Global enforcement outlook
Stricter AML regulation and enforcement
Following several high-profile global investigations, anti-money laundering (AML) enforcement is a global phenomenon that is showing no sign of abating.
In fact, we expect the post-COVID-19 landscape will only accelerate this trend. And as these recent developments show, it is likely that regulators will continue to leverage growing cross-border co-operation, use a wider range of detection and enforcement tools, and continue to focus on senior management, culture, and the adequacy of systems and controls.
Continued growing co-operation
Given that money flows are cross-border, national and transnational authorities continue to co-operate across borders too. As one US agency stated in relation to the 1MBD investigation, the case was ‘a model for international cooperation’. Governments and agencies across regions continue to build on that approach and are looking at strengthening international co-operation on significant cross-border money-laundering investigations.
In Europe, there are proposals to establish a regional AML supervisor for EU banks and the European Banking Authority (EBA) has observed improved co-operation between authorities. The UK and EU have also committed to co-operate post-Brexit in one of several areas of collaboration to combat financial crime contained in the EU Trade and Cooperation Agreement. Many of the details of what that looks like in practice remain to be worked out, but co-operation on money-laundering investigations and counter-terrorist financing is likely to be a priority.
In the US, the global investigations division of the Financial Crimes Enforcement Network (FinCEN) expects to continue collaborating with foreign counterparts to combat money-laundering and terrorist-financing activities. The US Federal Reserve Board and FinCEN have also issued a proposed rule change that would require financial institutions to collect, retain and transmit information from a much larger volume of international transactions.
In addition to increased co-operation between jurisdictions, ‘copycat’ enforcement – where money laundering investigations in one jurisdiction led to increased enforcement in other jurisdictions – is a developing feature of the landscape, particularly in Europe, where national authorities have in the past been criticised for allowing the US to lead enforcement in relation to European-based conduct.
Increasing scrutiny and enforcement tools
With so many money-laundering cases hitting the headlines in recent years via leaks of confidential documents and whistleblowing activity – including a leak of suspicious activity reports (SARs) filed with FinCEN – AML compliance efforts have come under close scrutiny.
Alongside this, there has been a drive to put in place measures to support detection and enforcement. For example:
- the UK Financial Conduct Authority (FCA) has been increasingly adopting dual-track criminal and regulatory investigations so that it can use the widest range of enforcement tools to tackle money laundering in the finance sector, although we are yet to see the fruits of those investigations;
- the UAE has strengthened AML laws in recent years – the federal laws were overhauled in 2018 and 2019, and the Dubai International Finance Centre updated its AML rules in April 2020 to reflect the federal-level changes; and
- EU member states had until 3 December 2020 to implement the sixth EU AML directive (6AMLD) into national law. While the fifth EU AML directive mostly aimed to increase transparency, the 6AMLD lays down minimum requirements for the definition of the crime of money laundering, effectively setting an EU-wide minimum standard for member states to combat money laundering using the criminal law. But some member states, like Germany, are going further. The expanded criminal liability for AML violations under proposed German legislation would heighten scrutiny and require a re-evaluation of processes to detect money laundering.
AML is in focus across regions. The UAE and Dubai International Finance Centre have enhanced their AML rules in recent years, and the respective authorities have increased their investigation and enforcement activity around AML issues, with further activity expected.
Meanwhile, the US National Defense Authorization Act for Fiscal Year 2021, which was passed into law on 1 January 2021, includes a comprehensive re-examination of US AML law, including:
- the creation of a comprehensive beneficial ownership registry for companies doing business in the US; and
- a significant expansion in US authorities’ power to investigate non-US financial institutions and subpoena records held overseas.
In addition to legislative changes, many agencies have bolstered their approach to data analytics to support their efforts. For example, the director of enforcement at the US Commodity Futures Trading Commission has flagged COVID-19-related issues as a priority, explaining we ‘now have the tools, including through the development of our data analytics program, to better test and verify the information we receive’.
Recent enforcement action shows that FinCEN is continuing to focus on SAR-filing requirements and the adequacy of AML systems and controls. The recent leak of FinCEN files, including thousands of SARs, raised questions about whether the number of SARs filed exceeds FinCEN’s ability to review them, and we may see reforms to filing requirements. In the meantime, enforcement action, such as the 2021 Capital One decision, shows that FinCEN will continue to hold financial institutions accountable for AML compliance, and we recommend that clients take regular steps to assess and address AML risks.
The impact of COVID-19 on enforcement
AML compliance programmes have received significant attention from banking regulators and enforcement authorities. But in light of novel challenges presented by the pandemic, regulators may now place even greater emphasis on assessing whether systems and controls have adequately detected money laundering and fraud.
For example, the US Federal Reserve, the Office of the Comptroller of the Currency (OCC) and other agencies have issued joint guidance clarifying the circumstances in which they would take enforcement action for non-compliance with the Bank Secrecy Act (BSA). The joint statement identifies the pillars of BSA/AML compliance programmes as a system of internal controls, independent testing, designated individual(s) responsible for BSA/AML compliance and training.
FinCEN and the OCC have also recently highlighted the challenges inherent in compliance in response to the pandemic and underscored the importance of having good governance from the board when dealing with a disruption or managing a crisis.
COVID-19 and the potential misuse of government stimulus funds will place a greater focus on fraud and detecting financial crime. This may mean companies will be, even more than previously, in the line of fire for missing red flags or inadvertently facilitating money laundering or fraud.
In the UK, the FCA has warned that it is important to remain vigilant to new types of fraud and amend control environments where necessary to respond to new threats.
In a similar vein, the EBA recently published a report on AML, indicating that EU regulators need to focus more on assessing the systems and controls to identify, assess and monitor AML risks, instead of adopting a ‘tick box’ approach.
Senior management responsibility
It is not only systemic failings around AML that are being scrutinised: enforcement authorities are also looking to hold individuals to account.
Where executives have failed to set a culture of compliance from the top, they may face enforcement action for failing to ensure sufficient oversight and/or allocation of resources to evolving threats.
And in major money-laundering investigations, it is not just individuals responsible for preventing money laundering who are being targeted: C-level executives are increasingly under scrutiny too.
Law enforcement agencies are increasingly willing to start proceedings against top executives of financial institutions. In some cases, not having prevented money laundering is enough to get in the prosecutors' crosshairs.