The Top Four AML Issues of 2014 – Beneficial owners, FATCA, and more of the new year’s challenges

Just under 25 years ago, the field of anti-money laundering was launched into the global spotlight with the founding of the Financial Action Task Force, or FATF, in 1989. In creating the FATF, the heads of the G7 nations, the world’s most powerful countries and largest economies at the time, recognized money laundering as a global issue that required a global response.

Much has changed over the past two and a half decades, with a rules-based approach to AML transforming into a risk-based one, and financial institutions facing an increasingly complex compliance landscape. Yet money laundering remains a worldwide threat, and efforts to combat it are more globalized than ever.

For financial institutions, the constantly evolving battle with money launderers translates to new challenges for AML programs. Looking ahead to the new year, ACFCS poses the top four AML issues facing the private and public sectors in 2014.

4. Hunting beneficial owners, and preparing for new regulations           

Pinning down the beneficial owners behind accounts, corporations, trusts and other legal entities has long been a thorn in the side of AML and KYC programs. As financial criminals increasingly rely on complex corporate structures to conceal their identities, the challenges have only grown in recent years.

In 2014, regulators and international bodies are set to impose new rules and guidance that will ratchet up the pressure on institutions’ efforts to identify and verify beneficial owners.

The push for tighter standards on beneficial ownership can be traced in part to the FATF’s revised 40 Recommendations in 2012. The Recommendations highlighted the need for regulations requiring disclosure of beneficial owners of corporations and other legal entities. Lately the FATF has been prodding national governments to act on that guidance, announcing that its latest round of country evaluations will emphasize beneficial ownership rules and transparency in corporate structures. Evaluations start this month, and continue into 2014.

Governments worldwide have responded. In the US, the Financial Crimes Enforcement Network (FinCEN) caused a great deal of consternation last year with an “advanced notice of proposed rulemaking” on customer due diligence at US financial institutions. Among other measures, the proposed rule would require institutions to identify beneficial owners of accounts down to a 20% ownership stake during initial due diligence.

After packed public hearings and hundreds of comment letters, FinCEN has gone quiet on when the proposed rule would become an actual regulation. However, in an interview ACFCS conducted earlier this year, FinCEN director Jennifer Shasky Calvery stated the beneficial owner rule was still very much in progress. It is likely in the pipeline for 2014.

Also on the horizon for 2014 is the European Union’s 4th Money Laundering Directive, which was issued in proposed form earlier this year. The updated Directive would require companies and legal entities to maintain records on their beneficial owners, and make them available to financial institutions or other persons conducting due diligence.

The United Kingdom plans on going a step further in 2014. In July of this year, it issued proposed rules to create a central registry of “ultimate beneficial owners” of legal entities.

While these new regulations and requirements may create short-term headaches for financial institutions, they will likely ease difficulties in tracking down beneficial owners over the long run. Institutions are typically hamstrung by a lack of available information on beneficial owners of legal entities. If new rules are successful in changing that reality, 2014 could be the year beneficial ownership identification transitions from a challenge to a routine part of due diligence.

3. Big spending, and big expectations

If surveys and announcements of budget increases by global financial institutions are to be believed, 2014 will be a year of serious spending on AML compliance. The embattled banking giant JPMorgan Chase may be the highest-profile example, after it publicized plans to spend an additional $1.5 billion on risk management and compliance in the new year.

According to a survey from consulting firm WealthInsight, spending on AML programs internationally has grown steadily over the past five years, from $3.6 billion in 2008 to over $6 billion in 2013. This trend is expected to increase exponentially in 2014.

Another survey of more than 300 senior compliance officers and executives in North America, conducted by Veris Consulting, found 66% of respondents reporting an increase in their AML and sanctions compliance costs. Sixty-one percent stated they planned on adding more staff over the next year.

Despite greater spending and more staffing, however, few institutions seem to feel their AML programs have adequate resources. In a number of surveys conducted over 2013, almost all compliance officers felt that regulatory expectations had increased, and expected intense regulatory scrutiny to continue in 2014.

Moreover, expectations from internal stakeholders are also on the rise. The Veris survey found that 61% of compliance officers experienced greater involvement from their institution’s board of directors in the AML program. The end result may be greater strain on AML teams, despite more funds coming their way.

2. FATCA finally arrives, as AML meets tax evasion

After delays and controversy, the first provisions of the long-awaited Foreign Account Tax Compliance Act (FATCA) will finally come into effect in 2014. AML programs at many US and non-US institutions are already feeling the effects of this sweeping US tax evasion and financial account reporting dragnet, but their role in FATCA compliance is likely to increase in 2014.

In general, FATCA requires non-US financial institutions to identify accounts they hold for US persons, and report information on those accounts to the US Internal Revenue Service. To enforce compliance, FATCA imposes a 30% withholding tax on US-source payments made to accounts or non-US institutions that fail to report.

What part AML will play in these requirements depends largely on how an institution decides to structure its FATCA compliance program — a subject of much confusion at many institutions. Whatever the approach, AML programs are often being asked to support FATCA-related data collection processes. AML and KYC departments often house the customer information needed to determine a customer’s FATCA status, and can also provide tools to help monitor that status on an ongoing basis.

Additionally, anecdotal evidence suggests that many AML compliance executives are participating or even leading the committees tasked with building the FATCA program at both US and non-US institutions.

While this focus on FATCA inevitably pulls resources away from core AML functions, some institutions are hoping for silver linings. The increased customer information collected and aggregated as part of FATCA compliance may help institutions to form a more accurate view of customers and better risk rating in the new year.

1. The FATF wants results on money laundering, not just rules 

In February of this year, the FATF announced a major shift in their methodology for assessing the effectiveness of a country’s AML program. Rather than focusing on the laws and regulations a country has on the books, the international body will be scrutinizing the results of that legal framework.

This pivot from “technical compliance” to effectiveness has consequences for both the public and private sectors. For governments, it now means the FATF will be probing the performance of regulators and law enforcement, examining, for example, a country’s track record of money laundering prosecutions and convictions.

For financial institutions, FATF executives have explicitly stated they will be looking for performance metrics as well, such as how effectively institutions are complying with suspicious activity and transaction reporting regimes. This will be old news to many institutions, who have dealt with such expectations from government regulators for decades.

However, pressure on national governments and regulatory agencies has a tendency to “trickle down” to the financial institution level. The forecast for 2014, therefore, is likely to involve greater scrutiny of AML reporting at financial institutions.

ACFCS will provide expert training on the latest challenges and emerging risks in the AML field, including beneficial ownership and FATCA, at the 2014 Financial Crime Conference, February 5 – 7 at the Marriott Marquis in New York. For more information and to register, visit www.financialcrimeconference.com