U.S. report and Trump administration’s tone suggest tougher AML enforcement in Asia

Financial institutions in the Asia-Pacific region will need to scrutinise their financial crime compliance frameworks in view of a more determined enforcement climate in the United States, industry sources said.

Anti-money laundering, counter-terrorism financing and sanctions compliance experts said the Trump regime’s promised regulatory rollbacks were unlikely to make life easier for foreign financial institutions.

Banks must review their financial crime compliance efforts, given an uptick in enforcement is already in motion and individual institutions could be targeted at any time.

Their comments followed a deeper analysis of release International Narcotics Control Strategy Report (INCSR) by the U.S. State Department, which was released in March. It has sparked concerns among APAC institutions about the methods of AML/CTF enforcement the Trump administration will use to further its policy goals.

“I expect there to be even more scrutiny in the coming months over illicit financing coursing through Hong Kong and China, as authorities look to financial flows moving through Asia that present a real risk of money laundering, high-end corruption, sanctions breaches and tax evasion,” said Juan Zarate, chairman of the Financial Integrity Network in Washington, D.C.
Bill Majcher, president of EMIDR a cyber crime and business risk consultancy in Hong Kong, said the Trump administration would not hesitate to extract punitive financial settlements that ultimately benefited the U.S. Treasury Department and domestic banks.

“If foreign banks are caught offside but wish to be part of the U.S. global banking system, they had better be prepared to pay a steep price,” he said.

Sven Stumbauer, director at consultancy AlixPartners in Miami, said financial services firms should review their compliance controls in view of the changing political climate.
“AML compliance officers should focus their efforts on making sure their current AML/CFT and sanctions compliance programmes and systems are in line with the business their financial institution is engaged in and periodically updated,” he said.

Enforcement trends in the U.S. have alarmed some Asia-Pacific industry figures about a more determined AML/CFT and sanctions compliance environment driven out of the States, especially from the New York Department of Financial Services (NYDFS). Sources said the risks appeared to be heightened for foreign banks and particularly those with roots in the Asia-Pacific region, which are attracting more scrutiny from U.S. regulators. The $215 million fine against the Agricultural Bank of China in December and the $300 million fine against Standard Chartered Bank in 2014 stand as testament to that, they said.

Another regulatory risk is the extraterritorial reach of the Treasury’s Office of Foreign Assets Control (OFAC), which can have a significant impact on foreign financial institutions, Stumbauer said. Two notable cases he cited were Banco Continental S.A. in Honduras and the Balboa Bank and Trust in Panama. Both banks were designated as “specially designated narcotics traffickers” under the Foreign Narcotics Kingpin Designation Act.

Valuable insights

The 2017 edition of its annual INCSR report was prepared by State Department’s Bureau for International Narcotics and Law Enforcement Affairs. The report identified jurisdictions with financial institutions that “engage in currency transactions involving international narcotics trafficking proceeds that include significant amounts of U.S. currency; currency derived from illegal sales in the U.S.; or illegal drug sales that otherwise significantly affect the U.S.”

The annual INCSR is a popular resource for the AML/CFT profession worldwide.
It examines:
• financial crime typologies that financial institutions in certain regions might encounter;
• the risks that financial institutions should consider when developing their AML risk assessment or evaluating counterparty money laundering risks; and
• calibrating transaction monitoring systems based on the typologies laid out in the report.

The 2017 report said the Hong Kong Special Administrative Region’s (SAR) main weakness was its lack of a declaration system to detect the physical cross-border transportation of currency and bearer negotiable instruments.

Majcher said the lack of border controls on cash and financial instruments was a glaring gap in Hong Kong’s AML regime, which the local authorities had yet to address adequately.
Compliance professionals in Hong Kong were well aware of the problems that this posed in combating local money laundering. Majcher said their attention was focused on the aspects of the AML regime that triggered the most assertive response by regulatory and enforcement agencies, however, while bigger problems were left alone.

“Compliance is governed by a de minimus approach in pretty much every financial hub on the planet. So there is little commercial incentive for Hong Kong to do more than is required of it to be compliant,” said Majcher, a former Royal Canadian Mounted Police inspector who specialised in money laundering investigations.

Primary sources

The INCSR said local government officials had identified financial crimes, fraud, illegal gambling, smuggling, loan sharking and vice as “primary sources of laundered funds.” Additionally, 90 people were convicted of money laundering offences in the city between January 1 and November 30, 2016 — and $34.3 million (HK$267.24 million) in assets were confiscated.
A spokeswoman for the territory’s banking regulator, the Hong Kong Monetary Authority, said the report assessed Hong Kong positively overall.

A government spokeswoman from the local Financial Services and Treasury Bureau (FSTB) reiterated that Hong Kong was committed to combating money laundering and terrorist financing under its international obligations to the Financial Action Task Force (FATF).
The Hong Kong government is consulting on proposals to amend the Companies Ordinance to require companies incorporated in Hong Kong to maintain beneficial ownership information. It is also reviewing the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance, Cap 615, more colloquially known as AMLO (2012), to “prescribe statutory customers due diligence and recordkeeping requirements for designated non-financial businesses and professions,” she said.

The FSTB spokeswoman said that, depending on the outcome of these consultations, the relevant amendment bills would be introduced to the Legislative Council before the end of the month. The proposals would be implemented as soon as the LegCo scrutinised and passed the amendment bills, she said.

“Hong Kong has also taken active steps in establishing a declaration/disclosure system on the cross-boundary movement of physical currency and bearer negotiable instruments (CBNIs), in accordance with the relevant FATF recommendation. For this purpose, we have introduced the Cross-boundary Movement of Physical Currency and Bearer Negotiable Instruments Bill into the Legislative Council in March 2017, and are working towards the early implementation of the Bill for the practical operation of the declaration/ disclosure system,” she said.

The report also said mainland “has not cooperated sufficiently on financial investigations and does not provide adequate responses to requests for financial investigation information”.
The INCSR listed Cambodia, China, Hong Kong, India, Indonesia, Myanmar, North Korea, Laos, Malaysia, and Thailand as being “of primary concern” regarding the laundering of drug money. It said financial institutions in Pakistan, the Philippines and Vietnam were involved in dealing with the proceeds of drug trafficking which “significantly affects the U.S.”

Compliance implications

Given the report, and recent enforcement trends in the United States and internationally, Stumbauer said institutions should focus on the following areas in 2017 and beyond:
• Keeping abreast of changing regulations and regulatory expectations
• Know-your-customer (KYC) compliance and updating, or “refreshing”, customer information on a periodic basis
• Establishment and enhancement of a culture of responsibility from the top down, which should be driven by an engaged board of directors
• Conducting thorough AML and sanctions risk assessments and an accurate risk quantification for institutions as a whole and for their customers
• Calibrating transaction monitoring systems to better detect potentially suspicious activities

Zarate said the INCSR report had significant implications for Chinese banks.
“There is growing regulatory and enforcement scrutiny over Chinese banks, especially as they expand their market share and access around the world. Chinese institutions are having to meet the more stringent global standards of financial integrity# if they want to be considered premiere financial institutions, something Western banks have learned the hard way under the weight of penalties, monitors and reputational damage,” Zarate said.

Zarate, who had formerly served as assistant Treasury secretary for terrorist financing and financial crimes, said the Chinese banking system was grappling with the pressures of greater expansion, #and expectations for transparency and accountability along with the risks of money laundering, corruption, tax evasion, and terrorist financing.

“The Chinese banking system is coming to grips with the implications of these expectations,” Zarate said.

Keeping abreast of changing regulations and regulatory expectations
Know-your-customer (KYC) compliance and updating, or “refreshing”, customer information on a periodic basis
Establishment and enhancement of a culture of responsibility from the top down, which should be driven by an engaged board of Chinese banks with U.S. branches or subsidiaries will almost certainly come under closer scrutiny from the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

Ed Wilson, partner with law firm Venable in Washington, said the U.S. used the threat of expulsion from the dollar-clearing “club” to enforce compliance.
“This is particularly the case when, as here, the U.S. views other countries as not enforcing adequate AML controls,” Wilson said.

Correspondent relationships

Wilson said the second category of institutions that needed to worry were Chinese banks — including those in Hong Kong and Singapore — that had correspondent relationships with U.S. banks.

“The U.S. banks will probably increase the due diligence and customer identification program (CIP) requirements on these banks and, in some instances, terminate the correspondent relationship. As you appreciate, losing correspondent relationships can cause great harm to a bank,” he said.

The third concern regarding Chinese banks was trade finance. Given the ever-tightening trade bonds between the United States and China, the involvement of banks in foreign currency transactions has also increased. More than 90 percent of U.S.-dollar transactions clear through New York.

“The harder it is to arrange trade finance, and to clear U.S. dollar payments, the more expensive it is for goods to flow between our countries,” Wilson said.

One of the implications from INCSR for regional financial crime compliance teams is to ensure they undertake risk calibration.

Such information was essential to address the growing emphasis on risk-sensitive due diligence and monitoring even if an offshore government or authority issued it, said Urszula McCormack, partner with law firm King & Wood Mallesons in Hong Kong.

McCormack said regulators expected to see “dynamic risk assessments,” while at the same time, institutions had to avoid “de-risking”.

Regulators in London and Washington, and the Financial Stability Board had admonished de-risking as a poor substitute for proper risk- based compliance, she said.

“What this means in practice is that you would not use a high-level report like [the INCSR] to reject business outright from, say, Barbados, Turkey or Vietnam. You should consider what is there and dig a little deeper,” McCormack said.

Trump agenda
It is unclear what the Trump administration will do in the area of financial crime compliance, but tools such as the Bank Secrecy Act 1970, the USA PATRIOT Act 2001 and the Foreign Account Tax Compliance Act 2010, or FATCA, are unlikely to face revision.

Stumbauer said despite the administration’s promise to limit regulatory burdens on the financial sector, there had been little indication that it desired to pull back on the enforcement of existing AML, CTF and OFAC rules.

“Holding financial institutions accountable for deficiencies in their AML, CTF and OFAC controls … aligns with the president’s campaign positions,” Stumbauer said.

Wilson, who worked at the departments of state and justice, said Asian institutions might have a harder time under President Trump.

“Justice, under Attorney General Sessions, appears to be focusing more on ‘traditional’ crime and immigration. This would include money laundering. As a result, I think we are going to see stiffer penalties for violating the AML and CTF rules, based on an underlying theory that punishment is a deterrent to future bad acts. We may also see more Department of Justice involvement on matters that might have, in a prior administration, been left to the bank regulatory agencies,” Wilson said.

Published 02-Jun-2017
 Ajay Shamdasani, Regulatory Intelligence

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