Addressing key regulatory hurdles around EU directives, sanctions and challenges within intelligence sharing

Article ahead of the 2nd Annual Fraud and Financial Crime Europe Summit,

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By Guglielmo Migliori, Senior Research Executive, CeFPro

Global regulators have heightened their focus on fraud, financial crime and money laundering as a result of the greater sophistication reached by criminals. However, jurisdictional approaches may often vary, causing several challenges for international cooperation. As a result, many industry professionals have claimed that a more effective collaboration between banks and law enforcement agencies is needed to achieve common goals, such as compliance with the 5th EU anti-money laundering directive and sanctions against Russia and Iran.

The ability to successfully identify and mitigate against fraud cases is rapidly growing in importance. The demand for intelligence sharing is coupled with the need for innovative and encrypted technology to monitor and alert financial organizations of suspected criminal activity. Ideally, this would allow financial institutions to obtain a clear picture of potential threats and share this with their counterparts, both in public and private sectors.

To assess the current landscape further, The Center for Financial Professionals conducted extensive research with a multitude of industry professionals. Our goal was to pinpoint the main opportunities and challenges addressed by fraud, financial crimes and AML specialists in the upcoming months. The results from this analysis provided an interesting array of results.

Just some of the main topics produced from our research have been highlighted below:

5th AML Directive

Regulation continues to be a top area of debate and discussion: the 5th AML directive, for which financial institutions will have until January 2020 to implement, brings a vast array of challenges which need to be addressed. One of the main points of discussion is that some risk transactions will require increased due diligence: what could be the best procedures for this? It could be risk-based solutions, or perhaps alternative methods available in the market. Given these different possibilities, it becomes increasingly important to gain a full understanding of customers in case remediation programmes are needed, especially in identifying and verifying if the right profiles are onboarded. One more concern around this directive, is also what Brexit could mean for British and EU based banks.

We have gathered a few interpretations given by the industry:

“I think that we are going to see a lot of customer remediation programs – because of this, financial firms need to give a great effort in time and money in order to really understand what kind of business your customers are in.”

“Possibly, a gap between the UK and EU countries could arise in regards with the AML 5th directive. This gap may not be too large, but AML-wise, there could be a few cracks. There are some kind of dividers FIs need to start thinking about”.

This directive has expanded the importance about the effectiveness of due diligence for onboarding – it should be performed effectively in all banks, so that banks don’t de-risk based on the higher costs to maintain these banking relationships. Legal requirements in each jurisdiction within the EU are primarily based on EU directives, however, the implementation of these laws and interpretation could vary between different member States. Consequently, when regulations must be implemented on the basis of the directive, the regulatory requirements can have similarities across the states but are not cohesive.

Sanctions

Another top area highlighted in our research was related to sanctions. It highlighted that the developments on Russia and Iran are a key focus for financial firms, especially in the UK where, after Brexit, there could be additional sanctions against Moscow. Concerns regarding Brexit and sanctions are increasingly overlapping due to the uncertainty of their impact on financial markets.

“There are several unresolved issues around how global banks are supposed to deal with the European blocking statute in the context of financing; there are contexts where you have many different jurisdictions involved, so it’s crucial to assess who can agree to which laws to be in full compliance.”

“There is so much uncertainty around who might be subject to sanctions, and what is expected to obtain with these sanctions. These sanctions started under the Ukraine and Crimea conflicts – a lot of things have happened since then”.

From this, it’s clear how vital it is for banks to assess the purpose of these sanctions – this could be reached by developing a road map with high-end, inter-banks discussions and have all parties to agree common goals.

“Many banks haven’t moved to Iran, because of the JCPA. If so, they would run the risk of U.S. secondary sanctions. Possibly, these sanctions could be enforced, creating a lot of developments.”

The EU, China and Russia want to try to salvage the JCPA, but an intricate strategy is needed. Some companies will simply avoid doing business in Iran meaning that Iran will not benefit from JCPA as its status is undetermined. Again, a cohesive strategy between banks and regulators to create common goals and how to achieve these are needed.

Intelligence sharing

Lastly, as suggested before in our piece, one more point of interest raised during our research is in regards with data sharing between financial firms and governmental agencies. By achieving a successful collaboration, both parts will be highly benefitted: public and private sector data could be intertwined to identify potential fraud, not just patterns. Not only, there would also be the possibility to have a more detailed view about the risk likelihood, so that risk situations become easier to manage. By assessing the situation as a bigger picture, it will facilitate the work prevent money laundering schemes as well.

“It would be ideal to have private and public sectors sitting at the same table, engaging with each other. We need to have put two sets of data together and work as a team, rather than trying to play a singles game”

“Without a proper communication, there could be gaps to be exploited by criminals. Both public and private sectors need to joined similar systems, in order to be able to share data easily”

All of this shows there are so many advantages in sharing data effectively, especially if being done at different stages, so that all the data disclosed can be as relevant as possible. Obviously, there is one question: are there barriers in trying to do this? How are these barriers overcome? The industry needs some practical examples from case studies: it’s important to see how in the past the industry practically shared data, ideally across organizations in different sectors, so that the result of that sharing, they managed to identify threats. It’s not just about sharing data, but sharing the right data, so it’s crucial to understand where the opportunities are. If the two sectors identify that relevant data and match them, this will produce something extremely useful, rather than just a mere comparison of data sets.

In conclusion, there are several challenges in fraud, financial crime and AML which were presented as top challenges for the next months. To develop solutions for them, The Center for Financial Professionals will be hosting the 2nd edition of the Fraud and Financial Crime Summit, taking place on April 2-3 in London. Please feel free to contact me at guli@cefpro.com or +44 (0)20 7164 6582.