Given the opportunities for money laundering, fraud and other financial crime that government responses to the pandemic presented, it is perhaps no surprise that AML regulations have tightened, and enforcement activity has significantly increased. We examine the emerging risks in this space, highlighting recent legislative and enforcement trends.
Exploiting the new normal
The rapid shift to remote and digital work, as well as government assistance measures implemented in response to the pandemic, provided opportunities for criminals to exploit, increasing AML and terrorist financing risks. Recent reports from the Financial Action Task Force and the UK National Crime Agency have identified a number of areas of AML operations that may be compromised, and identified the rise in suspicious activity reports. The unfolding events in Russia are also placing regulatory authorities in leading financial centres under increasing pressure to crack down on money laundering linked to the region. As countries around the world seek to build back better after the pandemic, we are seeing an increased effort from governments and regulators to tackle fraud, money laundering and other financial crime.
Increased regulation and tougher enforcement action
Around the world, we have seen significant overhauls of AML and CTF legislation in recent years:
- The US enacted the Anti-Money Laundering Act of 2020 (AMLA), a substantial package of legislative reforms to US AML and CTF laws. The AMLA expands subpoena powers, whistle-blower incentives and penalties with a view toward implementing additional transparency in financial markets to address potential money laundering. The US is also expected to continue to sharpen its approach on sanctions, particularly in relation to China. Companies should be alert to changes in sanctions, countersanctions and blocking rules that may apply to their businesses.
- The EU published the long-anticipated EU AML/CTF legislation that has wide-reaching implications, including creating a new supervisory body to address money laundering across the EU and implementing AMLD6, which will focus on aligning and expanding criminal liability for involvement in money laundering in all EU states.
- China has also expanded its AML/CTF legislation, resulting in wider definitions of money laundering activities, enhanced supervision powers and increased fines. The Hong Kong SFC has similarly introduced new guidelines that seek to tackle AML in light of the changing nature of transactions conducted within the banking and finance sector.
Cryptocurrency AML risks
Cryptocurrencies are an increasingly pertinent factor in the rise of financial crime, with an estimated $14bn worth of cryptocurrency stolen in 2021. The de-centralised unregulated nature of crypto creates money laundering risks that can result in liability for corporations or banks linked to these activities. Liability can arise under money laundering offences that criminalise the handling of proceeds of criminal activity and the failure to disclose criminal funds to regulatory authorities. A dishonesty offence may also be triggered where there is a deliberate intent to mislead a regulatory authority on crypto crime. In addition, financial institutions may face liability for failing to have sufficiently strong systems and controls to counter the risks of crypto.
Criminalisation of systems and controls failings
As we predicted in our series on 2021 global enforcement trends, we have seen stricter rules implemented and enforced to prevent systems and controls failings that can facilitate money laundering:
- The FCA achieved its first criminal conviction of a UK bank for failing to prevent money laundering offences under the UK’s Money Laundering Regulations 2007, resulting in a fine of £264.8m. The authority also issued a warning to retail banks with its ‘Dear CEO’ letter, setting out the AML shortcomings in banks’ systems and controls.
- A similar trend of increased scrutiny of senior management can be seen in Hong Kong, where, after an inspection of firms’ AML controls, the SFC pinpointed deficiencies in firms’ systems and controls procedures. The SFC reminded senior management that they bear primary responsibility in ensuring compliance, and could face personal liability if they fail to fulfil this role. The risks of enforcement action are clear from action taken against two licensed firms disciplined over AML-related systems and controls failings; with the SFC imposing fines of HK$8m and HK$3.6m respectively. Similarly, the HKMA has taken its first enforcement action against an online payment service provider, resulting in a fine of HK$1m for failing to have in place adequate and appropriate systems of control to ensure compliance with the AML Guideline. The HKMA has also taken disciplinary actions against four banks over similar failures, imposing fines totalling HK$44.2m.
- In Europe, Swiss authorities handed down in December 2021 the first criminal conviction against a bank for failing to maintain effective internal controls and compliance systems, which was followed by another criminal trial against a major Swiss bank announced in February this year, while a Dutch bank was ordered to pay €480m on grounds of serious compliance shortcomings.
- The US brought its first criminal charge under the Bank Secrecy Act against a broker-dealer due to the company’s wilful failure to file a suspicious activity report. Another notable decision was FinCEN’s $390m penalty against a US bank in January 2021 for failing to report millions of suspicious transactions. While this is a civil penalty, it is notable in that it levies a sizable fine for failure to implement an adequate AML compliance program.
As authorities are increasing their focus on addressing money laundering, it is therefore crucial that the business sector maintains adequate procedures in this field. RegTech may present solutions in this area, which has been endorsed by the FCA, following a recent City UK Report, and is also supported by the HKMA. It will be vital that these and other innovative tools are utilised to ensure that the world of commerce can respond to emerging money laundering risks in the post-pandemic era.
This is the eighth in our 2022 Global Enforcement Outlook blog series, which looks at key enforcement and investigations trends. All other blogs in the series will be made available here.
Knowledge Assistant, Iva Saramova also contributed to this blog.