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FTI: 7 Industry Trends From 2019 Impacting Financial Crime Compliance in 2020 (Pt. 1 & 2)

From new regulations to record-breaking fines, several developments from last year’s financial crime compliance landscape are changing the way business gets done in 2020. Here, in part 1 of a 2-part series, FTI Consulting looks at what compliance professionals should know and how they can respond. 

The global financial industry experienced several disrupting events in 2019. The political and economic fallout from Brexit and the uncertainty stemming from the U.S.-China trade wars are two examples. Now, as the first quarter of 2020 draws to a close (and we wrestle with the worldwide coronavirus pandemic), we are seeing more clearly how these events are affecting the global financial crime compliance landscape — and we can shed light on how they will further impact that landscape in Q2 and beyond.

Here, in the first of two articles, are insights that can help compliance professionals stay a step ahead throughout the year.

1. Increase in New Regulations

New financial crime regulations in 2019 added to the complexity of today’s regulatory landscape. Key moments included:

• Regional uptick in new regulations in the months preceding Financial Action Task Force (FATF) evaluation of countries.
• Response to new risks techniques brought on by the FATF that focus specifically on virtual assets and virtual asset service providers. Guidance was issued in June 2019, but provided a very short time span to align to the new global standard; that left countries scrambling to be compliant by the November deadline.
• Supervisory ramp-up in the aftermath of money laundering scandals, as seen in the frequent amendments being added to the EU money laundering directive.

Here’s what occurred in Q1:
• The world’s most comprehensive regulatory framework for payment services, Singapore’s Payment Services Act, came into force.
• Malaysia followed suit with revised anti-money laundering (AML) guidelines and amendments to the Anti-Corruption Act.
• China’s continued efforts to improve the effectiveness of AML programs in the banking and insurance sectors.

Here’s what to expect in the remainder of 2020:

• Implementation of the next phase of reforms to Australia’s AML regime
• Amendments to the Philippines AML Act
• Significant overhaul of crypto regulatory framework in Japan and Korea
• Potential updates to the Hong Kong’s Securities and Futures Commission (SFC) AML guidelines in response to the fairly recent FATF guidance for the securities sector

How to respond: Compliance professionals, often with multijurisdictional responsibilities, should leverage technology to keep up with the fast-paced regulatory change. Focus on areas where you want to bolster confidence regarding regulatory requirements. By mapping all relevant regulation to your policies and controls, you can begin to understand the impact of the new changes and maintain a realistic remediation plan and defensible audit trail.

2. The Continued Trend of Enforcement

Enforcement actions are on the rise, and 2019 finished just shy of becoming a record-breaking year in terms of the number and value of monetary penalties. Here are some highlights:

• Banks were the main recipient of fines, but their share is steadily decreasing in favor of the non-banking sector.
• When it came to applying sanctions, the U.S., UK and EU counterparts took a leading role.
• Supervisors were tough to each other, as the European Banking Auhtority (EBA) called out the Maltese Financial Intelligence Unit (FIAU) for breach of duty concerning its supervision of the Pilatus Bank.

Here’s what to expect in the remainder of 2020:

• Penalties surpassing US$1 billion dollars will continue to come in as large scandals like 1MDB and Danske Bank reach the settlement stage in the course of this year.
• The APAC region will see an uptick in enforcement action in response to the poor FATF ratings in the areas of supervision and application of preventive measures.
• Regulators in ChinaHong Kong and India started the season with a bang. Australia will soon follow as it remains a supervisory powerhouse.
• Asian subsidiaries of overseas institutions will come under increased scrutiny of the supervisors in the region. This will expose the weaknesses in a group-level risk management framework, as evidenced in the recent case against a Swiss-based private bank with an international presence. 

How to respond: If you receive a notice of investigation, do not panic. Instead, focus on a plan as that is half the battle. Maintain open and transparent dialogue with the regulator, engage experienced independent third parties early on in the process, and give thoughtful consideration to the tailored reputational management strategy to mitigate the consequences of the potential fallout.

3. Emphasis on Personal Liability for Financial Services Professionals

Supervisors continued to emphasize the personal liability of individual employees, including compliance personnel, for identified systemic failings. Here’s how we saw it play out in 2019:

• The action from supervisors and employers alike varied depending on the nature and severity of the violation — from criminal charges against senior executives and lifetime bans in relation to the 1MDB scandal to the terminations, temporary suspensions as seen in in the recent SFC case.
• Compliance professionals fell victim to the years of underinvestment in systems, processes and people and eventually ended up as the scapegoats.
• A notable exception is the example of an Australian Prudential Regulatory supervisor who realized you have to go after the top to get the right tone from the top.  

Here’s what to expect in the remainder of 2020:

• The risk of individual liability for compliance failures — coupled with inadequate financial reward — will result in growing apprehension among compliance officers.
• This will further reduce the ranks of capable and qualified candidates and ultimately affect the effectiveness of second line of defense and regulatory goals.

How to respond: To discharge their duties as responsible officers, compliance professionals must ensure the appropriate action is taken. Detailing the issues within their programs and highlighting them to the senior management without taking any action will fall short of eliminating their personal liability.

Pt. 2

From aggressive use of sanctions employed as a foreign policy tool to shifting attention to entities outside the banking sector, several developments observed last year continue to shape the financial crime compliance landscape in 2020. Here, in the second of two articles, are important trends that compliance professionals can expect. 

As we enter Q2, we are gaining better insight into how the global compliance landscape has changed based on major news events of 2019 that affected the financial industry and Q1 trends. Here, in a continuation of a two part series, are insights financial crime compliance professionals will want to be aware of in Q2 2020 and beyond.

4. Increased Attention on Those Outside of the Banking Sector

Banks continue to bear the brunt of it, but increasingly, non-bank institutions ended up getting caught in the supervisory crosshairs in 2019. Here’s how we saw it play out:

• Multimillion-dollar fines were issued to money remitterscasinos/gaming entities and other designated non-financial businesses and professions (DNFBPs), such as estate agents.
• Non-monetary enforcement actions were taken against fintech players in Australia that had previously flown under the radar
• The Financial Action Task Force (FATF) evaluations continuously highlighted the DNFBP sector as an Achilles’ heel of countries’ anti-money laundering (AML) and countering finance of terrorism (CFT) regimes. Shortcomings were found in the areas of risk understanding, execution of customer due diligence (CDD) measures, reporting of suspicious transactions and quality of supervision.

Here’s what to expect in the remainder of 2020:

• New players in the digital space will add a new dimension to the risk, as they continue to rely on remote onboarding of customers and deploy new tech-driven products and services.
• New players will capture the growing volumes of transactions with a weak understanding of their regulatory obligations and their deficient compliance culture.
• One big blowup is all that is needed to move the attention needle, and we feel the time is ripe for a shakeup.

How to respond: Newly regulated businesses should deepen understanding and awareness of the risks they are facing, starting with the comprehensive financial crime risk assessment. In addition, the low level of reporting raises concerns, given the size and risk profile of the sector, and warrants further strengthening of the transaction monitoring controls to ensure timely reporting of suspicious activities.  

5. Using Technology to Rein in the Cost

The overall cost of compliance continued to weigh on the bottom line as profits slumped and costs soared. What impact did they have on the 2019 season?

• According to some estimates, tier 1 banks individually spent approximately $1 billion on compliance-related matters last year. That’s $270 billion industry-wide, with 10 percent to 15 percent of their headcount allocated to the compliance function.
• Despite widespread dramatic cost cuts and layoffs in the past years, the levels of compliance staff haven’t budged. Moreover, they have grown.
• The costs of compliance failures have proven to be even more excruciating. Penalties aside, banks have seen billions of dollars of market value erased in a matter of a few days, the imposition of tougher capital requirements and increase in operating expenses measured in hundreds of millions of dollars to cover the cost of litigation, remediation and ongoing monitoring.
• Estimates have shown that the reputational cost of noncompliance is around nine times greater than any resulting fine.

Here’s what to expect in the remainder of 2020:

• Companies that have gone past the remediation of legacy issues and invested heavily in Research and Development (R&D) — as well as tech-driven transformation of their risk management programs — will start seeing a return on investment, primarily through a reduction in the cost of labor over the long term.
• The gap between the “tech-haves” and “tech-have-nots” will continue to widen, resulting in significant pressure at the executive level of the latter to manage the rising cost. However, this will not come at the expense of effectively managing regulatory risk.      

How to respond: To meet heightened expectations in terms of efficiency and desired risk outcomes, organizations have to (re)design their risk management programs, basing them on risk-based, tech-enabled and data-informed principles. 

6. Greater Collaboration Between the Public and Private Sectors

Private-public partnerships (PPPs) proved they could disrupt the illicit flow of funds and safeguard financial systems from criminal abuse. Here’s where they made their case in 2019:

• Initiatives such as Fintel Alliance in Australia, AML/CFT Industry Partnership (ACIP) in Singapore, Fraud & Money Laundering Intelligence Taskforce in Hong Kong and recently launched PPP in Malaysia  combined the expertise and skills of government intelligence and law enforcement agencies with private sector businesses.
• Their achievements in the fight against financial crime were mixed. The most notable ones include the promotion of data analytics in AML/CFT, and detecting suspicious activities related to the sexual exploration of children.

PPP is a step in the right direction when it comes to responding to the modern nature of the financial crime, but the overall impression remains that more could have and still should be done, particularly in Hong Kong.   

Here’s what to expect in the remainder of 2020:

• Other countries will jump on the wagon by establishing similar initiatives. Success will depend on the government support that is vital to the success of such coalitions, key impediments being the lack of adequate funding, staffing and legal reforms addressing the barriers to information sharing and exchange.

How to respond: The measure of success of private-public partnerships should be their effectiveness in creating vital intelligence that leads to arrests and disruptions of serious crime group operations, as well as the seizure or restraint of illicit funds.

7. Use of Sanctions as a Foreign Policy Tool

Penalties for sanctions violations have hit a decade high at a time when the U.S. administration is increasingly using them as a substitute for foreign policy rather than a tool. In the past year:

• The Office of Foreign Assets Control (OFAC) has reached 26 settlements worth $1.3 billion in total. Reinforced by the dominance of the U.S. dollar in the global trade, this is a stark comparison to just seven settlements and $71 million in 2018.
• Last year’s enforcement trend reflected a broadening range and diversity of sanction programs; meanwhile, the Specially Designated Nationals (SDN) list continued to swell with new additions. It now runs over 1,200 pages.
• Banks’ share in the overall population of penalized companies kept steadily decreasing as the focus moved to non-banks and corporations outside of traditional financial services realms. These include household names such as Western UnionApple and Expedia. Finally, the U.S. government’s pushing the limits of its jurisdiction in the case against three major Chinese banks — under threat of cutting their access to the U.S. financial system — reverberated in professional and legal circles long after they’d been held in contempt of court for failing to provide information in relation to the North Korea probe.

Here’s what to expect in the remainder of 2020:

• The UK’s exit from the EU provides it with the opportunity to impose autonomous sanctions. The result could be even greater divergence and complexity of the global sanctions regime, which would increase challenges and costs for the companies looking to stay on the right side of the law.

How to respond: Firms should have in place a formal sanctions compliance program that is risk based and continuously evolving. At the same time, they should be proactively assessing their susceptibility to the most common root causes of sanctions violations, such as inadequate settings of the sanctions screening tool. 

As financial crimes become increasingly complex and sophisticated, it is critical for financial institutions to take charge — from reviewing emerging threat areas and ensuring compliance with stricter regulatory requirements to identifying breakthrough technologies — in order to win the war against financial crimes.

Rod Francis, Senior Managing Director
Matt Naletilic, Director

Compliments of FTI Consulting – a member of the EACCNY.