Last year saw a seismic shift in the regulatory world. Sentinels has released a report on how AML shaped the world in 2022. It explores the most impactful moments of the year towards AML and what companies had to navigate.
The first, and most influential moment of 2022, was Russia’s invasion of Ukraine. This kickstarted an unprecedented level of economic warfare through sanctions. The West used finance to cripple the Russian economy, with major economic sanctions and export controls to try and weaken Russia’s ability to finance the war. Targets of the sanctions included Russian leaders, billionaires and pre-Kremlin insiders.
A consequence of the conflict and sanctions was that many businesses exited the country or restricted their own engagement in the country. Over 1,000 foreign firms left Russia and many other companies either suspended or terminated business with Russian clients or those doing business in Russia.
The report said, “One of the many repercussions on anti-money laundering programs from Russia-related sanctions is the additional challenge of knowing who their companies are doing business with.
“The ongoing use of offshore or opaque jurisdictions to hide illicit wealth is an important obstacle for private companies expected to enforce sanctions. Consequently, a dramatic event like the manifold sanctions on Russia compel companies with exposure to refresh their AML risk assessments and re-examine their risk-based due diligence protocols.”
Ultimate Beneficial Ownership (UBO) issues
In November 2022, the European Court of Justice (CJEU) invalidated provisions of the EU anti-money laundering directives (AMLD) that extended the right to access beneficial ownership information to any member of the general public, with no requirement to demonstrate a legitimate interest.
This meant public access to the UBO was suspended in several member states. This prevented NGOs fighting for corporate transparency and journalises tracing illicit financial flows by revealing true owners of companies from continuing their operations. Sentinels added, “It also goes against 6AMLD, which imposes stricter requirements on companies to identify hidden beneficial ownership.”
IT added that the UBO registers were already in a poor state. Pointing to World Bank data that claims only 64 economies, out of 194, have a legal framework in place for collecting UBO information. “Not only does this demonstrate an ongoing failure of EU countries to comply with the 6AMLD, but an overall insufficient harmonisation which ultimately hampers firms’ financial safety.”
The cause of this, according to Sentinels, is the complexity of SML rules, which are time-consuming and costly. Also, member states differ in how they implement AMLDs, making it tough for companies that operate across jurisdictions to ensure full compliance.
Issues in the world of crypto
Regulators have increasingly looked to bring regulation to crypto and 2022 was no different. The European Council agreed on a set of crypto regulations to oversee the activities of virtual assets, the most comprehensive of any jurisdiction to date. This involved two core components, the Transfer of Funds Regulation (TFR), and the EU’s Markets in Crypto-Assets (MiCA) framework.
MiCA will bring protections for investors, as well as rules for market participants related to crypto asset-related risks. TFR enforces the Travel Rule in crypto. It will require financial institutions involved with crypto transactions to exchange relevant beneficiary and originator KYC information in the context of investigations for money laundering or terrorist financing.
Sentinels posed the question, “How ready is the industry to comply with new regulations, such as the new Travel Rule? If the infrastructure required to maintain compliance raises operational expenses, a shadow network of exchanges where assets are traded beyond the purview of authorities may develop.”
The challenge of complying to these regulations can already be felt. Sentinels explained that many are struggling to meet the requirements of the Travel Rule due to legal uncertainty and a lack of technical resources.
Drugs and Illegal Wildlife Trade (IWT)
One of the surprising developments to AML in 2022 was the opioid epidemic, which brought drug trafficking back to the forefront of AML compliance programs, it said. In the 12 month period ending March 2022, the crisis resulted in over 109,000 deaths by overdose.
Synthetic opioid trafficking involves major transnational organised crime groups, Sentinels explained, who move illicit proceeds through inter-alia, bulk cash smuggling, trade-based money laundering and wire transfers.
Digital assets are also used as a means of payment and laundering for narcotics, such as synthetic opioids, which are often marketed on dark web vendor sites, it said. Pointing to a report in November 2022 from the Financial Action Task Force found that money laundering from fentanyl and synthetic opioids is not understood by many authorities.
This report offered recommendations for strengthened measures and risk indicators for operational authorities. Additionally, AML functions started to be used in 2022 to combat the epidemic from infiltrating the financial system.
It said, “Given that the placement stage of the money laundering process makes the underlying predicate offences difficult to determine, compliance staff need to be vigilant of broader risk indicators that may help them identify money laundering schemes associated with drug-related trafficking.
“Robust risk-based due diligence and KYC procedures along with fine-tuned AML transaction monitoring systems, are tools designed to provide guidance to financial institutions in identifying when transactions appear out of pattern for a customer or business.”
Alongside drugs, another major development in AML was the uptick in enforcement activity around Illegal Wildlife Trade (IWT). Sentinels stated that IWT is the fourth most lucrative financial crime globally and is inherently linked to other forms of financial crime, including money laundering.
Environmental crime was a predicate offence in 6AMLD, and while there lacks a standard for combating IWT, real action is starting to take place. An example of this is the Thunder operation from INTERPOL and World Customs Organisation, which resulted in the seizure of IWT items, including nine pangolins and 389kg pangolin scales and derivatives, it has identified 141 companies suspected of engaging in illegal sales.
What does this mean for the regulatory landscape?
Sentinels concluded, “We expect that 2022 will be remembered as a watershed year for the compliance function in a number of areas, including how global sanctions are employed as well as a renewed commitment from governments and societies in the fight against corruption.
“Companies overcoming the challenges of complying with sanctions presents an opportunity to improve corporate data and encourage greater transparency, which will drive greater accountability in the corporate environment.”
Read the full report here.
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