Richard Grint, financial crime expert at PA Consulting, discusses financial crime risks and explains how leaders can be ready to proactively respond to changes.
The article notes that the last two years have seen a spate of high-profile CFO resignations following failures in their companies’ anti-money laundering (AML) regimes. This global cull has likely caused finance leaders around the world to reassess their AML and counter-terrorist financing (CTF) programmes urgently. But even without it, the recent issuance of new regulations and guidance on AML and CTF is making such reviews necessary.
The Financial Action Task Force (FATF) brought in its latest Terrorist Financing Risk Assessment Guidance in July 2019. The EU’s Fifth Money Laundering Directive came into force in January 2020. The sixth directive will follow swiftly on its heels in December.
These changes will affect many CFOs directly.
Control framework should be ‘robust, flexible’
The Fifth Money Laundering Directive (5MLD) extended existing customer due diligence obligations, increased reporting requirements for many businesses, and introduced new risk assessment duties. It also added a regulatory imperative that individual senior managers ensure compliance.
5MLD also extends its AML and CTF obligations to cryptocurrency exchanges and custodians, bringing the EU in line with cryptocurrency measures introduced in the US several years ago.
Lack of regulation had led Europe to become a haven for laundering cryptocurrency gained illicitly. While many virtual currency and wallet providers already require customers to verify their identities, some crypto transactions allow anonymity, which criminals have exploited to transfer funds without detection.
The Sixth Money Laundering Directive (6MLD) will standardise the approach of EU states to money laundering offences and expand the range of sanctions and the scope of liability, including extension of criminal liability to individuals.
Richard said with the sixth directive following so quickly after the fifth, the key message for CFOs and other finance professionals is that the regulatory landscape is evolving at pace. “Finance leaders should ensure their AML control framework is robust, flexible, and able to adjust to new threats and to incoming regulation. The most successful firms and leaders do not treat it as a compliance exercise. They proactively manage their financial crime risks to respond to such changes.”
From a finance perspective, both directives highlight and enforce requirements around the need for high-quality source-of-funds checks, he added. This means companies must understand exactly the origin of inbound money flows.
The FATF’s 2019 Terrorist Financing Risk Assessment Guidance is directed mainly at countries, but it provides recommendations for financial and other companies.
For example, it says that organisations such as banks need to play a much bigger role in tackling the growing threat of terrorist financing by collaborating with public bodies such as government and regulators, law enforcement bodies, and finance and trade centres.
The guidance highlights a range of products and services with inherent risk. These include pre-paid cards, money or value transfer services, remittance services, person-to-person transfers, correspondent banking services, money service businesses, hawalas, not-for-profit organisations, and precious metals or stones. It gives examples of associated activities that should be monitored closely.
The guidance also sets standards for the collection of quantitative and qualitative data and for considering all stages of terrorist financing in risk assessments. It recommends including factors such as domestic and foreign intelligence information, sources of funding, channels used, and geographic origin and destination of funds or other assets.
Richard said the guidance is part of a wider trend towards organisations being obliged to mitigate broader financial crime risks. “Leaders should make sure their financial crime control framework can handle all financial crime risks. By focusing on money laundering alone, firms risk missing their equally weighty obligations around terrorist financing.”