7 Industry Trends From 2019 Impacting Financial Crime Compliance in 2020 (Pt. 2)

FTI Consulting

[co-author: Matt Naletilic]

From aggressive use of sanctions employed as a foreign policy tool to shifting attention to entities outside the banking sector, several developments observed last year continue to shape the financial crime compliance landscape in 2020. Here, in the second of two articles, are important trends that compliance professionals can expect.

As we enter Q2, we are gaining better insight into how the global compliance landscape has changed based on major news events of 2019 that affected the financial industry and Q1 trends. Here, in a continuation of a two part series, are insights financial crime compliance professionals will want to be aware of in Q2 2020 and beyond.

4. Increased Attention on Those Outside of the Banking Sector

Banks continue to bear the brunt of it, but increasingly, non-bank institutions ended up getting caught in the supervisory crosshairs in 2019. Here’s how we saw it play out:

• Multimillion-dollar fines were issued to money remitters, casinos/gaming entities and other designated non-financial businesses and professions (DNFBPs), such as estate agents.
• Non-monetary enforcement actions were taken against fintech players in Australia that had previously flown under the radar
• The Financial Action Task Force (FATF) evaluations continuously highlighted the DNFBP sector as an Achilles’ heel of countries’ anti-money laundering (AML) and countering finance of terrorism (CFT) regimes. Shortcomings were found in the areas of risk understanding, execution of customer due diligence (CDD) measures, reporting of suspicious transactions and quality of supervision.

Here’s what to expect in the remainder of 2020:

• New players in the digital space will add a new dimension to the risk, as they continue to rely on remote onboarding of customers and deploy new tech-driven products and services.
• New players will capture the growing volumes of transactions with a weak understanding of their regulatory obligations and their deficient compliance culture.
• One big blowup is all that is needed to move the attention needle, and we feel the time is ripe for a shakeup.

How to respond: Newly regulated businesses should deepen understanding and awareness of the risks they are facing, starting with the comprehensive financial crime risk assessment. In addition, the low level of reporting raises concerns, given the size and risk profile of the sector, and warrants further strengthening of the transaction monitoring controls to ensure timely reporting of suspicious activities.

5. Using Technology to Rein in the Cost

The overall cost of compliance continued to weigh on the bottom line as profits slumped and costs soared. What impact did they have on the 2019 season?

• According to some estimates, tier 1 banks individually spent approximately $1 billion on compliance-related matters last year. That’s $270 billion industry-wide, with 10 percent to 15 percent of their headcount allocated to the compliance function.
• Despite widespread dramatic cost cuts and layoffs in the past years, the levels of compliance staff haven’t budged. Moreover, they have grown.
• The costs of compliance failures have proven to be even more excruciating. Penalties aside, banks have seen billions of dollars of market value erased in a matter of a few days, the imposition of tougher capital requirements and increase in operating expenses measured in hundreds of millions of dollars to cover the cost of litigation, remediation and ongoing monitoring.
• Estimates have shown that the reputational cost of noncompliance is around nine times greater than any resulting fine.

Here’s what to expect in the remainder of 2020:

• Companies that have gone past the remediation of legacy issues and invested heavily in Research and Development (R&D) — as well as tech-driven transformation of their risk management programs — will start seeing a return on investment, primarily through a reduction in the cost of labor over the long term.
• The gap between the “tech-haves” and “tech-have-nots” will continue to widen, resulting in significant pressure at the executive level of the latter to manage the rising cost. However, this will not come at the expense of effectively managing regulatory risk.

How to respond: To meet heightened expectations in terms of efficiency and desired risk outcomes, organizations have to (re)design their risk management programs, basing them on risk-based, tech-enabled and data-informed principles.

6. Greater Collaboration Between the Public and Private Sectors

Private-public partnerships (PPPs) proved they could disrupt the illicit flow of funds and safeguard financial systems from criminal abuse. Here’s where they made their case in 2019:

• Initiatives such as Fintel Alliance in Australia, AML/CFT Industry Partnership (ACIP) in Singapore, Fraud & Money Laundering Intelligence Taskforce in Hong Kong and recently launched PPP in Malaysia combined the expertise and skills of government intelligence and law enforcement agencies with private sector businesses.
• Their achievements in the fight against financial crime were mixed. The most notable ones include the promotion of data analytics in AML/CFT, and detecting suspicious activities related to the sexual exploration of children.

PPP is a step in the right direction when it comes to responding to the modern nature of the financial crime, but the overall impression remains that more could have and still should be done, particularly in Hong Kong.

Here’s what to expect in the remainder of 2020:

• Other countries will jump on the wagon by establishing similar initiatives. Success will depend on the government support that is vital to the success of such coalitions, key impediments being the lack of adequate funding, staffing and legal reforms addressing the barriers to information sharing and exchange.

How to respond: The measure of success of private-public partnerships should be their effectiveness in creating vital intelligence that leads to arrests and disruptions of serious crime group operations, as well as the seizure or restraint of illicit funds.

7. Use of Sanctions as a Foreign Policy Tool

Penalties for sanctions violations have hit a decade high at a time when the U.S. administration is increasingly using them as a substitute for foreign policy rather than a tool. In the past year:

• The Office of Foreign Assets Control (OFAC) has reached 26 settlements worth $1.3 billion in total. Reinforced by the dominance of the U.S. dollar in the global trade, this is a stark comparison to just seven settlements and $71 million in 2018.
• Last year’s enforcement trend reflected a broadening range and diversity of sanction programs; meanwhile, the Specially Designated Nationals (SDN) list continued to swell with new additions. It now runs over 1,200 pages.
• Banks’ share in the overall population of penalized companies kept steadily decreasing as the focus moved to non-banks and corporations outside of traditional financial services realms. These include household names such as Western Union, Apple and Expedia. Finally, the U.S. government’s pushing the limits of its jurisdiction in the case against three major Chinese banks — under threat of cutting their access to the U.S. financial system — reverberated in professional and legal circles long after they’d been held in contempt of court for failing to provide information in relation to the North Korea probe.

Here’s what to expect in the remainder of 2020:

• The UK’s exit from the EU provides it with the opportunity to impose autonomous sanctions. The result could be even greater divergence and complexity of the global sanctions regime, which would increase challenges and costs for the companies looking to stay on the right side of the law.

How to respond: Firms should have in place a formal sanctions compliance program that is risk based and continuously evolving. At the same time, they should be proactively assessing their susceptibility to the most common root causes of sanctions violations, such as inadequate settings of the sanctions screening tool.

As financial crimes become increasingly complex and sophisticated, it is critical for financial institutions to take charge — from reviewing emerging threat areas and ensuring compliance with stricter regulatory requirements to identifying breakthrough technologies — in order to win the war against financial crimes.

The changes to the financial compliance landscape and beyond based on 2019 events have been extensive. To learn how new regulations and record-breaking fines will affect the remanider of 2020, read the first article in our series here.

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FTI Consulting

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