Anti Money Laundering (AML) has arguably become the top regulatory priority for banks in Asia Pacific (APAC), according to a new white paper from Wolters Kluwer. Watershed events, such as the theft by hackers of funds from Bangladesh Central Bank, not to mention the rapid ramp up in action again AML control failures across the region, means that banks are now operating in a more tightly controlled AML environment. Here, Michael Thomas, Senior Adviser at Wolters Kluwer covering APAC, shares his views with FinTech Finance on three of the region’s major economies and the AML trends they are experiencing. He also shares his views on how strategic approaches to technological advances can help ensure they are managing the challenges.
The Australian Attorney-General’s Department (AGD) has recommended that the government extend the national AML regime to cover real estate agents and precious gem dealers, following warnings from the Paris-based Financial Action Task Force (FATF) over potential illicit funds entering the country via investments into these assets.
While funds moving through banking and remittance systems and casinos are subject to scrutiny, under current rules buyers are able to purchase gems or homes in cash with no real obligation to identify themselves or the source of the money. Media reports have suggested that authorities are reacting to the influx of Chinese investment as investors a safe haven away from the turmoil of their home market.
The AGD has also advised that regulation should be extended to new payment systems, including digital wallets and currencies. The government is considering the department’s recommendations, and relevant amendments to legislation may be forthcoming in the months ahead.
In Hong Kong, meanwhile, regulators are working through the huge number of documents released from the Hong Kong office of Mossack Fonseca, the law firm through which the Panama Papers were leaked.
They are likely to follow through with investigations at banks implicated in the papers and are expected to take strong action against those deemed to have acted irregularly. The Hong Kong Monetary Authority had already noticeably toughened its stance, last year fining the State Bank of India for inadequate KYC controls in its first disciplinary action under an AML ordinance that took effect in 2012. Regulators are certain to continue this penal approach in order to protect the reputation of the city’s financial sector.
As the largest wealth management hub in the Asia Pacific region, Singapore also has a difficult balancing act. Considerable funds were moved from Switzerland to Singapore when Switzerland was forced to start sharing information with other European countries; Singapore will not want to see that money move out again.
To prevent this, regulators will need to pressure the banking sector to identify ultimate ownership and protect the citystate’s clean reputation, without compromising the confidentiality of wealth management customers.
Authorities are likely to put greater emphasis on banks doing proper due diligence and assessing whether ultimate ownership information is reportable or if, in its absence, accounts should be closed.
They are less likely to prevent the movement of funds to and from offshore financial centers completely as the wealthy often need to use complex structures to reduce their tax liabilities. There is a fine line between tax optimisation and tax evasion, and more banks must now make this judgement when monitoring their clients’ activities. The Monetary Authorioty of Singapore has, in line with The Financial Action Task Force on Money Laundering (FATF) recommendations, designated tax crimes as money laundering predicate offenses. This means institutions are responsible for minimizing the risk of gains from tax evasion entering the local financial system.
Tackling the challenges
The above examples demonstrate the breadth of challenges banks are facing in the region. But no matter where a bank is based such challenges can be managed by adopting a multi-track approach that combines technology, organizational change and the development of talent.
The increase in regulatory actions and the size of the possible penalties makes it commercially viable (as well as wise from a reputational point of view) to enhance existing disparate systems so they are seamlessly connected and integrated with ongoing assessments and controls.
Financial institutions therefore need to pay particular attention to both regulations and guidance issued by authorities in countries in which they operate when assessing the suitability of AML solutions. Particularly in the Asian context, varying rules and standards make it essential that solutions are flexible so that they can accommodate a wide variety of queries and be quickly adjusted for change. Where local
language is also a concern at the user level and for reporting to local regulators, local language capabilities must also be taken into account in any assessment of suitability.
It is also important that AML solutions are rule based, to ensure they quickly flag and respond to any newly identified potential risks. When trawling data for potential compliance lapses or irregularities, artificial intelligence (AI) solutions can cast a wide net. AI solutions, if given unrestricted leeway to formulate conclusions, can generate a vast number of exceptions that are difficult to manage, at least until the solutions are further refined and focused. Rules-based solutions are generally easier to connect to existing processes and policies, and can be highly specific, ensuring a consistent approach and allowing gaps to be closed quickly when new risks are reported.