How will 2021 be remembered?

‘Another vintage year’ would be an apt reflection on the fight against financial crime in 2021, as everything from money laundering and tax evasion to human trafficking and sanctions hit the main headlines across a world barely recovering from the first three waves of a pandemic that’s hit every corner of every economy. So, what have been the big stories and the major developments in the world of AML and financial crime this year? Let’s take a walk through the themes dominating our space in 2021.

Suspicious activity on the rise

Suspicious Activity reports were up 20% on the previous year and money laundering was never far from the headlines. In its latest ‘SARs in Action’ report from November, the National Crime Agency (NCA) provides an insightful update in expansion at the national Financial Intelligence Unit as part of the UK’s SAR’s Reform Programme, with recruitment of new staff, training and process improvements designed to strengthen the UK’s ability to fight cross-border financial crime. The report also highlights two growing areas of financial crime – the disturbing area of Wildlife Trafficking and the rise in crime related to cryptocurrencies. A number of case studies show how SAR’s reports actually lead to criminal conviction; let’s hope the expansion and reforms lead to more bad actors being brought to justice.

Human traffickers exploit global unrest

Human trafficking and modern-day slavery dominated the FCC headlines, with immigrants and immigration around the world posing a massive challenge for governments everywhere, not least by unintentionally obfuscating law enforcement attempts to uncover and stop traffickers’ operations. The extent of human trafficking in the UK was revealed in a January 2021 report from Human Rights Impulse estimating that up to 138,000 people were trafficked in the UK in 2018. With record numbers of migrants crossing the English Channel this year, the situation is surely playing into the hands of criminals, often allowing them to work in plain sight, as is graphically depicted in the NCA’s own recent report on Modern Slavery and Human Trafficking.

Amendments to the Modern Slavery Act 2015, are currently passing through Parliament and expected to land spring 2022, they contain strengthening measures, including a legal obligation to support statements made by companies on modern slavery in their financial statements and on websites, and tougher penalties for failures. Organisations will therefore surely need to sit up and take notice, from next year.

New customer behaviours drive radical change in both the provision of financial services and opportunities for criminals

Customer attitudes and behaviours are changing, accelerated by the pandemic and leading to a huge growth in digital banking services. Fintech is on the march and customers demand a seamless and speedy experience. A report in October from Tech Nation showed that by the summer of 2021, VC investment in UK fintechs had reached $4.9bn—more than the total raised through the whole of the previous year.

The fintech revolution is reaching every corner of financial services too – even those formerly adverse to change. Research from ESIThoughtLab, sponsored by LexisNexisRisk Solutions, into the retail investment space clearly indicated a march to digital services among its users – and not just the younger millennials. Revealingly, 89% of respondents said their smartphone will be their main channel for accessing their investments, going forward – a remarkable shift for a sector previously so ensconced in tradition.

Behind much of the shiny fintech exterior is AI technology, such as machine learning and natural language processing – both rightly gaining traction and adoption for their ability to handle large quantities of unstructured data and access open-source intelligence, as well as being capable of training computers to carry out routine, heavy lifting AML tasks often still done by humans. The application of data and behavioural analytics to spot patterns of illegal behaviour and specific financial crime typologies and anomalies is exciting stuff and we’re really still only just scraping the surface of what this technology can offer in 2021, and It’ll be a number of years before it’s fully realised.

There’s always an unfortunate flipside when it comes to technology – financial criminals continue to keep pace and evolve their attacks in parallel with advancing capabilities, with the added advantage of being free from the data privacy and regulatory restrictions facing financial institutions. Virtual currencies are naturally proving to be a breeding ground for money launderers, who can use it to work the financial system to their advantage while remaining hidden in plain sight.

That said, LexisNexis Risk Solutions was in the thick of it once again in August, announcing the acquisition of further technological capability to help customers in the fight against financial crime. TruNarrative, a financial crime lifecycle platform with the power to provide end to end and continuous risk-based AML controls, gives users a complete view of customer activities and therefore the insight to spot suspicious activity quickly.

The Cat and Mouse game, it seems, has no end in sight.

UK Government consultations are re-shaping regulation, and not just in the UK

Over the past decade or so, regulation has tended to lag behind actual financial crime risk events. FATF principles were strengthened in 2014, largely in response to large scale corruption and money laundering among rogue government officials, as well as large scale terrorist threats, leading to the 4th Money Laundering Directive, with a greater focus on the risk-based approach – but not until 2017, three years on.

Admittedly, thanks to events such as the Panama Papers revelations, the emergence of random, small scale terrorist events and the rise of digital, meant that the 5th Money Laundering Directive followed close behind. The challenge for authorities is always how to get ahead and stay ahead of the game.

Currently, the EU is implementing the 6th Money Laundering directive with a strong focus on predicated crimes that lead to money laundering and introducing tougher penalties and greater legal responsibility.

The European Union is also moving ahead with the creation of an AML watchdog for the entire EU region, superseding individual country regulation. The same is happening in the US with the new Anti-Money Laundering Act having come into force in January 2022.

In 2021 UK Government launched two consultations aiming to both improve the existing regulatory framework and provide an in-depth review of the entire UK AML regime, asking tough questions about what doesn’t work, what could work better and how the whole supervision challenge could be done better. Outcomes from the former consultation are likely to be implemented in the spring of 2022.

This article gives good insight into how the legal sector is viewing this review and what it proposes.

Pandora Papers revelations showed why data and data analytics rule in uncovering financial crime

The use and abuse of offshore and shell companies to obscure true ownership was once again thrown into the spotlight with the ‘Pandora Papers’ revelations in October – with one notable difference: the shocking extent to which the perpetrators are the very people responsible for setting the rules in their respective countries.

Whilst the media rightly focussed on how wider availability of beneficial owner data is vital, the less well-understood story is how the International Consortium of Investigative Journalists (ICIJ) actually conducted their investigation and what we can learn from it.

The leaked data came from 14 different sources in different countries providing around 12 million records of largely unstructured data, including text documents, spreadsheets, passports, bank statements, tax declarations, company documents, property documents and emails, covering a time period of over 20 years. A mountain of data – so where to start?

A team of journalists, financial crime researchers, technology and data scientists were supported by machine learning tools, natural language processing and special programming languages to automate the huge task of finding the proverbial the needle in the haystack.

Data from external sources was also used, including company registries, sanctions lists, adverse media databases and even open-source intelligence. It took a year to make sense of the data and create searchable structured records from which it became possible to identify links between entities. From this huge task, the investigation bore fruit and the revelations soon emerged, creating considerable casework for Law Enforcement Agencies.

So, what can we learn from this episode, aside from the somewhat disturbing extent of global money laundering and tax evasion and the mammoth tax confronting international governments trying to prevent it? On the positive side, it demonstrates that with the right combination of human intelligence and smart technology – harnessing the power of artificial intelligence – anything is possible. This, I believe, is where the future victories in the fight against financial crime, money laundering, tax evasion and indeed the wider issue of fraud, will be won. The time for complying with basic tick-box rules is over. As an industry, we must all accept our collective responsibility to do more to stop these illicit activities and look closer – find the needles in the haystack! With the help of our allies – technology and analytics – anything is possible.

Trade Based Money Laundering on the rise

Trade disruption during the pandemic has provided a near-perfect cover for money launderers, particularly given the severe limitations on physical audit and inspection.  FATF President, Marcus Pleyer recently labelled trade-based money laundering as ‘a new kind of fraud that enabled criminal organisations to launder $400m in recent years.’ The UK is particularly vulnerable now, as it realigns its global trade partnerships post-Brexit. A recent report published by the Journal of Money Laundering Control reported on by Global Trade Review highlights the huge challenge UK Financial Institutions face in aligning the need to establish new trade partnerships with the need to avoid striking deals with fraudulent traders. It states that the UK’s proposed Developing Countries Trading Scheme designed to cut tariffs and simplify rules of origin requirements for up to 70 countries is likely to “increase the UK’s exposure to trade-based money laundering” and “underestimate the money laundering risks of dealing with high-risk jurisdictions.”

Now more than ever, UK and EU firms need to ensure they are using the best, most up to date data sources in trade-based money laundering checks, something LexisNexis Risk Solutions specialises in.

Understand the 8 key components regulated UK firms need to successfully achieve a Risk-Based Approach.

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The environment is under attack again – this time from financial crime

A Financial Action Task Force (FATF) report in July threw the spotlight on so-called ‘green crime’ covering a multitude of transgressions, from illegal extraction of minerals and chemicals, illegal deforestation and trade of timber products, to illegal land clearance and household and commercial waste trafficking. It has, sadly, now become one of the most lucrative lines of business for money launderers, generating up to 281bn in revenue, annually. The report recognises that only a concerted international cooperative effort can tackle the problem. But with governments fully employed in tackling climate change, will this prove one problem too many? As with all types of money laundering, the money has to go somewhere, so the key to tackling is understanding how to ‘follow the money.’ The FATF report sets a number of detailed recommendations for all member countries to adopt in both local laws and other measures needed to stem the flow.

Regulators turn the heat up in 2021

Both regulators and legislators switched gears during 2021, shifting focus from technical rules compliance to effectiveness of AML controls and adoption of the risk-based approach. In both the UK and the EU, new proposals are now underway to improve both the regulation itself and the way in which it is supervised, with some consolidation likely.

Financial Institutions continue to be fined record sums for AML and Sanctions breaches and for the first time in 2021, one major UK bank faced criminal prosecution.

The FCA likes to bare its teeth and is well known for issuing ‘Dear CEO’ letters when it wants to admonish firms or get an important regulatory message across. A recent and particularly hard-hitting case in point this year was its letter in May to UK retail banks, which drew attention to widespread failings seen in AML Controls across the sector. They noted common inadequacies in business and customer risk assessments, customer due diligence, including poor enhanced due diligence, transaction monitoring and suspicious activity reporting. It’s clear from this that the regulator is upping the ante and next year is unlikely to see a change of heart. Firms would do well to use the relative calm in the run-up to the festive season to carry out a thorough gap analysis of AML processes and put in place an action plan to remediate the weaknesses. Beware, the regulator is on the prowl.

It’s not just retail banks either. Supervisors in just about every sector from Law Firms, to Estate Agents, to Crypto-Asset firms and digital payment services are all are piling on the pressure for firms to implement more robust AML controls. If your firm is grappling with what a Risk-Based Approach should look like, LexisNexis Risk Solutions published a handy guide this year to help.

What’s on compliance officers’ festive list for 2021?

If I had to point to one key vulnerability for KYC at the end of 2021, it would surely be the ever-increasing costs of compliance – due to hit £30bn for UK financial services firms in 2023. Next year must surely be the year there’s a radical change of approach across the sector – this certainly can’t go on.

All that’s really needed for firms to fix their AML woes is to embrace the power of new technology, improve their data management and quality of data, adopt data analytics tools to better understand customer behaviours and detect suspicious activity, upskill their compliance teams and unify disconnected front and back-office systems. Then, of course, there’s the regulatory updates to deal with. Ok, that’s quite a wish list – even Santa has his limitations.

That said, achieving it all would not only practically guarantee to keep the regulator off your backs for the foreseeable future and keep the bad actors at bay, but you’d likely have some very happy and contented customers.

The question is, do you believe in miracles?

Perhaps the best we can hope for this year is a peaceful and restful break where we’re able to see family and friends. So, let’s keep fingers crossed and aim to come back with recharged batteries ready to tackle all the challenges that 2022 may bring.

Finally, remember that the LexisNexis Risk Solutions team is here to help you at any time.

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