AML Beyond Banking: The Increasing Scope of Global AML Regulation

Increased transparency in the banking sector has made other avenues for money laundering gain greater prominence, writes Claus Christensen at Know Your Customer Ltd.

According to a recent estimate by the United Nations, the amount of criminal proceeds laundered globally every year lies somewhere between 2 and 5 percent of global GDP, or, in other words, between USD 1.6 to USD 4 trillion a year. When faced with such unfathomable numbers, one struggles to comprehend the tangible, practical reality that hides behind them.

The history of fighting money laundering can be traced all the way back to organised crime activities of the Prohibition era in the US. However, there is no doubt that the last ten to fifteen years have seen an exponential acceleration in investigations, regulations and prosecution of such practices. Following the recommendations of the Financial Action Task Force (FATF), financial institutions’ attention in Europe and the US in regard to money laundering and terrorism financing has been mainly focused on better policing the movement of funds across the banking sector. Other parts of the world – with East Asia at the forefront – have followed suit, and numerous regulations have been introduced all over the world to regulate money transfers and banking transactions.

However, “layered” banking transfers – across different jurisdictions and with the aim to conceal the illicit source of funds – represent only one of the methods put in practice by money launderers. Increased international transparency has made these avenues less attractive in recent years though, so other options, like exploiting real estate dealings and commercial transactions, especially those centred on heavy flows of cash or on the provision of services, have gained greater prominence. Historically, detecting and prosecuting such activities was extremely hard, but the introduction of more sophisticated technologies and a better understanding of money laundering practices in general are driving change. The result is that the scope of anti-money laundering (AML) regulation is now extending well beyond the traditional banking sector.

In Europe, the new direction is exemplified by the Fifth Anti-Money Laundering Directive (AMLD5), whose key elements I analysed in a previous article for Regulation Asia. In fact, one of the new requirements introduced by AMLD5 is that art dealers will now be required to run AML and KYC checks on any customer buying or selling items with a value of EUR 10,000 (USD 11,300) or more. Because of their often subjective value, artworks are an extremely useful vehicle for money launderers looking to clean some of their illicit funds. One of the other requirements of AMLD5 is for countries to set up national beneficial ownership registers for trusts. Since trusts are often favoured for money laundering aims thanks to their very opaque nature, the new provision is a clear sign of the EU’s commitment to better transparency across their societies.

The extension of AML requirements to more sectors and types of businesses is also accelerating in Hong Kong. After the introduction of the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Ordinance last year, a series of Hong Kong businesses and professions are now subject to enhanced customer due diligence and record-keeping obligations as well. The list of Designated Non-Financial Businesses and Professionals (DNFBPs) now required to carry out the same KYC reporting duties as financial institutions includes accounting and legal professionals as well as estate agents and trust or company service providers. The ordinance flags buying or selling real estate as one of the types of transactions lawyers and accountants should pay particular attention to, ensuring that all necessary due diligence checks have been executed before proceeding.

Another jurisdiction where real estate transactions have recently gone under closer scrutiny is the UK. Following an abrupt increase in transactions from offshore companies in 2015, the National Crime Agency warned that foreign criminals were using the UK real estate market to launder their illicit money. The Office for Professional Body Anti Money Laundering Supervision is a new watchdog created in 2018 to address concerns about the failure to control money laundering. It oversees 22 organisations, from the Law Society to the Association of Tax Technicians. In October 2018, the UK government also launched a new organised crime strategy, with the declared aim of tackling this issue. In particular, the UK’s Security Minister Ben Wallace announced a crackdown on estate agents, high street solicitors and accountants which facilitate about GBP 100 billion (USD 130.6 billion) of money-laundering in the UK, but are failing to consistently report suspicious activity.

In Singapore, the spotlight is currently on jewellers and businesses dealing in precious stones and metals. A new bill will soon require dealers in precious stones and auctioneers to register with the Registrar of the Ministry of Law (interested parties will have up to six months from the commencement of the Bill to complete their registration). At the same time, more due diligence and identity verification checks will now be required on customers suspected of money-laundering and terrorism financing. The law is only one of the efforts recently introduced to boost Singapore’s standards for anti-money laundering, in line with international standards.

In general, when looking back at the last few months, the feeling is that we are only starting to scrape the surface regarding the penetration of dirty money in our societies. It is becoming more and more evident that, to really tackle the issue, we need to extend regulations and checks to a greater variety of businesses and sectors.

If there is one thing that money launderers are great at, it is to find new ways to clean their money, staying one step ahead of regulators and law enforcement. For instance, UK-based challenger bank Revolut last year reported suspicions of criminal activity on its digital payments system to the National Crime Agency and the Financial Conduct Authority. This episode not only demonstrates how regulations need to constantly adapt to the new world order if they want to keep up with criminals, but also showcases the importance of proactive measures and robust KYC and AML checks powered by technology for businesses active in sectors at risk.

Only by fostering better collaboration between regulators and regulated organisations along with embracing technology we can hope to make progress in the never-ending fight against money laundering.

Claus Christensen is CEO at Know Your Customer Ltd.

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