10 million, whichever is higher.

The plans suggest AMLA will have 250 dedicated staff who will take over responsibility for the AML Counter Financing of Terrorism database from the European Banking Authority and the FIU.net, the “secure communication network” for FIUs. AMLA’s direct responsibilities are limited to the financial industry. That means it will still be up to governments to tackle dirty money within other sectors, such as gambling, diamond dealers, legal services and auditing.

National supervisors will still play a crucial role in the ongoing sys­tem of supervision. AMLA is suggested as a body capable of pro­viding additional support to existing national resources. The idea of instituting a superseding EU-wide FIU was “rejected as dispropor­tionate” by the impact assessment of the European Commission. However, AMLA is empowered to take over the supervision of specific cases if it is deemed that a national authority has failed to do their jobs properly.

AMLA’s work with FIUs will include facilitating complete and swift information exchange, promoting cooperation among member state FIUs, conducting periodic reviews of supervisory bodies to ensure adequate resourcing, powers to draft binding regulatory and technical standards, and guidelines in relation to AML. The wide-ranging brief of the AMLA also includes full application of the anti-money laundering and CFT rules to the burgeoning cryptocurrency sector and imposing a new EU-wide limit of €10,000 on large cash payments. Additionally, the AMLA will directly supervise some of the riskiest financial institutions operating in multiple Member States or require immediate action to address imminent risks.

This changing EU AML infrastructure will be a significant area of focus as it develops throughout 2022 and generally it looks clear that this regulatory perennial of AML policymaking will grow vi­brantly once again this year.

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