After a roller-coaster year in Bank Secrecy Act (BSA) compliance, marked by regulatory upheaval, election-hacking intrigues and the multi-billion-dollar surge in initial coin offering (ICO) funding, the ride could get even more convulsive in 2018.
Thomson Reuters recently sponsored the Association of Certified Anti-Money Laundering Specialists (ACAMS) 2017 Year-End Compliance Review and 2018 Outlook webinar, where a panel of AML experts offered their top predictions for the sector next year.
Moderated by ACAMS Chief Analyst Kieran Beer, six bank compliance specialists participated in the discussion and listed the following as the most urgent issues facing the AML community:
- Artificial intelligence (AI)
- Complying with the Financial Crimes Enforcement Networks (FinCENs) Customer Due Diligence (CDD) Rule
- The Trump administration’s potential decertification of the Joint Comprehensive Plan of Action (JCPOA) agreement with Iran
- Corruption probes, stemming from scandals like the Paradise Papers
- Modernizing transaction monitoring systems (TMS) to detect new identifiers of human trafficking, the opioid crisis and other emerging financial crime trends
Also, while ACAMS’ panelists did not address this issue in their 2018 predictions, the proliferation of cryptocurrencies and other financial technologies have created unprecedented compliance risks for financial institutions (FIs).
The growing links between AML and cyber-enabled crime, particularly as it pertains to identity theft, constitutes a digital crisis for banks as they scramble to retune risk management processes in often futile efforts to detect increasingly stealth synthetic ID frauds and transaction launderers.
In fact, 2017 Internal Revenue Service Criminal Investigation (IRS CI) documents obtained by Thomson Reuters state that the agency has seen “identity theft morph from an unsophisticated street-level crime, to a sophisticated international organized cyber-crime operation.”
It follows that next-generation threats should be met with next-generation solutions. To this end, ACAMS reporter and webinar panelist Daniel Bethencourt predicted that AI will gain more traction in AML next year, as it empowers better contextualization for suspicious activity reports (SARs), a process plagued by inaccuracy.
1. AI - Powered AML
Touted by The Clearing House, America’s oldest banking association and payment processing service, as an essential reform to achieve “A New Paradigm” for AML, A.I. and machine learning could be the most effective tools to detect wrongdoing.
While AI is not yet able to replace human decision-making, it can provide better context for suspicious activity by revealing hidden patterns, correlations and sub-correlations, according to Bethencourt. He said A.I. could be the “holy grail” in reducing a SAR false-positive rate, which could run as high as 98 percent, going by IBM Watson Financial Services Solutions data.
Using machine learning, AML analysts could derive more insight from generated alerts, which raises the standard of proof, thus enabling them to screen SAR accuracy more efficiently and focus on the highest priority issues, says Bethencourt.
While legacy TMS applications are only able to crunch roughly 90 days of transaction data in suspicious activity scans, the new wave of AI solutions are able to analyze roughly two to three years of customer activity, providing a more detailed context to screen AML risks.
With compliance departments exerting 80 percent of their resources on false alerts and other low-priority issues, according to consulting firm McKinsey & Company, AI could be the X factor that cuts costs and leads to more sustainable compliance.
2. Relaxed CDD Compliance?
ACAMS Managing Editor Colby Adams shared his outlook for CDD rule enforcement, saying that he doesn’t expect regulators to “immediately begin penalizing firms that are not in total compliance with the rule when it takes in May.” Adams also said that regulators are likely to take “efforts to comply into consideration during those examinations.”
Another panelist, Megan Hodge, the executive compliance director for Ally Financial, largely agreed with Adams on CDD. “My prediction is that this is going to be no big deal,” she said.
However, in the wake of the Paradise Papers scandal – a massive leak of 13.4-million financial and legal documents, many of which are linked to Bermuda-based law firm Appleby and corporate services provider Estera – FinCEN’s most recent guidance hints at a more rigorous and risk-based view of CDD implementation.
In fact, FinCEN Director, Jamal El-Hindi, told attendees at a financial crimes conference in December, that his agency “encourages banks to collect additional information on customers below the 25 percent equity interest threshold in order to ‘support industry’s own efforts’” when they feel they need to collect information at a lower threshold.
As a financial crimes investigative probe leaked Appelby records for evidence of criminal wrongdoing, regulators could take a harder line on CDD compliance examinations in 2018.
3. JCPOA “Snapback” (The Art of the Un-Deal)
Adams also predicted major AML compliance upheaval resulting from President Donald Trump’s imminent decertification of the Iran nuclear deal – the defining foreign policy resolution of the Obama administration.
With the fate of the agreement resting solely in the hands of the commander-in-chief, January 18th is the deadline for Trump’s decision on recertification. “I personally think he will not recertify that deal. His position on that issue seems pretty entrenched,” said Adams.
In the event of decertification, Adams said that U.S. sanctions will snap back, which would allow the majority of an eight-member U.N. commission to reimpose trade embargoes if they find Iran to be breaking the terms of the deal.
According to Adams, some U.S. banks will then have to reexamine all of their relationships with foreign banks to make sure they are not “involved in any way with Iran,” leading to further de-risking and restructuring for the financial industry.
4. Corruption Crackdown
Returning to the Paradise Papers scandal, heightened enforcement for corruption was ACAMS reporter Valentina Pasquali’s top prediction for 2018. Pasquali also cited the Panama Papers, corruption probes that have ensnared officials at the highest levels of various Latin American governments, the Malaysia 1MDB investigation, and an inquiry into Swiss banks laundering Uzbekistani telecom bribes as potential regulatory storms for FIs involved in those transactions.
While the Trump administration’s relaxed guidance on Foreign Corrupt Practices Act (FCPA) enforcement may reduce corruption risk exposures in the U.S., regulatory fallout from global investigations could lead the industry to engage politically exposed persons (PEPs) with even more caution in 2018.
5. Modernizing TMS Rules to Spot New AML Threats
The final prediction came from ACAMS panelist and Condor Consulting President John Byrne, who highlighted the growing threat of human trafficking and how banks are beginning to understand financial indicators of this crime.
Additionally, Byrne discussed ways that TMS rules could be modified to address the growing scourge of the American opioid epidemic. “There certainly should be a financial connection in there that perhaps we can get involved in and help.”
The rise of cryptocurrencies is one proliferating financial crime trend that institutions should address to combat the opioid crisis. Law enforcement is finding that traffickers are increasingly using the cover of anonymous virtual currencies and dark web markets to source synthetic opioids like fentanyl from China and distribute them in the U.S. The recent case of Aaron Shamo, a 27-year-old man who ran a multi-million-dollar dark web opioid trafficking ring in Utah, highlights emerging cryptocurrency AML risks.
Virtual currencies are also being exploited by terrorism-financing networks as the December arrest of Long Island woman Zoobia Shahnaz shows. Shahnaz fraudulently obtained $85,000 in loans and credit cards, and then converted it into bitcoin to fund ISIS terrorists by wiring money to shell companies in Pakistan, China and Turkey.
A collage of loan fraud, bitcoin, terrorism-financing and offshore legal entities, the Shahnaz case embodies the financial crimes investigation of the future. What’s more, criminals are increasingly migrating away from bitcoin and moving toward more anonymity-enhancing cryptocurrencies like monero, ether and Zcash, according to a 2017 report from Europol, the European Union’s top law-enforcement agency.
Under attack from a hyper-connected digital underworld, financial compliance managers must retune TMS applications to capture the increasingly sophisticated and cyber-enabled indicators of financial crime.
Identity Is Everything
Although not specified in the webinar, Thomson Reuters’ believes that Know Your Customer (KYC) onboarding processes will assume a higher compliance priority this year. Today, the majority of funds laundered are the proceeds of fraud, a financial crime that has become increasingly more sophisticated, transnational, and cyber-enabled.
But if fraud is the pillar of the illegitimate economy, then identity theft is the building material that allows it to stand. If banks and other FIs could more accurately identify customers and eliminate risk at the onboarding stage, then they wouldn’t have to spend time and money manually reviewing SARs or paying regulatory fines for inadvertent mistakes.
To this end, a cutting-edge investigative public records tool with constantly updating data streams and transparency of sources can help FIs identify bad actors more immediately and effectively. As such, the biggest trend to watch in 2018 might be the rise of KYC as a growth-engine for the financial industry.
About the author
Tim Lloyd is a financial journalist and Bank Secrecy Act subject-matter expert, specializing in banking industry compliance, regulatory technology, blockchain governance, information security, and risk. His coverage focuses on financial technologies and the growing symbiosis between money laundering and cyber-enabled crime. His ghostwritten and published work has been featured in the Financial Times, The Wall Street Journal, Bloomberg Treasury & Risk Management, Forbes, Dealbreaker, Equities, InSight Crime, Investor’s Business Daily, VentureBeat, and others. He is completing his master’s in Specialized Journalism at the University of Southern California in Los Angeles.