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The top five cross-cutting trends for the financial crime field in 2014

Wednesday, December 31, 2014  
Posted by: Brian Kindle
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In a year marked by surprising new regulations and policy changes, unprecedented legal cases and record-setting enforcement actions, and major developments in every financial crime field, picking the top trends of 2014 is no easy task.

Amid the many notable events of a crowded year, however, a few recurring topics rose to the forefront, affecting nearly every actor in the financial crime field – big banks to law enforcement, regulators to money services businesses. Below, ACFCS provides a look back at five of the key cross-cutting trends and issues that shaped the past year.

ACFCS also scrutinized trends that impacted specific financial crime fields and looked ahead to the issues that are likely to rise to prominence in 2015 here.

International groups and nations ratcheted up standards on beneficial ownership and took up the banner of corporate transparency

From meeting rooms packed with world leaders at G20 summits, to the halls of the European Union Parliament, to US regulatory agencies in Washington, DC, the topic of beneficial ownership cropped up in many different contexts in 2014.

The ability to identify and verify the true owners behind corporate entities and financial accounts was increasingly recognized as a linchpin in combating a wide array of financial crimes, from money laundering and terrorist financing to corruption and tax enforcement. Global standard-setting bodies like the G20 and the Organization for Economic Cooperation and Development (OECD) called for better identification of beneficial owners in order to combat tax evasion. In the US, the Financial Crimes Enforcement Network (FinCEN) issued a proposed rule in August that would require institutions to identify and verify beneficial owners behind legal entities, creating a new “pillar” for AML programs that focused on customer due diligence.

One of the biggest surprises came from the European Union, which moved in December to create an EU-wide registry of beneficial owners behind corporations that would be accessible by both law enforcement and members of the public with a “legitimate interest.” The US Foreign Account Tax Compliance Act, with its requirement to identify US beneficial owners behind certain types of legal entities down to a 10% ownership level, has also added urgency to global efforts to increase disclosure of beneficial owners.

In 2015, the implementation of the OECD’s tax information exchange system, along with the likely release of FinCEN’s final rules on beneficial ownership, will only increase pressure on customer due diligence programs at financial institutions. For law enforcement, heightened disclosure of beneficial owners is a boon long sought after by investigators.

Read more here:

Global push for beneficial ownership transparency hits headwinds of political sparring and strained resources

FATF takes aim at beneficial ownership with new guidance

FinCEN’s proposed beneficial owner rules ease fears of financial institutions but raise tough new questions

Cybercrime rose to the top of the compliance agenda

On the cybersecurity front, 2014 was a banner year – for the bad guys, that is. Hackers punctured the virtual defenses of JPMorgan and nearly a dozen other banks, along with Target, Home Depot, Google, Apple and others, pilfering the data from tens of millions of customers.

That has prodded federal investigative and regulatory agencies to usher in new cyber protection protocols, voluntary standards and push for legislation. Early in 2014, the US National Institute for Standards and Technology issued a “cybersecurity framework,” a set of best practices and a diagnostic tool that companies could use to assess their cyber program. The framework was the product of collaboration between the private and public sectors, including US banking and securities regulators. Later in the year, the New York Department of Financial Services announced plans to examine institutions it regulates for cybersecurity preparedness.

As a result, banks have begun exploring ways to better gird themselves against attacks, including by increasing communication and data sharing between their cyber security and financial crime departments. Some institutions have built formal ties between AML and cybersecurity staff, a trend that is likely to gain steam in the year to come.

Read more here:

Institutions bolster ties between AML and cybersecurity units to ward off soaring cyber threats

US federal and state regulators ratchet up cybersecurity examinations

Too big to secure? JPMorgan data breach creates new challenges, cybersecurity experts warn

Trade-based money laundering returned to prominence as a conduit for illicit proceeds

Trade-based money laundering (TBML) is hardly new, but its prevalence in 2014 led financial crime analysts, investigators and law enforcement agencies to conclude that TBML’s use in a wide variety of financial crime schemes is on the rise. In the US, a multi-agency raid of the Los Angeles “fashion district” in 2014 exposed how Mexican cartels used the retail industry to funnel hundreds of millions in proceeds from drug sales, extortion and kidnapping across the US-Mexico border.

Worldwide, other nations scrutinized TBML as a means to move funds tied to political corruption, tax evasion, terrorist financing and human trafficking. India has launched a nascent crackdown on TBML as part of its strategy against “black money,” or the proceeds of corruption and tax evasion that are leaving the country. Turkish officials also expressed concerns that TBML was being used in the country as a means to move funds for terrorist organizations. In a report released earlier this year, advocacy group Global Financial Integrity estimated that of the $991 billion in illicit funds that flowed out of developing countries in 2012, a staggering 78% moved through TBML.

The resurgence of TBML has led to calls for sectors outside the financial industry, such as retail and import/export, to augment their policies and procedures against financial crime. While the problem is widely recognized, solutions are harder to come by. Efforts to detect and prevent TBML remain hampered by a lack of data and standardization on the pricing of goods and the sheer volume of international trade, among other factors. For now, TBML is thriving as a conduit for dirty money of all types, and is very likely to remain a challenge for investigators and compliance professionals in the coming year.

Read more here:

FinCEN order targeting LA’s fashion district may prod institutions to review trade-based money laundering defenses

LA raid on narco money laundering shows proliferation of TBML

Trade-based money laundering, lack of transparency fuel surge in Brazil’s illicit financial flight

A regulatory push for individual accountability put compliance professionals in the crosshairs

Spurred on by public outcry and political pressure, regulators in the US, UK and other nations deployed tougher enforcement tactics in financial crime cases over the past year, targeting individual employees along with institutions and businesses. Individual accountability was a recurring theme in enforcement actions in 2014, and in several cases it was professionals in compliance roles who found themselves in the crosshairs.

In February, FINRA imposed a $25,000 monetary penalty on the former AML program director of Brown Brothers Harriman, one of the largest investment banks in the US. A few months later, French financial giant BNP Paribas would enter into a plea agreement with US enforcement agencies for violating US sanctions, paying an $8.9 billion penalty and consenting to fire 13 senior managers, including the bank’s former head of compliance and ethics for North America. In December, the US Financial Crimes Enforcement Network imposed a landmark $1 million civil penalty on the former chief compliance officer for MoneyGram for failing to prevent millions in fraudulent transactions from flowing through the money services business.

That same month, the New York Department of Financial Services insisted on firings and bans of employees of Bank Leumi as part of a $400 million settlement with the Israeli institution over tax evasion charges. Meanwhile, UK regulators have brought charges and imposed monetary penalties on a number of executives and traders allegedly involved in rigging the Libor and foreign currency exchange rates.

The drive to hold individuals accountable in a wide range of financial crime cases seems likely to continue, if not intensify, in the coming year. This has led some compliance professionals to voice concerns that increased individual liability will discourage qualified candidates from entering the compliance field, despite a robust compliance job market and increasing salaries.

Read more here:

Personal liability of compliance officers now a permanent occupational risk, cases show

BNP Paribas case sheds light on rising liability for compliance roles, and renews debate on enforcement tactics

The rise of ISIS and the Arab Bank case increased global risks tied to terrorist financing

The rise of the Islamic State of Iraq and Syria (ISIS) in the year 2014 renewed global concerns over the funding channels and changing techniques used by terrorist organizations. Accruing a sum of approximately $2 million a day during the height of its power, ISIS became one of the most lucrative terrorist groups in the world. The rise of ISIS led other nations to question how the group was garnering and moving its funds, and whether law enforcement and the financial services sector were even capable of cutting off its diversified funding streams that range from oil sales, to bank robberies, to overseas donations.

ISIS, along with other jihadi organizations, also proved adept at using the cyber-landscape to its advantage, soliciting funds on its own web outlets and social media. In response, many financial institutions have expanded their compliance programs to adopt better counter terrorist financing measures, including more robust due diligence, screening and onboarding procedures.

2014 also saw a landmark court decision that increased liability for financial institutions tied to terrorist financing. For the first time, a financial institution was held accountable for helping facilitate a terrorist attack in a civil suit in New York. Arab Bank was found liable of violating the US Anti-Terrorism Act for opening and maintaining accounts that facilitated jihadist attacks by Hamas terrorists in the 2000s. This legal outcome is unprecedented and augments compliance burdens for financial institutions, particularly in high-risk regions.

Read more here:

Explosion of ISIS funding has institutions wary over illicit flows abroad and supporters at home

The expensive business of terrorism: economist Loretta Napoleoni tracks down ISIS funds

National intelligence agencies wary of cyberterrorism as ISIS builds a “digital caliphate”


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