In today’s ACFCS Fincrime Briefing, Malta bolsters laws, resources to tackle laundering, Congress pressuring FinCEN on Facebook crypto coin risks, AI implementation, and more.

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Malta creating new unit to tackle complex, international financial crimes, seize, freeze assets: Finance Ministry

Malta is creating a new unit to more aggressively uncover and prosecute large-scale, complex financial crime cases, and increase the power authorities have to freeze the assets of illicit entities, according to the country’s Ministry of Finance.

Taken together, the “sweeping reforms” will reinforce the country’s “commitment to fighting the scourge of financial crime and money laundering,” according to written and public statements by Finance Minister Edward Scicluna, adding that the new measures are designed to “boost the resources available to regulators and law enforcement,” and finally, their effectiveness to produce prosecutions and convictions.  

The changes cover three main areas:

Complex money laundering cases: Creation of new Financial Organized Crime Agency to investigate and prosecute the most serious cases of money laundering and financial crime

• Speed up case closures: New Police Prosecution Unit to accelerate the prosecution of serious cases
• More seized, frozen assets: Enhanced powers for the Asset Recovery Bureau
• Separation of duties: State Advocate Bill to separate Attorney General’s civil and prosecution functions

The moves are in response to growing internal and external pressure on Malta from U.S. and European authorities over extensive gaps in the country’s anti-money laundering (AML) compliance defenses, lax oversight and enforcement by regulators and prosecutors and few investigations of large money laundering cases currently plaguing the region.

In November, the European Commission took rare and drastic steps to increase legal pressure on Luxembourg and Malta for not adequately implementing bloc-wide financial crime compliance regulations, while pulling back similar actions against Spain after a range of recent improvements.

The move comes as several EU member states – including Denmark, Estonia, Latvia, the Netherlands and others – have become mired in money laundering scandals to the tune of hundreds of billions of dollars and individual banks in some countries have paid in some cases record penalties in the hundreds of millions of dollars for extensive and longstanding AML failures.

Across the board, the commission levied a range of censures against the three countries.

Authorities chastised Malta’s financial intelligence unit for having lax supervision of the banking sector with ostensibly the worst punishment handed down to Luxembourg, which at the time faced a lump sum penalty and daily fines until examiners deem it in line with Europe’s Fourth AML Directive.

At issue with Malta and the Financial Intelligence Analysis Unit (FIAU) has been what European authorities believe is a disconnect between what examiners concluded on the ground and what was actually going on behind the scenes at financial institutions in the region.

The disconnect was exemplified by what happened at Pilatus bank, which the European Central Bank (ECB) shuttered in November due to widespread fraud and money laundering allegations, culminating in the indictment of the institution’s chairman on related charges.

Prior to this, the Maltese FIAU has given Pilatus overall positive reviews for AML program functions.  

That all changed in March when U.S. prosecutors arrested Pilatus Chairman Ali Sadr Hashemi Nejad.

The Iranian allegedly orchestrated a scheme to evade U.S. economic sanctions and secret more than $115 million paid under a Venezuelan construction deal through the U.S. financial system – a dynamic layering risks on top of risks, something a regulator should have realized required significantly more scrutiny.

Pilatus also faced allegations of processing graft-gilt payments for senior Azeri and Maltese figures by investigative journalist Daphne Caruana Galizia, later killed by a car bomb attack, according to media reports.

The European Banking Authority (EBA) investigated and concluded that Malta’s FIAU “was breaching Union law” and issued recommendations to improve the situation in July, which have not been implemented to the watchdog’s satisfaction. “It considered that Malta failed to correctly supervise financial institutions and ensure their compliance with anti-money laundering rules.”

Part of the challenge is that Malta has a “comparatively small public administration, with its limited available resources,” a dynamic that has “forced public institutions to take on multiple roles. This has been most evident in the roles of prosecution and investigation where both the police force and Attorney General have occupied dual functions.”

De-coupling these groups will allow more specialized, intensive financial crime investigations, though details are still spare on how the country will organize, structure, staff and better analyze, share and shape data, intelligence and tips into concrete cases, prosecutions and convictions.

“Organized financial crime is an international scourge that knows no borders and can only be eradicated through a joined-up approach between countries,” Scicluna said in a statement.

The country is “determined to play our part in making this happen,” he said. “That is why we are throwing ever more resources at the problem and enacting legal and regulatory reforms to transform the fighting capabilities of our institutions and regulators,” (via the Malta Ministry of Finance).

Malta’s name in recent years has been thrown in the mix of countries that have become synonymous with tax evasion, corruption and money laundering schemes – with one of its largest banks going under because of these issues.

With the EU, and various country regulators in places like Estonia, Sweden and Denmark, under enormous pressure for its oversight and failures to prevent a massive money laundering scandal in the hundreds of billions of dollars, it’s no surprise Malta is finally starting to say we need to make major AML improvements – quickly and publicly.

What is still unknown is if these ovations are real, or if they are just window dressing to get EU overlords off its back. What is also unknown is that even if there is a will, does Malta have a way? There still might be a gap between Malta’s AML and money laundering risks and its capacity, resources and expertise. Only time will tell, but the world will be watching.

Anti-Money Laundering in Capital Markets: Relatively uncharted territory with lax oversight, enforcement, underreported SARs

The use of capital markets to launder money via investment banks is a topic seldom raised. There are the headline-grabbing cases, to be sure, such as Deutsche Bank’s trouble with mirror trades or Goldman Sachs’ connection to the 1MDB bonds, but these are rarities that fall short of driving industry efforts.

Yet it would be naive to assume that money laundering doesn’t occur through capital markets simply because participants are typically regulated and traded financial instruments fall under the purview of companies listed on stock exchanges.

If one were to take the UK as an example, anti-money laundering (AML) risk management related to capital markets is in its relative infancy.

For a less anecdotal take, one need only look at the latest UK National Crime Agency Suspicious Activity Reports (SARs) Annual Report to see that the sector appears to be underreporting potential criminality. Of the 463,983 SARs filed in 2018 by UK financial institutions, only 107 related to capital markets.

It’s not just investment banks. The historic lack of focus on the sector includes both regulators and law enforcement officials.

While the 2015 UK National Risk Assessment of Money Laundering and Terrorist Financing Report made no mention of vulnerabilities associated with capital markets, the 2017 assessment acknowledged that “capital markets (raising and trading equity and debt and trading derivatives, currency and commodities) are assessed as to be exposed to high risks” of money laundering, in part due to a “relative lack of controls,” (via KYC360).

Dev is a financial crime compliance professional with incredible experience and knowledge in this space. So I was happy to see him tackle AML compliance and laundering in the complex, intermediated and, at times, confusing world of securities.

In short, it’s clear there are very different levels of understanding, oversight and enforcement in the space when it comes to AML compliance and investigating and prosecuting frauds. That needs to change as criminals and fraudsters are counting on that.

It’s vital that compliance officers, regulators and investigators the world over get together, communicate, cooperate and coordinate to ensure criminals aren’t gaming the system – or, as in the case of some of these frauds, individuals and countries could lose billions.

FinCEN in Congressional hotseat over oversight of Facebook’s planned crypto coin, Calibra, use of AI to counter fincrime

Key economic and national security congressional powerbrokers are ardently querying the country’s financial intelligence unit on how it will oversee, analyze and mitigate the potential threat of Facebook’s new crypto coin – and how proactively government analysts are using new, innovation technologies to do so.

Those are just some of the issues covered in a bipartisan briefing between U.S. Representatives Emanuel Cleaver, II (D-MO), Chairman of the Subcommittee on National Security, International Development, and Monetary Policy, Trey Hollingsworth (R-IN), Bill Foster (D-IL), and French Hill (R-AR) along with members of the House Financial Services Committee and Ken Blanco, Director of the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).

The briefing was held to discuss FinCEN’s use of AI and ML technology to detect illicit financial activity and how the bureau is working with regulators to encourage the use of these technologies among financial institutions.

“With the evolution of virtual currencies and new marketplaces, nefarious actors are continuously adapting to find new ways to engage in illegal financial activity,” Cleaver said.

“Now that we’re seeing a giant corporation like Facebook—which has already shown an inability to identify and impede these kinds of actors at an acceptable level—creating its own virtual currency called Libra, it cannot be understated the importance of Congress and financial transmitters to be proactive in utilizing the newest and most powerful technologies to ensure the financial system is not being used improperly.”

“I appreciated Director Blanco and his team for sharing the Bureau’s ongoing efforts to use AI/ML to combat money laundering and to collaborate with both financial institutions and technology providers to help strengthen our financial system,” Hollingsworth said.

“FinCEN’s work is critical to our national security and the prevention of illegal activities such as money laundering and illicit financing,” Foster said, adding that the bureau’s engagement with AI analytic tools was a welcome sight. I look forward to working closely with my colleagues to ensure FinCEN has the resources it needs to effectively carry out its mission,” (via the U.S. Congress).

Combined with the industry call to innovation in December it’s clear that federal investigative agencies, and most likely very soon, federal regulators, will start feeling more heat to engage in new, whiz bang technologies like artificial intelligence, machine learning, deep learning and the like – just as regulators are nudging banks to take voluntary techno leaps of faith.

This means several things for the various players in the financial crime and compliance space. For banks, this means you may get more queries from FinCEN, or law enforcement, because bureau analysts are touching more data, finding new connections and starting or furthering more cases for investigative agencies of all stripes.

But if FinCEN is touching more suspicious activity reports (SARs) through AI, and has more analysts looking at these SARs, they may also start seeing trends from more banks that are filing weak or defensive SARs – leading to additional regulatory scrutiny.

Conversely, FinCEN may uncover that while one bank is filing a bevy of SARs on a given group or crime, banks right next door of the same size, customer base and risk exposure are not filing as many, again, opening the door to questions from examiners.

Overall, and, not surprisingly, the main takeaway that FinCEN is more broadly using AI means regulatory partners are likely already following suit – with the tacit expectation that banks of a certain size, risk exposure and resources should also be engaging in AI to better understand and report on potential financial crime suspicions.

Japan’s largest bank pays NYDFS $33 million after it jumps charter, kicks out examiners, sues state: settlement

After nearly two years of battling New York state regulators, Japan’s largest bank will pay its adversary $33 million to settle a lawsuit the institution started after kicking local examiners out and preventing them from coming back in after switching to a federal charter.

The New York State Department of Financial Services (NYDFS) negotiated the settlement Tuesday with MUFG Bank, closing a lawsuit started by the institution against the state regulator in November 2017, a day after the U.S. Treasury’s Office of the Comptroller of the Currency (OCC), granted the group a federal charter for branches in New York, Illinois and California, along with offices in Texas.

At issue is that MUFG believed it could prevent New York regulators from entering the building after its conditional charter approval in 2017, even though it was still juggling two NYDFS orders focusing on financial crime compliance failings – even suing to keep them out.

But the NYDFS at the time countered in a counter suit that it still had authority to oversee financial crime compliance issues that occurred under its charter prior to the conversion.

That is a vital point for state and federal examiners as the MUFG banking group has paid more than a half a billion dollars for similar fincrime compliance failings in years past, (via the NYDFS). To read ACFCS coverage of the action, click here.

Monroe’s Musings: This whole story has been kind of crazy. Very rarely, if ever, does a bank think that simply by jumping to a federal charter and kicking state examiners out, it can escape their oversight – or evade an incoming AML action.

This reminds me of a song: “I fought the law…and the law won.” The moral of this story: work with your regulators, at any level, not against them. It will work out better in the end.