Fighting money laundering and terrorism financing

By Xavier Kong

With more awareness on the dangers of money laundering and terrorism financing, come more laws to help fight them. However, is the increase in legislation a viable method? KINIBIZ looks at the issues currently faced in the region by compliance officers in the face of money laundering.

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As in all battles throughout history, the field is constantly shifting and changing, and it behooves the combatants to be able to keep up with developments and changes, lest they risk being blindsided midway through the fight.

Proper execution requires proper planning, and proper planning, in itself, can only be done through proper intelligence and information. Such is the way of battles, even the battle of law and order against crime.

Actually, keeping up with changes is especially pertinent for that particular battle, particularly for the side of law and order, due to the point that crime is meant to find ways to circumvent law and order, and the arsenal they have.

While this would turn the battle against crime into a reactionary war, such is the way of the world where everyone is innocent unless proven guilty.

In the fight against money laundering and the financing of terrorism, the battlefield has changed in such a way that details are the name of the game, and KINIBIZ points back to how proper planning requires proper intelligence and information.

Now, the fight against money laundering is not one where it is the money launderers against law enforcement. No, the fight now is actually money launderers against the system they exploit along with its prerequisite parts, as well as law enforcement.

What KINIBIZ is saying here, is that every bank, every teller, every person even, is a part of the fight against money laundering, and the way forward is good and proper compliance.

Compliance refers to regulatory compliance. Compliance is, on its own, the adherence to a rule that has been set in place. As such, regulatory compliance, in this particular iteration, means the adherence of a company or organisation to the laws, policies, regulations, guidelines, and specifications relevant to its business.

However, as technology advanced and the creative mind was put to use in ways that benefit the one and harm the rest, compliance measures have been put to the test again and again, as white-collar crime rises to go international, without heed of national boundaries.

With that, compliance is being brought to the forefront of the battle against money laundering and the financing of terrorism, as part of the ongoing battle by the enforcement agencies and the authorities against the crime. However, by virtue of its new place on the frontlines, compliance, in and of itself, has become more and more complicated.

“Compliance is a long-term investment,” said Mohd Zabidi Mohd Nor, prudential financial policy department director of Bank Negara Malaysia, during his presentation at the International Conference of Financial Crime and Terrorism Financing 2015 recently.

Zabidi also noted that the increased attention on compliance has led to unprecedented penalties and fines, a greater complexity of requirements, and increased regulatory scrutiny. The greater complexity of requirements was actually identified as one of the challenges faced by regional authorities in terms of compliance.

Another challenge faced by regional compliance authorities has been identified by Ida Rumondang, deputy director for product and the anti-money laundering/combating the financing of terrorism (AML/CFT) division from the department of banking research and regulation of Indonesia’s Financial Services Authority, is the issue of financial inclusion.

Financial inclusion refers to the move to deliver financial services at affordable costs to the disadvantaged and low-income segments of society. However, the challenge faced by regional authorities, according to Rumondang, is that the means of customer due diligence are, at this time, still too complicated for it to be integrated with financial inclusion.

“(It) requires a simplified, yet still effective, variant of customer due diligence,” said Rumondang, who also echoed Zabidi in that a greater complexity of requirements and legislation was a challenge being faced in the changing landscape of AML/CTF.

Rumondang also stressed the importance of meeting regulatory expectations, which involves following all international recommendations and standards, but still complying with the related national laws and regulations.

“While good compliance meets all the minimum standards, great compliance is cost-effective and adds value to the strategic business,” added Zabidi, explaining that meeting minimum standards is about ensuring conformity to the relevant requirements, so-called “checking all the boxes”.

On the other hand, he explained that great compliance would eliminate redundancies, thus reducing costs, and enhances the competitiveness of the entity through the elimination of redundancies.

Risk intelligence

Another concern that had been brought to the forefront is the topic of risk. This particular topic was brought to prominence when the Financial Action Task Force (FATF) came out with the 2012 revision of their set of standards, which marks risk as a core concern. This, in turn, leads to the importance of raising awareness about risk intelligence, as well as the risks and negative effects of de-risking.

Risk intelligence, in general, refers to the ability to estimate probabilities accurately. In terms of compliance and AML/CTF, the same pretty much applies.

Richard Chalmers, the former co-chair of the working group on evaluation and implementation of the FATF, noted that it was “fundamentally important that stakeholders identify, assess, and understand money laundering and terrorism financing risks”, adding that this applied “across the board” to national policymakers, regulators, law enforcement, and regulated institutions.

However, in its bid to raise awareness on the importance of risk and risk intelligence, the task force has instead faced accusations of promoting de-risking.

De-risking is a situation where financial institutions terminate or refuse their services, for whatever reason, to certain categories of people. In the case of the allegations of FATF condoning de-risking, it is often due to the financial institutions associating those categories with a higher risk of money laundering.

However, Chalmers refuted those allegations, noting that the organisation’s “standards only allow de-risking in very limited circumstances only”, namely when the business fails to identify their customer (failing the know-your-customer portion), or if there is a reason to suspect that money laundering or terrorism financing was involved.

“The true essence is to understand risk, and to implement appropriate procedures, systems, and controls,” said Chalmers, adding that de-risking actually creates a larger risk of money laundering or terrorism funding, as those who have been denied services may turn to other informal (and often illegal) mechanisms.

According to Chalmers, the FATF approach to risk has national risks assessments as a starting point, of which Malaysia had recently made a first attempt. The organisation also advocates the engagement of all stakeholders, with Chalmers saying that all stakeholders are obligated to manage risk. Even the new “mutual evaluation” process in use now has risk at its heart.

Chalmers then noted that the focus should be on outcomes, rather than the “ticking of all the boxes”, with stakeholders being able to use terms such as “how well” and “to what extent” to show that the response is now targeted towards handling money laundering and terrorism funding. This concurs with Zabidi’s statement that great compliance, rather than good compliance, should be the aim.

Chalmers also echoed that challenges moving forward will be greater still, and noted that there is a need to improve the understanding of risk appetite, as well as its drivers.

On the topic of de-risking

De-risking, as an issue itself, comes with its own set of causes and effects. De-risking also stands as one of the obstacles against financial inclusion, as the act of de-risking is, in itself, the core of financial exclusion.

Chrisol Correia, the director of global AML at LexisNexis Risk Solutions, explained that there are two causes to de-risking, with the first being regulatory pressures from higher AML/CTF awareness and greater consequences of AML/CTF.

The second cause of de-risking is identified as business pressures from higher compliance costs, external pressures for a more robust “know your customer’s customer” procedures, as well as the pressure of market opportunities turning unfavourable in value due to the higher costs.

Correia noted that de-risking, while protecting banks from the risk of money laundering, affects other aspects through unintended consequences, such as causing disruptions to vulnerable sections of society, and propagating unequal access to services, which in turn risks financial exclusion or marginalisation. Handled badly, de-risking could also carry the potential threat of class actions or discrimination claims.

In response to de-risking, Correia echoed Chalmers in advocating risk intelligence, as improved risk intelligence “would allow an institution to better estimate the risk of an action or venture”. Correia also noted that increased risk intelligence would also allow more sustainable AML/CTF actions to be taken.

In the next part of this issue, KINIBIZ will look at the crime trends in Malaysia, and the part money laundering plays in the criminal world.

Tomorrow: Crime trends and money laundering in Malaysia