Financial Crime

Issue 1168 / 14 July 2022

European Central Bank

Using AI to fight financial crime - ECB publishes speech - 13 July 2022

The European Central Bank (ECB) has published a speech by Elizabeth McCaul, Member of the Supervisory Board of the ECB, on the use of artificial intelligence (AI) to fight financial crime. Overall, Ms McCaul judges that any technological solution needs to be buttressed by three pillars: an appropriate regulatory framework; sufficient supervisory oversight; and a deep understanding by banks and supervisors of the potential, and the limitations and risks, of new technologies.

In the speech, Ms McCaul discusses the interaction between digitalisation and anti-money laundering (AML) and countering the financing of terrorism (CFT), highlighting challenges posed by the digital transformation of business models, including that:

  • some companies, in particular digital platforms or mixed activity groups, may not be fully captured by the regulatory framework and fall outside the scope of AML legislation;
  • certain new entrants, such as some FinTech companies, have an insufficient understanding of their AML/CFT obligations and suffer from structural weaknesses in their customer due diligence and know-your-customer frameworks; and
  • there may be AML/CFT challenges inherent to the business models of some new entrants, such as in deploying new payment processing methods that don’t use traditional identification information.

Ms McCaul highlights that the potential of AI in banking goes beyond AML and CFT, noting that many banks already use it for credit scoring, algorithmic trading, robo-advice or chatbots. She cautions that two of the most important challenges for AI are transparency and explainability, and concludes that particular attention must be paid to the programming of AI, its governance and quality assurance or backtesting.

ECB speech by Elizabeth McCaul: Technology is neither good nor bad, but humans make it so

HM Treasury

The Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 2) Regulations 2022 - Statutory instrument and explanatory memorandum published - 12 July 2022

The Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 2) Regulations 2022 (the Regulations) have been published, together with an explanatory memorandum.

The Regulations amend the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLRs) by substituting the list of high-risk third countries (in respect of which extra customer due diligence measures must be taken) in Schedule 3ZA of the MLRs for a new list which aligns with that of the Financial Action Task Force (FATF).

In the new list Malta has been removed and Gibraltar is now classed as a high-risk third country. The complete list of high-risk third countries in Schedule 3ZA of the MLRs is as follows: Albania, Barbados, Burkina Faso, Cambodia, Cayman Islands, Democratic People’s Republic of Korea, Gibraltar, Haiti, Iran, Jamaica, Jordan, Mali, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Philippines, Senegal, South Sudan, Syria, Turkey, Uganda, United Arab Emirates, and Yemen.

The Regulations came into force on 12 July 2022.

The Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 2) Regulations 2022

Explanatory memorandum

Webpage

HM Treasury and The National Crime Agency

Russian invasion of Ukraine - NECC publishes red alert on financial sanctions evasion - 12 July 2022

The National Economic Crime Centre (NECC) has published a red alert which provides information on common techniques used by designated persons and their UK enablers to evade financial sanctions (the Alert). The NECC observes that, while this behaviour has generally occurred prior to sanctions being imposed on the designated person, it is also happening shortly afterwards.

The Alert explains that designated persons are using associates, including family members and close contacts, via enablers (defined as ‘individuals or businesses facilitating sanctions evasion and associated money laundering’, which includes lawyers, estate agents and auction houses) to:

  • transfer assets, such as shareholdings in holding companies, to trusted proxies such relatives or employees;
  • sell or transfer assets at a loss to realise their value before sanctions take effect; and
  • divest investments to ensure ownership stakes are below the 50% threshold, or relinquishing previous controlling stakes.

Among other things, the Alert sets out the relevant sanctions evasion offences and indicators of sanctions evasion, and details the threat response from the National Crime Agency (NCA) and Office of Financial Sanctions Implementation (OFSI).

Red Alert: Financial Sanctions Evasion Typologies: Russian Elites and Enablers

Financial Conduct Authority

Russian invasion of Ukraine - Treasury Committee publishes FCA letter on sanctions - 11 July 2022

The House of Commons Treasury Committee (the Committee) has published a letter (dated 4 July 2022) sent from the FCA responding to the Committee’s questions regarding the FCA’s financial sanctions responsibilities in light of the Russian invasion of Ukraine. Key takeaways from the letter include:

  • the FCA has not been made aware of material deficiencies in firms’ sanctions systems and controls, and has not identified any difference in the adequacy of firms’ sanctions controls based on their size or sector;
  • having given firms a reasonable period to respond to the recent Russia sanctions, and having set out its expectations, the FCA has now increased its assessment work on sanctions controls to proactively test compliance;
  • the FCA and OFSI have a memorandum of understanding and regularly share information on specific breaches cases; and
  • the FCA recognises that there are risks that cryptoassets could be used to circumvent sanctions, but highlights that the risks are much lower in FCA registered cryptoasset firms.

FCA letter: Treasury Committee’s Inquiry on Russia: Effective Economic Sanctions