Pandora’s Box And The Biggest AML Trends in 2021

December 22, 2021
2021 has tested the anti-money laundering (AML) regimes of world economies, shedding light on gaps in the existing frameworks and forcing legislators to cast the net wider to fight the flow of illicit money.

2021 has tested the anti-money laundering (AML) regimes of world economies, shedding light on gaps in the existing frameworks and forcing legislators to cast the net wider to fight the flow of illicit money.

The pandemic has changed many aspects of anti-money laundering measures. Remote working has become the new normal, contactless solutions have grown to be the preferred method of payment and people have made more e-commerce purchases.

The rise in online payments has created new pathways for money laundering, with financial criminals shifting to digital technologies.

The October release by investigative journalists of more than 11.9m confidential documents, known as the Pandora Papers, which revealed how high-level officials, oligarchs and billionaires use shell companies to hide their wealth offshore, also caused seismic change.

The scandal made clear that beneficial ownership registers are a must-have to end shell companies and expose how so-called gatekeeper professions — lawyers, accountants and real estate agents — facilitate the flow of illicit money under existing AML frameworks.

In addition, with the crypto asset sector growing to about $1.6trn by mid-2021, regulators have been looking at whether existing rules can sufficiently address the money laundering risks it presents.

United Kingdom — “Tough, assertive, confident, decisive, agile”

Throughout the year, the net of AML compliance has grown wider in the UK, covering far more sectors than the usual suspects.

AML enforcement has also become tougher and more widespread, as regulators have made it clear there is more to AML than the Money Laundering Regulations.

In its business plan 2021/22, Nikhil Rathi, chief executive of the Financial Conduct Authority (FCA) said: “The FCA must continue to become a forward-looking, proactive regulator. One that is tough, assertive, confident, decisive, agile.”

Living up to this mantra, the regulator concluded two high-profile AML cases before the end of the year, handing out a record £264.8m fine to NatWest and a £64m penalty on HSBC for money laundering deficiencies.

At the same time, in July, the HM Treasury opened a consultation on a proposal to modernise the UK’s Money Laundering Regulations 2017.

Although experts consider the proposal “not a huge overhaul”, instead just “tweaking around the edges”, the amendments would fix a gap in the rules governing beneficial ownership reporting.

It also proposes to exempt payment service providers with low money-laundering risk from the scope of regulated sectors, such as account information service providers (AISPs), bill payment service providers (BPSPs), telecom, digital and IT payment service providers (TDITPSPs) and, potentially, payment initiation service providers (PISPs).

In addition, the update would require crypto asset firms to record information on the originators and beneficiaries of transfers above £1,000, also known as the travel rule, hence transposing FATF Recommendation 16 to the UK AML framework.

European Union — A new chance for harmonised AML rules

In July, the EU published a long-awaited proposal to revamp AML and counter-terrorism finance (CTF) rules, with the aim of streamlining and centralising its efforts to prevent financial crime.

The centrepieces of the trading bloc’s ambition are to create an overarching AML regulator and a single rulebook to harmonise the relevant EU legal framework in a directly applicable regulation.

AML insiders have welcomed the move.

“The whole industry, especially financial institutions, are very, very happy with the single rulebook,” one card company said.

Others point to the new EU authority as key to cultural change. “Market participants are not being supervised nationally anymore with regulators who are of the same nationality, or perhaps people that you studied alongside,” a compliance consultant told VIXIO.

Although the market has high hopes for harmonisation driven and the EU-wide agency, MEPs pointed out that the package could miss the mark if its implementation is fragmented and the rules are not enforced.

“The EU has the best laws in the world, but the worst policy enforcement,” they stressed.

The new AML package also addresses numerous issues that the Pandora Papers brought to the fore in October.

It includes provisions to address weaknesses in beneficial ownership reporting and highlights the role of intermediaries, such as lawyers and accountants, in facilitating financial crime.

“We will have to ensure they [the intermediaries] will be fully subject to stringent AML regime and legal professional privilege cannot be used to cover illegal practices,” an MEP warned.

The development and discussions around how the AML package will look will likely be a key part of next year’s agenda.

Similarly, we may also expect EU legislators to heat up the debate over the introduction of the travel rule, which would require crypto firms to share information on the originator and the beneficiary of crypto transfers above €1,000, after, in December, the European Council agreed on a negotiating mandate.

United States — Fixing the gaps

2021 kicked off with a strong and powerful message in the U.S.: The passage of the Anti-Money Laundering Act 2020 (AMLA) means that beneficial owners can no longer hide behind shell companies and compliance officers must change the “tick-the-box” approach to a more risk-based one.

As one of the main sponsors of the bill, Congresswoman Carolyn Maloney (D-NY), put it, the AMLA is “the most important anti-money laundering and anti-corruption bill in 20 years”.

But the regulatory changes did not stop there. Congress tasked the Financial Crimes Enforcement Network (FinCEN), to implement the provisions of the AMLA by issuing new regulations or updating the existing ones.

Throughout the year, FinCEN has worked to fulfil its new duties and meet the tight deadlines. It published the first-ever national AML priorities, issued proposed rules to implement the beneficial ownership reporting provisions and released a request for information to modernize existing AML regulations and guidance.

Although the new AML act fixes important gaps in the U.S. framework, in early October the Pandora Papers brought to light further flaws and made legislators rethink whether they have gone far enough with the AMLA.

Among other issues, the Pandora Papers revealed how a dozen U.S. states became go-to vehicles for financial secrecy because certain trusts and so-called gatekeeper professionals, like lawyers, accountants or real estate agents, are exempt from AML reporting requirements.

Since then, we have already seen FinCEN, members of Congress and even the White House taking steps to assure that key gatekeepers to the financial system cannot evade scrutiny.

Going forward, we expect these initiatives will go further, with FinCEN taking a leading role in handing down regulations to address these issues.

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