The sheer size of the property market in the UK and the high value of property assets means that extremely large amounts of criminal funds can be “cleaned” in a single transaction. Joy Ighade, Founder and CEO of Alexander Jon Compliance Consultancy, which specialises in financial regulation, general compliance, and financial crime, gives her thoughts on why money laundering is so prevalent in the UK property industry and what steps it can take to tackle it.
What is the impact of money laundering on the property industry and the wider UK economy?
In reality, the full scale of money laundering throughout the UK property sector is unknown. However, Transparency International UK has been collating information on questionable funds being invested in UK property since 2016 and believes this figure currently stands at £6.7bn.
Transparency International have identified 513 properties in the UK that have been bought with suspicious wealth - three of those properties have a combined value of more than £5bn. This is just a small proportion of the total proceeds of crime invested in UK property.
Information obtained and affirmed by Pandora Papers, which comprised circa 12 million documents exposed secret dealings and hidden assets of the world’s richest and most powerful, in particular the revelation of secret owners of more than 1,500 UK properties with an estimated value in excess of £4bn worth of property assets purchased via offshore companies.
This is just the tip of the iceberg.
Why is the property industry so attractive to money launderers?
Traditionally, property has always been viewed as a reliable form of long-term investment, and despite the current economic outlook, it remains a popular choice of investment – particularly for wealthy individuals with excess cash.
Aside from genuine wealthy individuals, UK property attracts sophisticated criminals who need to disguise their proceeds of crime. Buying property is an easy way and means of money laundering while enabling criminal networks to continue to thrive.
UK property can be bought by using offshore companies. Whilst Companies House now requires a certain amount of due diligence and information to be provided on the beneficial owner, this does not seem to be the case for companies registered overseas and especially in countries with well-known secrecy jurisdictions. The flip side to this is that the true purpose and origin of financial transactions remain unclear.
Proper and accurate due diligence on property buyers must be conducted to ensure firms and banks know who they are dealing with and know the true origin of the funds. It is clear also from the number of fines meted out by some of the UK Money Laundering Supervisors that institutions are still falling short in this area.
HMRC recently revealed that almost half of those falling foul of AML regulations are property firms. Why is the industry failing to meet their AML obligations?
In direct response to the HMRC October 2022 headline - it focused on Estate Agents who either failed to register with the HMRC for AML purposes or the firm had registered but had failed to put in place adequate risk assessments and other relevant policies and procedures to ensure the firm met its required AML obligations.
These offences attracted numerous fines and in one particular case a sentence of 120hrs unpaid community service.
Until August 2022, it was perfectly legal for offshore companies to purchase property in the UK without providing details of the beneficial owner, which effectively allowed the beneficial owner to remain anonymous.
However, the new Economic Crime (Transparency and Enforcement) Act 2022 requires overseas firms with property in the UK to register with Companies House by 31 January 2023.
Aside from the above, there is a blasé attitude from a number of property firms that they believe they will never be caught out and therefore prefer not to engage in the required resource to ensure they abide by the UK AML regulations.
Where such an attitude does not exist, it is usually a simple case of the firm not having the financial capability to employ the right individual to carry out the role or the firm believing they have adequate policies and procedures in place as well as the personnel - even if a little lacking.
Traditionally, property has always been viewed as a reliable form of long-term investment, and despite the current economic outlook, it remains a popular choice of investment – particularly for wealthy individuals with excess cash.
Is the government doing enough to support the property industry, and if not, what steps should it be taking?
Firstly, it is important to be clear on the facts – the UK has in place Money Laundering Regulations which, depending on the type and category of the firm, it expects all firms to act in accordance with these regulations. The Regulations are UK statutes and therefore penalties are issued for non-compliance. The onus remains on each firm to ensure it operates within the regulations.
These regulations alongside industry-wide guidance provide a framework within which firms are expected to conduct its business. The UK Government has recognised the need for further specific regulation where it is clear that the current regulation does not cater for certain scenarios or loopholes.
To this end, the government has introduced a plethora of legislation and reforms and property firms should avail themselves of this information by employing competent personnel to ensure they are operating within the regulations.
Many companies are investing in AML technology. Is it an effective solution for ensuring customer due diligence, record keeping and the reporting suspicious activity?
Technology is positively impacting the economic world globally, and in most industry sectors it speeds up operations and efficiencies without impacting accuracy.
Anti–Money Laundering technologies can play a valuable role in enabling property firms to tighten their policies and in flagging potential criminal activity, but such technology can only work effectively alongside experienced Compliance Professionals who have the capabilities to spot the warning signs and other potential red flags.
The client due diligence process has come a long way in terms of digitisation. This is only set to improve and ensure every aspect in the CDD process is fully electronic. However, it seems that the young, disruptive and innovative financial institutions and firms are more successful in ensuring the CDD process is almost 99% electronic.
In relation to record keeping, a lot of firms have automated their processes and have sought to go paperless where they are able. However, there are instances where it is still not fully developed and therefore firms should still make adequate arrangements for records that are not yet fully electronic.
Many firms have sought to improve their own internal suspicious activity reporting moving from a more manual process, however, the ability to do this has depended on the firm’s financial resources to implement such electronic systems.
In conclusion, there are many benefits in investing in AML technology, however, the scale to which this can be done will always depend on the scale and resources of the individual firm.
If a property company is concerned that they are not doing enough to meet their AML obligations, what would you advise them to do?
The first steps are recognising and acknowledging that there is an issue that needs to be rectified and that it is brought to the attention of the Board and Senior Management.
The Board and Senior Management must ensure that it hires a dedicated Compliance Professional with sufficient seniority and independence to carry out the role effectively.
The firm must ensure the Compliance Professional is competent. The firm should seek to hire a competent individual / s who will carry out a number of tasks including ensuring there is a robust Financial Crime Framework & Compliance Strategy developed and implemented.
Almost immediately, the person controlling the bank account begins to disperse these funds in a flurry of payments to the Czech Republic, Hungary, Croatia and Hong Kong.
Suspicious as these transactions were, NatWest did not freeze the account when the Saudi money arrived. It allowed the outward payments to take place, despite the fact they triggered fraud alerts. NatWest temporarily froze the account, then unfroze it, and by the time the bank’s fraud team properly investigated and took decisive action, it was too late. The account had effectively been emptied, and the funds were long gone.
The $5 million was stolen from my client, an Italian engineering multinational called Maire Tecnimont. In a corporate version of push-payment fraud, somebody impersonated a senior manager at the company’s Saudi subsidiary and duped the payment to be sent out to NatWest in Brixton. From there, the money was funnelled to Eastern Europe and Asia and remains missing, effectively untraceable.
All of that took place in 2018, and Maire Tecnimont is currently suing NatWest in the English High Court over the incident. The bank argues it is not responsible, not least since, traditionally, the legal position has been that banks are not held to have a “duty of care” to third-party fraud victims who are not their account holders.
A court will decide where liability lies, and it is not my intention to prejudge the outcome here. What I would strongly suggest, though, is that the bank’s procedures in this episode were not sufficient to prevent a large-scale fraud, nor to prevent the successful laundering of large sums via the UK banking system.
It is beyond doubt that push-payment fraud on businesses represents a very considerable economic, and crime-fighting, problem. Confidence tricks on individual account-holders tend to get more attention in the press. But similar scams perpetrated on businesses - commonly referred to as “CEO Frauds”, since they involve a scammer impersonating a high-ranking official of the victim organisation - cost billions of dollars a year, according to statistics from the Federal Bureau of Investigation.
The FBI has identified Britain as a major through-station for fraudulent transfers. And unlike individual bank customers, businesses who fall victim to push-payment scams in the UK have scant entitlement to compensation.
Having acted on multiple matters involving CEO fraud, I believe the banking industry has to take this problem more seriously. On behalf of clients, I have made a submission to that effect to the House of Commons Treasury Select Committee, which is currently investigating Economic Crime.
Technology is part of the problem. Often, banks’ anti-money laundering (AML) monitoring depends on decades-old tech and does not include speedy fraud detection. Banks keep their AML and fraud detection procedures bifurcated, meaning they cannot cross-reference the account history against live transactions in real-time. It can take banks a month to review some suspicious transactions, by which time laundered funds have long since been dissipated.
But as any FinTech entrepreneur will tell you, the technology exists to ensure near to real-time monitoring of accounts. It is no longer acceptable for banks to refuse to implement this technology whilst allowing their account holders to launder money and facilitate criminal activities.
Often, banks’ anti-money laundering (AML) monitoring depends on decades-old tech and does not include speedy fraud detection.
At the heart of the problem is that the banks are currently not incentivised to invest in AML tech. Compensating fraud victims doesn’t cost them very much. Typically, a bank will indemnify its own customers in respect of sums lost via fraud through the bank’s own negligence, in line with various banking and customer obligations. But it does not offer similar protections to non-customers whose stolen money has been laundered through its systems – even when the criminal perpetrators are account-holders with the bank. It has little financial incentive, therefore, to monitor against fraudsters amongst its customers. And when the losses imposed on outsiders by those fraudster-customers run into the millions, the bank is even less willing to acknowledge liability.
The UK industry’s Voluntary Code is not fit for purpose. It offers protection to small-scale victims of push-payment fraud (individuals, “micro-enterprises” and small charities), but does not cover businesses with ten or more persons as employees, or balance sheets of more than €2 million.
As fraud becomes more sophisticated and pervasive, that position looks unsustainable. Some £3.2 trillion in company turnover in the UK is found in businesses of more than ten employees. All of these organisations are currently at risk of being defrauded without hope of compensation from the payments industry’s “no-blame fund”. Nor does the Voluntary Code cover international payments.
The result is that banks find themselves increasingly in reputational difficulties. In March - in an issue entirely unrelated to my clients – it was announced that NatWest would face prosecution from the Financial Conduct Authority, for allegedly failing to monitor and scrutinise transactions that turned out to be part of a large money-laundering scheme.
Fraudsters are evolving their methods and moving at pace with technology, whilst banks are falling behind, seemingly content just to trudge along. If the persistence of fraudsters continues to outstrip banks’ determination to combat them, it could fundamentally damage confidence in the UK’s all-important banking system.
This is not to say that banks – as opposed to, say, telecoms companies, whose systems might enable fraudsters to access a victim’s bank details – should have to shoulder all the financial responsibility for compensating the victims of push-payment fraud.
But in circumstances where a bank has been negligent in its implementation of AML controls and fraud prevention technology that is readily available, and the victim has suffered loss, the bank should be required to provide appropriate compensation – whether or not the victim is a customer of the bank, and whether or not the victim is a corporate entity. That, I suspect, would finally focus management attention and technology investment on fighting the fraudsters.
It may be a lot to ask, but it’s not unreasonable, or unfeasible. The GDPR has obliged large companies in many sectors to consider data protection in ways that few would have expected even ten years ago. Social media firms are under pressure to tackle misinformation and prejudicial language. These changes require money and computing power. But they are the changes that a big-data economy and society are demanding. Banks would be unwise to ignore those demands.
This ongoing disruption, coupled with changing consumer behaviour characterised by the growing preference toward mobile and online services, is driving regulatory changes that are shaping the future of finance.
While this is happening to varying degrees in regions and countries around the world, there are local nuances to consider. This is particularly true in the United Kingdom, where speculation is rife around what the future will hold for the UK following its departure from the EU and the impact this will have on financial services.
As one of the world’s leading financial centres, the UK is well-positioned to keep pace with changes in the industry. But in terms of regulations, there are still several questions around how the UK will adapt, what legislation it will adopt or modify, and what impact this may have on the wider EU region.
The Payment Service Directive 2 (PSD2) has been a linchpin of European financial regulations since its introduction in 2018, increasing security for online transactions and encouraging more competition through open banking.
The transition period ended on 1st January 2021 and enforcement of PSD2’s Strong Customer Authentication requirements for merchants will take effect at different times. The EU’s deadline is on 1st January 2021 while the UK’s is on 14th September 2021, which will no doubt cause a great deal of confusion for consumers.
It’s well known that digital currencies have – in their relatively short history – been used for illegal activities, so building trust in the technology through compliance will be a key focus for regulatory bodies in the future.
In the case of a no-deal Brexit, a draft version of the UK Financial Conduct Authority’s (FCA) Regulatory Technical Standards on Strong Customer Authentication and Common and Secure Open Standards of Communication indicates that the UK regulators would continue to accept the EU’s eIDAS certificates (or electronic Identification, Authentication and Trust Services) for authenticating third-party providers to banks. However, the document also recognises that UK entities may require alternative methods, suggesting that both routes are still on the table.
Discussions are still ongoing, but time is running out. As security is a key component of the directive, mandating the use of transaction risk analytics and replication protection in mobile apps, any new UK-specific variant will have to ensure that consumers remain protected and banks can still offer fully seamless digital experiences.
Driving digital identities
Some of the biggest regulatory developments throughout 2020 have come in the area of identity verification, with COVID-19 accelerating digitisation initiatives and investment. As an increasing number of customers are either reluctant or unable to visit a bank branch, fully digital and seamless identity verification has become a key requirement for remote account opening and onboarding.
This is an area where regulations – such as Know Your Customer (KYC) – play a key role, and where authorities have had to move quickly. For example, in response to the pandemic, the UK FCA issued guidance on digital identity verification permitting retail financial firms to accept scanned documentation sent via email and ‘selfies’ to verify identities.
This was supplemented by a 12-month document checking service pilot launched by the UK Government in the summer. Participating private sector firms can digitally check an individual’s passport data against the government database to verify their identity and help prevent crime.
And this is just the beginning. There are plans for private-sector identity proofing requirements and work being done to update existing identity-checking laws to become more comprehensive. Perhaps most significantly, the UK government plans to develop six guiding principles to frame digital identity delivery and policy: privacy, transparency, inclusivity, interoperability, proportionality, and good governance.
This all points towards a financial future that will be driven by digital identities. With customer behaviour likely changed forever, digital identity verification will be essential to improving the remote onboarding experience, while also minimising the threat of fraud and account takeover attacks.
The evolution of AML
Anti-money laundering (AML) legislation is also set to progress in the future, driven largely by an increasing focus on cryptocurrencies. Digital currencies are currently garnering plenty of attention from European regulators, as illustrated by the introduction of the 5th Anti-Money Laundering Directive (AMLD5).
EU member states were required to transpose AMLD5 into national law by the beginning of the year, with the goal of preventing the use of the financial system for money laundering or terrorist financing. One of the directive’s key provisions focuses on restricting the anonymous use of digital currencies and, as such, it now applies to both virtual cryptocurrency exchanges (VCEPs) and custodian wallet providers (CWPs).
VCEPs and CWPs that were previously unregulated must now follow the same rules as any other financial institution, which includes mandatory identity checks for new customers.
With the role of cryptocurrencies in our financial system expected to increase significantly over the coming years, we can expect European regulations to continue in this vein – particularly in a leading FinTech nation like the UK. It’s well known that digital currencies have – in their relatively short history – been used for illegal activities, so building trust in the technology through compliance will be a key focus for regulatory bodies in the future.
2020 has certainly been a year of upheaval for financial services regulations and we can expect this trend to continue into the new year. With digitisation in the industry evolving at a rapid rate, governments and lawmakers will have to work hard to keep pace. As the EU and the UK have shown, the future of finance will have plenty to offer.
Matthew Leaney, Chief Revenue Officer at Silent Eight, examines the issue that correspondent banking poses to the financial sector.
On the one hand, it has long been a key mechanism for integrating developing countries into the global financial system and giving them access to the capital they need. On the other hand, correspondent banking relationships are inherently risky for the global banks that grant access to the respondent bank’s customers without being able to directly conduct Know Your Customer/Customer Due Diligence (KYC/CDD) checks on them.
It’s not a small problem: make access too easy and you risk allowing billions of illicit funds through your door; cut off the relationships and you starve emerging markets of capital and drive their transactions into the shadows.
To its credit, the Financial Action Task Force (FATF) understands the dilemma and has provided continued guidance to clarify the issue. In its October 2016 Guidance on Correspondent Banking Relationships, it explicitly stated that its standards “do not require financial institutions to conduct customer due diligence on the customers of their customer (i.e., each individual customer)”. Rather, they require the correspondent bank to conduct sufficient due diligence on the respondent bank’s processes to understand the risk they present and whether the risk is acceptable within their risk management framework.
Still, many global institutions have decided over the past few years to “de-risk” by shutting down or curtailing their correspondent banking relationships in many countries. It’s easy to see why. It makes sense to exit a relationship when the risk associated with it exceeds your risk tolerance. But the solution doesn’t need to be this drastic. After all, correspondent relationships aren’t inherently bad, they just present a higher level of risk than the bank is willing to accept. Lower the risk and you’re back in business.
It makes sense to exit a relationship when the risk associated with it exceeds your risk tolerance. But the solution doesn’t need to be this drastic.
The solution is straightforward, at least in concept: lower the risk by increasing the effectiveness of respondent banks’ AML/CTF programs. This approach is exemplified by our partner Standard Charter’s “De-Risking Through Education” strategy, featuring regional Correspondent Banking Academies to help raise awareness of best practices and emerging technologies.
Heidi Toribio,Managing Director, Global Head Financial Institutions, Global Banking,at Standard Chartered Bank said that the initiative was key to preserving correspondent banking relationships, and removing ambiguity from compliance standards through partnership. “Correspondent banking goes to the heart of facilitating cross-border trade and financing growth, which is central to our DNA and our purpose as a bank,” she said.
A key element to preserving these relationships is improving the controls within the respondent bank by leveraging emerging technologies like Artificial Intelligence. Silent Eight understands this and has developed solutions to meet this need. With its AI-driven screening system, banks in developing countries could demonstrate a data-driven AI process that learns and improves its output as it addresses alerts. The process gives reliable results, resolving each alert and documenting the reason for the action. The whole AI process is systematic, reliable, consistent and auditable, and provides the analyst clear information on which to make a final determination.
Leveraging AI solutions into AML/CTF programs is a priority for banks in developing countries so they can demonstrate that their programs are up to global standard. It should also be a priority for global institutions that are or were acting as correspondents, since it allows them to diversify into a broader range of markets at an acceptable level of risk. Together with initiatives like De-Risking Through Education, the adoption of technology like Silent Eight can help developing economies once again gain access to global financial markets and help keep their financial transactions out of the dark.
This week Finance Monthly hears from Simon Rodway, a solutions architect at Entersekt, on the potential and realistic impacts of Libra on the traditional banking system.
The social media giant Facebook announced in June that it has developed a cryptocurrency dubbed Libra and plans to launch it early next year. While some may dismiss it as just more hype, the sheer dominance of Facebook in people’s social lives gives it huge potential to disrupt banking and payments as we know it today.
The company claims that Libra will improve the way we send money online, making it faster and cheaper, as well as improving access to financial services – even for those without bank accounts or limited access to traditional banking. It will be based on a blockchain platform called the Libra Network and Facebook says that it will run faster than other cryptocurrencies, making it ideal for purchasing and sending money quickly. Importantly, Libra will not be managed by Facebook itself; rather, by the Libra Association – a not-for-profit organisation comprised of 28 companies (so far) from around the world such as Paypal, Lyft and Coinbase. It aims to sign up 100 companies by the time the cryptocurrency is launched.
One thing’s for sure: it’s going to be an interesting development to watch, especially in the wake of Facebook’s cryptocurrency wallet company Calibra’s David Marcus presenting his testimony to the United States Congress banking committee. The result was that Facebook would “take time to get this right” and there would be no launch until all concerns could be fully addressed.
So, even though it’s still early days, Libra has given us a lot to think about. Ill-informed speculation and click bait aside, there are legitimate concerns around fraud – with reports already of over one hundred fake domains being set up relating to Libra. There are also the money laundering and financial risk concerns.
In terms of the impact and financial risk, most of what we’re hearing is coming from within the more established financial sectors. They’re either dismissing Libra as noise or decrying it as a vehicle for potential terrorist activities – something, they say, that regulators won’t allow to happen, despite Calibra openly reporting its intention to work with said regulators and policymakers to ensure the platform is secure, auditable and resilient.
At the same time, of course, they’re defending the current system, claiming that it works well, is safe and secure, and doesn’t support terrorism. But, if we’re honest, Anti-Money Laundering (AML) systems have, to date, been largely unable to stop the vast amounts of laundered funds from moving around. In addition, our Know Your Customer (KYC) and Know Your Business (KYB) processes use data from the likes of Companies House, which has been heavily criticised for their own lack of data validation and governance.
All that aside, what’s become quite clear is that the existing system presents too many blockers for the poorer, under-banked members of our society. Those working in the UK, for example, and legitimately wanting to transfer their wages to their families in other countries, end up paying exorbitant banking fees, only to wait days for their funds to clear.
This is where Libra, with its vision for financial inclusion, could make a difference. And if Libra doesn’t make it happen this time around, the technology and conceptual design are essentially open source, so someone else will. The wheels are in motion, and financial institutions that ignore the trend do so at their peril.
Money laundering is a pan-European problem, with 90% of the continent’s biggest banks having been sanctioned for money laundering offences, new research by anti-money laundering (AML) experts Fortytwo Data shows.
The firm found that at least 18 of the 20 biggest banks in Europe - including five UK institutions - have been fined for offences relating to money laundering within the last decade, many of them within the last few years - an indication of how widespread money laundering has become.
Recent crises at the likes of ING, Danske Bank and Deutsche Bank only reinforce this impression, demonstrating how no bank is immune to money laundering sanctions, no matter how large.
All 10 of the biggest banks in Europe are known to have fallen foul of the AML authorities - HSBC, Barclays and Lloyds from the UK, French quartet BNP Paribas, Crédit Agricole Group, Société Générale and Groupe BPCE, Germany’s Deutsche Bank, Santander of Spain and Dutch bank ING.
Others to have been fined in recent years are the British banks RBS and Standard Chartered, Italy’s Intesa Sanpaolo SpA, UBS Group and Credit Suisse of Switzerland, Spain’s Banco Bilbao, Dutch institution Rabobank, and Nordea Bank of Sweden.
All five major UK banks - HSBC, Barclays, Lloyds, RBS and Standard Chartered - have been fined for money laundering offences. Earlier this year, Donald Toon, director of prosperity at the National Crime Agency, admitted in a Treasury Meeting that money laundering in the UK is “a very big problem” and estimated that the amount of money laundered here each year has now risen to a staggering £150 billion.
Banks and financial services companies have faced an uphill struggle to move onto more advanced AML platforms as they often attract a price tag running into tens of millions of pounds, potentially hundreds of millions once the cost of integration, operation and maintenance have been factored in.
More advanced augmentation platforms have moved the conversation on in the last few years, creating opportunities for companies to improve the efficiency of their AML processes at vastly reduced cost, while still using data stored in legacy systems.
Julian Dixon, CEO of Fortytwo Data, comments: “It is clear Europe’s largest banks are collectively struggling having problems when it comes to anti-money laundering standards. The increasing sophistication of the money launderers makes this an ever more difficult task.
“Money should not be laundered on their watch. However, standards must be maintained. The fact that almost all of Europe’s 20 biggest banks are known to have failed to comply with AML regulations is a troubling finding.
“These days, there are effective solutions to be found. Technology has reached a level where it can vastly improve the efficiency of suspicious activity detection and all major banks have a responsibility to embrace 21st Century solutions to this problem, rather than continuing with outdated legacy systems.
“The UK has an opportunity now to lead the way and set a higher benchmark for others. That £150 billion is known to be laundered here every year is a problem that needs to be addressed and if we can clean up our act, others will be compelled to follow our example.”
(Source: Fortytwo Data)
It is becoming clear that trade digitisation has huge potential to unlock access to world trade for small-to-medium-sized enterprises (SMEs). The move away from laborious, manual, paper-based processes will lever simpler access to trade finance, now that it is being provided by more agile, technology-friendly alternative funding providers. Here Simon Streat, VP of Product Strategy at Bolero International, discusses the new wave of digital change and the drive it’s providing for SMEs worldwide.
Regulatory burden has meant that SMEs often don’t fulfil certain criteria for banks to justify lending to. The demands of anti-money laundering (AML), Know Your Customer (KYC) rules, sanctions and other banking stipulations have been deemed too time-consuming and too costly to be worth the trouble where smaller exporters and importers are concerned. This is a significant blow, since by some estimates, more than 80% of world trade is funded by one form of credit or another. Until now, if your business was deemed too small to be worth considering for finance, there was hardly anywhere else to go.
The result has been deleterious to the prosperity of SMEs and detrimental to international trade. In 2016, the ICC Banking Commission’s report found that 58% of trade finance applications by SMEs were refused. This, as the authors pointed out, hampered growth, since as many as two out of every three jobs around the world are created by smaller businesses.
This rather depressing view was supported by a survey of more than 1000 decision-makers at UK SMEs which was conducted in February this year by international payments company WorldFirst. It found that the number of SMEs conducting international trade dropped to 26% in Q4 2017, compared with 52% at the end of 2016. Economic conditions and confidence have much to do with this, but so does access to trade finance.
There is a growing realisation, however, that if digitisation makes sense for corporates seeking big gains in speed of execution, transaction-visibility and faster access to finance and payment, it definitely will for SMEs. The ICC Banking Commission report of 2017 estimated that the elimination of paper from trade transactions could reduce compliance costs by 30%.
Over the past few years, for example a number of trade digitisation platforms have emerged offering innovative business models for supplying trade finance and liquidity, while optimising working capital, and enhancing processes for faster handling and cost savings. Progress is under way, but it requires expertise.
Fintechs in trade hubs such as Singapore, where there is huge emphasis on innovation, are taking the lead, transforming the availability and access to finance for SMEs. By making the necessary checks so much faster and easier and opening up direct contact with a greater range of banks, digital platforms enable customers to gain approval for financing of transactions that would otherwise be almost impossible. Not only that, they enjoy shorter transaction times and enhanced connectivity with their supply chain partners.
If we scan the horizon a little further we can also expect to see SMEs benefit from the influence of the open banking regulations, which require institutions to exchange data with authorised and trusted third parties in order to create new services that benefit customers.
Although the focus of these new regulations is primarily the retail banking sector, the tide of change will extend to trade finance, creating a far more sympathetic environment for the fintech companies and alternative funders. Yet the fintechs cannot do it alone, they need to be part of a network of networks that operates on the basis of established trust and digital efficiency.
No technology can work unless it is capable of satisfying the raw business need of bringing together buyers, sellers, the banks into transaction communities. That requires the building of confidence and the establishment of relationships, along with – very importantly – a real understanding of trade transactions and the processes of all involved. It also requires on-boarding and you can only achieve that once everyone knows a solution will deliver the efficiency gains it promises, as well as being totally reliable, secure and based on an enforceable legal framework. All this requires a level of expertise and insight that cannot simply be downloaded in a couple of clicks.
Nonetheless, it seems pretty obvious that thanks to digitisation, the market for SME financing in international trade is set for real expansion.
The international community’s anti-money laundering watchdog is on UK soil putting the country through its paces.
Inspections of Britain’s defences against terrorists and money launderers by the Financial Action Task Force (FATF) are relatively rare but hugely important. The last evaluation was in June 2007 and negative findings can severely impact the country’s reputation in the war on terrorist financing and the laundering of criminal proceeds.
During the two-week visit, the UK has to prove to officials from some of the other 36 participating FATF countries that it has a framework in place to protect the financial system from abuse. The top secret inspectors have an “elaborate assessment methodology” but those involved are not allowed to talk publicly about the visit. The results of the inspection will be presented at an FATF Plenary session in October.
Julian Dixon, CEO of specialist Anti-Money Laundering (AML) and Big Data firm Fortytwo Data, comments: “AML supervisors are going to be on high alert this week because it’s not just public sector bodies who are inspected, but private organisations too.
“It’s also extremely timely, given the recent poisoning of ex-Russian spy Sergei Skripal, his daughter Yuliain and a policeman who came to their aid.
“The UK has been accused of being a soft touch for gangsters, politically exposed persons (PEPs) and criminal gangs, a theme that recently entered the popular imagination because of the TV series McMafia, written by journalist Misha Glenny.
“It’s unclear if this still holds true in the UK today, and that’s what the FATF are here to find out.
“It is up to the country being inspected to prove they have the right laws, systems and enforcement in place and the potential for reputational damage is high.
“After a recent inspection of Pakistan, FATF gave the country three months to prove it is doing enough to stay off an international watch list of those failing to curb the financing of terror groups.”
(Source: Fortytwo Data)
73% of financial crime professionals in UK financial services believe that the 4th EU Anti-Money Laundering (AML) Directive will make it easier for firms to prevent money laundering a survey of nearly 200 professionals has revealed. The Future Financial Crime Risk 2017 report, produced by LexisNexis Risk Solutions, global information solutions provider and part of RELX group, highlights that asset managers were especially positive about the advantages, with over 80% agreeing it would aid the fight against financial crime.
This marks a shift in attitude from when financial crime professionals were surveyed on the potential impact of the 4th EU AML Directive in 2015 as part of the inaugural Future Financial Crime Risks Report commissioned by LexisNexis Risk Solutions. Previously, only 17% of those surveyed believed that the regulation would significantly reduce money laundering whilst nearly a third (32%) thought it would make no difference or increase levels of money laundering.
On 26th June 2017 the Money Laundering Regulations 2017 (which is also known as Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017) come into force which transpose the 4th EU AML Directive into UK law. To support this, the Joint Money Laundering Steering Group (JMLSG) has released revised guidance within which they advise firms to adopt a risk based approach to customer due diligence.
Regulated organisations have been advised to risk assess relationships in order to determine the appropriate level of customer due diligence to be performed. In particular, additional checks are required in relation to identifying and screening beneficial owners when dealing with corporate entities. Therefore, as the demands of AML compliance continue to rise, institutions are required to know more about their customer than ever before.
Mike Harris, at LexisNexis Risk Solutions, comments: “In reality, Britain has always been at the forefront of fighting financial crime – but our research shows the compliance professionals in the financial services sector view the new regulations as further supporting the fight. That said, it’s important not to underestimate the sheer scale of the logistical challenge for organisations resulting from this regulatory change, especially for smaller to medium sized firms.
Many regulated entities may be less au fait with the risk based approach to due diligence than their financial counterparts and the changes that the 4th EU AML Directive brings. Therefore, it is critical that they review the JMLSG’s new guidance and revise their processes, controls and risk appetite for on-boarding customers to ensure they maintain compliance.”
Compliance departments are feeling increasingly challenged by higher regulatory expectations, coupled with staff shortages and technology concerns, according to a joint Dow Jones Risk & Compliance and Association of Certified Anti-Money Laundering Specialists (ACAMS) survey released at the 20th Annual International Anti-Money Laundering & Financial Crime Conference in Hollywood, Florida, last month.
The bi-annual survey, in its fourth year, is designed to assess the current regulatory environment and deepen the understanding of how new regulations are impacting the way companies work. Nearly 1,200 compliance and anti-money laundering staff throughout the world responded to the survey.
The survey found that increased regulatory expectations are the greatest anti-money laundering compliance challenge, cited by nearly two thirds of those polled worldwide, compared with just over half two years ago. Nearly half the respondents faced challenges in recruiting and retaining trained staff; a 36% increase on two years ago, while nearly a third of those polled cited outdated technology as a key concern.
This year’s survey saw that 60% of firms have added AML staff over the past 12 months; a 12% increase over the past three years. Other key findings from the survey include: FATCA requirements most prominent among drivers of increased workload, while 52% mentioned the impending implementation of the 4th EU Money Laundering Directive; an increase of nearly 24% over the past two years.
Standardized on-boarding processes and more stringent customer-acceptance standards have increased sharply in the past two years.