Anti-Money Laundering Weekly Review (5)Your weekly news and commentary round-up about financial crime
• With the fourth EU Directive on Money Laundering coming into force in June this year and instances of financial crime becoming increasingly frequent, it is more crucial than ever for teams within Financial Institutions (FIs) as well as across the industry, to collaborate to tackle financial crime and fraud. In 2016, more than 75 cyberattacks were reported to the Financial Conduct Authority (FCA) in the UK compared to just five in 2014; the challenges of managing and combatting financial crime are becoming more and more difficult. The need to mitigate financial crime is particularly prudent given that statistics from CEB Tower Group show that fines from financial crimes have increased by 55,000 percent over the past 10 years, thanks to more frequent and higher value attacks. In order to tackle financial crime and to lessen the impact of fraudulent attacks, organisations need to ensure that they have the correct infrastructure in place. Anti-Money Laundering (AML), Know Your Customer (KYC), and Fraud prevention solutions are all key to reducing and managing financial crime risk, yet knowing which one to prioritise can prove a challenge. Financial crime is unpredictable, therefore FIs need to implement prevention strategies and share resources between teams to that comprehensive customer profiles can be created. These profiles can make a huge difference in identifying unusual behaviour indicative of money laundering, tax evasion, human trafficking, and instances of fraud. Ultimately such an approach helps FIs reduce the amount of overall investment required to manage financial crime risk whilst enabling more accurate detection of fraud and money laundering. Implementing customer-centric infrastructure is only one benefit of collaborative work between teams and within the industry. As CEB Tower Group found that only 14 percent of fraud departments amongst FIs have a complete customer-centric view, much more work needs to be done to ensure that more organisations invest in sharing valuable KYC and AML data. Traditionally AML and fraud prevention teams have been siloed with each team gathering information on customers separately. However, research has shown that there is an 80 percent overlap in AML and fraud detection tools and processes, demonstrating the effectiveness of leveraging these assets across multiple groups to make financial crime risk management and prevention more effective and reliable.
(Source: International Banker, April 20, 2017)

• As Anti-Money Laundering (AML) regulations and expectations have continued to grow and change (e.g., the new FinCEN CDD Rule and the 4th EU Money Laundering Directive), so too have the expectations of AML Officers and their teams. As masters of their domain, their responsibilities have generally focused on ensuring that their policies and program are complaint with regulations. But as compliance with those regulatory requirements has impacted business through increased onboarding times and the resulting customer dissatisfaction, the expectations for an AML Compliance Officer have evolved. Operations efficiency, technology transformation, and collaboration with the business have been added to the list of responsibilities that an AML Compliance Officer now maintains. Stepping outside their comfort zone, AML Compliance Officers will certainly want to hire specialists in each of these areas to work on their teams and potentially lead dedicated AML Operations and AML Technology teams. At the same time, AML Compliance Officers need to be proficient enough in each area to be able to understand the larger picture and make decisions. Since AML Compliance Officers have always managed teams (which have continued to grow in size), the operations area is less of a stretch for them. Instead, it is technology that is the greater unknown. Understanding financial technology (FinTech) and regulatory technology (RegTech) has become important several ways: 1) understanding the myriad of RegTech solutions that can help AML. Compliance programs work more efficiently and effectively; 2) understanding how to manage the risk of the increasing numbers of FinTech customers; and 3) understanding how to monitor new technologies and related products for suspicious activity.
(Source: Finextra, April 20, 2017)

• The Board of Directors (Board) of an organization has oversight responsibilities over the compliance program. Board members are often unsure of the nature and scope of their responsibilities over compliance. The roll of many Boards is limited to receiving occasional updates from the compliance officer. Compliance is then checked off the “to-do” list and the Board moves on to other issues until their next compliance update. The way compliance has evolved over the years, makes it necessary for corporate boards to take more active responsibility for their compliance oversight function. Board members should be inquisitive about compliance and should not assume the compliance officer is performing all tasks as required in an effective compliance program. Like any other class of employee, there are some compliance officers who perform effectively and others who will let things slide if they are not held accountable by the Board. Best practice is for the compliance officer to have a direct line of responsibility to the Board. Reporting to other executives inherently diminishes the independence of the compliance officer and potentially impedes the performance of compliance activities. Compliance office independence is good for the program; at least if the compliance officer is adequately performing the compliance role.
(Source: JD Supra, April 20, 2017)

• Documents and computer files released by hackers provide a blueprint for how the U.S. National Security Agency likely used weaknesses in commercially available software to gain access to the global system for transferring money between banks, a review of the data showed. On Friday, a group calling itself the
Shadow Brokers released documents and files indicating NSA had accessed the SWIFT money-transfer system through
service providers in the Middle East and Latin America. That release was the latest in a series of disclosures by the group in recent months. Matt Suiche, founder of cybersecurity firm Comae Technologies, wrote in a blog post that screen shots indicated some SWIFT affiliates were using Windows servers that were vulnerable at the time, in 2013, to the Microsoft exploits published by the Shadow Brokers. He said he concluded that the NSA took advantage and got in that way. “As soon as they bypass the firewalls, they target the machines using Microsoft exploits,” Suiche told Reuters. Exploits are small programs for taking advantage of security flaws. Hackers use them to insert back doors for continued access, eavesdropping or to insert other tools. Because tracking sources of terrorist financing and money flows among criminal groups is a high priority, SWIFT transfers would be a natural espionage target for many national intelligence agencies.
(Source: Reuters, April 16, 2017)

• The new administration is reviewing the Obama-era nuclear weapons agreement with Iran to determine whether they will stop the deal’s suspension of U.S. sanctions, U.S. Secretary of State Rex Tillerson said this week. Tillerson said administration officials would review the deal despite also announcing that Iran is complying with the terms of the 2015 agreement reached under President Obama. “Iran remains a leading state sponsor of terror through many platforms and methods,” Tillerson wrote in a letter to House Speaker Paul Ryan. The terms of the nuclear agreement require the State Department to update Congress on Iran’s compliance every 90 days. Tillerson’s letter noted that Iran is meeting the deal’s requirements. Tillerson wrote that the President has directed an inter-agency review of the Iran deal, officially known as the Joint Comprehensive Plan of Action, to “evaluate whether suspension of sanctions related to Iran … is vital to the national security interests of the United States.”
(Source: ABC News, April 19, 2017)

• Even after disembarking from North Korea’s Air Koryo plane at Pyongyang airport, it’s difficult to miss the airline’s brand. The Air Koryo conglomerate makes cigarettes and fizzy drinks, besides owning a taxi fleet and petrol stations – and all have the same flying crane logo as the carrier. The military-controlled airline expanded into consumer products in earnest in recent months, visitors to the isolated country say. It was not clear if the diversification into the domestic market was related to the loss of many international routes when the United Nations slapped economic sanctions on North Korea for its nuclear and ballistic missile programs. Washington is now considering tougher measures, including a global ban on Air Koryo itself, to punish North Korea. But any U.S. action on Air Koryo would not be binding on other nations and would have little effect unless joined by China and Russia – both of which have sought to introduce exceptions to United Nations sanctions on North Korea in the past. “China may indeed agree to this kind of ban on Air Koryo since it seems like China and the U.S. have reached an agreement that North Korea needs to be dealt with in some way. But the question is whether Russia will agree to sanctions against Air Koryo,” said Sun Xingjie, an associate professor at China’s Jilin University. A United Nations panel which investigates North Korean sanctions infringements said in a report in February there was an “absence of boundaries” between Air Koryo and the air force. “The airline’s assets are actively utilized for military purposes,” the report said. The United Nations has not sanctioned Air Koryo, although it has accused it of being involved in the smuggling of banned goods. Civilian aircrafts are exempt from the U.N. ban on jet fuel exports to North Korea when refuelling overseas. Member states are required to inspect any cargo originating from North Korea, including on Air Koryo flights.
(Source: Reuters, April 20, 2017)

• The UN Security Council this week strongly condemned North Korea’s latest missile test and threatened to impose new sanctions against Pyongyang for its “highly destabilising behaviour.” In a unanimous statement, the council demanded that North Korea “conduct no further nuclear tests” and said Pyongyang’s “illegal missile activities” were “greatly increasing tension in the region and beyond.” The council threatened to “take further significant measures including sanctions” to address the crisis of North Korea’s missile launches. While previous statements have warned of further measures, the agreed text made specific mention of sanctions, signalling a tougher stance from the council. “If we have to start looking at sanctions or other actions, we will,” U.S. Ambassador Nikki Haley told reporters. The U.S. drafted statement was agreed upon after Russia insisted that language stressing the need to achieve a peaceful solution “through dialogue” was included in the final text. Moscow had blocked an earlier version of the statement – which comes after North Korea carried out a failed test on Sunday – even though China, Pyongyang’s ally had expressed its support for it.
(Source: Channel News Asia, April 21, 2017)

• A former U.S. Treasury official in the George W. Bush administration, a veteran banking lawyer, and a Harvard professor are three leading candidates as the new administration looks to fill the post of Federal Reserve vice chair in charge of banking oversight, people familiar with the matter said. Treasury Secretary Steve Mnuchin told The Wall Street Journal this week that the administration was “very close” to filling the regulatory post, which will play a critical role in the administration’s efforts to revamp regulation of the financial sector. Randal Quarles, who worked as undersecretary for domestic finance at the Treasury under President George W. Bush, met with Mnuchin and Gary Cohn, Trump’s director of the National Economic council, last week to discuss the role. Quarles, along with corporate attorney Thomas Vartanian and Harvard Law Professor Hal Scott, have all interviewed for the role, according to a source familiar with the talks. Several financial industry lobbyists believe Quarles to be the favorite for the position. In an op-ed in the Wall Street Journal in March 2016, Quarles and Lawrence Goodman, another former U.S. Treasury official, argued against breaking up big banks because it risks damaging the wider economy. He also talked about refining Obama-era financial rules, introduced in the wake of the financial crisis. Vartanian has also been mentioned as a candidate for the vice chair position. A financial services attorney for the Dechert law firm based in Washington, Vartanian has assisted large financial institutions with a host of complex transactions, and written frequently on financial rules. As director of international financial systems at Harvard Law School, Scott’s focus has been on financial firms, regulation and capital markets.
(Source: CNBC, April 13, 2017)

• Federal authorities have charged a Philadelphia lawyer and three other men in a so-called pump and dump scheme to inflate the stock price of a publicly traded company that makes a Breathalyzer-like device to detect marijuana use. A person-injury lawyer and investor was arrested Friday and charged with securities fraud and conspiracy in a complaint filed in federal court in Brooklyn by the acting U.S. attorney for the Eastern District of New York. The other two defendants, two of whom were also charged with money laundering, are from New York and New Jersey. U.S. authorities allege in the complaint that the NY defendant worked with the Philadelphia lawyer to conceal his interest in the company that manufacturers a “pot detector,” so that the defendant could more easily drive up its stock price through promotions and manipulative transaction designed to create the appearance of more market interest in the stock than was actually the case. The two defendants employed a New Jersey consultant with expertise in government anti-money laundering measures to avoid detection, according to the complaint. The alleged scheme apparently unravelled when one of the participants, identified in the complaint only as “confidential witness,” began working with the feds and recorded conversations with the other participants.
(Source: Philly, April 15, 2017)

• Bribery, tax evasion, money laundering, counterfeiting, corruption, even the finance of terrorism. These are among a long list of crimes enabled by the use of “cash.” The attempt to crack down on these crimes is driving governments and a range of companies to pursue the potential of a cashless society. “Cash plays a big role in crime. I think there’s a reason cash is king,” says Harvard economist Kenneth Rogoff, who has written extensively on the costs and benefits of phasing out paper currency. “Even though we have bitcoin, gold coins, uncut diamonds… you still find cash playing a major role [in crime], because it’s basically government licensed, anonymous currency. It has very high liquidity, low transaction costs, you can spend cash anywhere. All these other things, like you take gold coins to someone and they’re actually a lot of trouble to verify.” Rogoff says because most people only use cash for small transaction if $100 bills were eliminated, it could have a significant impact on crime and help boost tax revenue, by eliminating tax evasion, without most consumers noticing. “Getting rid of hundred-dollar bills and even fifties is hardly going to end crime, but [those bills] are a very convenient way to stash money, store money. It’s a big cost in laundering operations,” Rogoff says. India is going beyond eliminating large bills and aims to replace credit cards with biometric payment systems by 2020. India has already taken biometric data of 1.1 billion people; those who gave it are eligible for a free debit card account. There’s a range of different types of biometric data – eye, fingerprint, palm print, scans – MasterCard even has a “pay by selfie” app. As more transactions become digital, it will open the door to more “digital” financial crimes, which is why cybersecurity companies are creating solutions to prevent accounts from getting hacked.
(Source: CNBC, April 20, 2017)

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