Berlin Risk joined ACAMS 15thAnnual Anti-Financial Crime Conference as an exhibitor, sponsor and speaker at the Berlin conference in June 2019. The conference kicked off with the keynote address of Alexandra Jour-Schroeder, acting deputy director-general of DG Justice and Consumers in the European Commission who underlined the Commission’s commitment to strengthening the EU’s AML regulatory framework. In particular the controversial blacklist of non-EU jurisdictions was discussed.
Regulatory trends
The director of Editorial Content at ACAMS, Kieran Beer, moderated the first regulatory roundtable which reflected upon the latest AML trends in Europe. Beyond the challenges linked to the implementation of the EU’s Fifth Anti-Money Laundering Directive (5AMLD), which needs to be transposed into domestic law by EU member states until January 2020, the potential impact of a future Sixth Anti-Money Laundering Directive (6AMLD) was addressed.
Different from a common perception, the EU Directive on combating money laundering by criminal law, adopted in October 2018, is not an amendment to the 5th EU AMLD, and thus not the 6th EU AMLD, but a distinct EU regulatory instrument, meant to complement and reinforce the application of the existing framework set by the AML Directives. The Criminal Law Directive must be implemented by the EU member states by December 2020 and establishes minimum rules for criminal liability for money laundering by, among other things, (1) harmonising the definition of money laundering and predicate offences, (2) imposing minimum sanctions and (3) extending criminal liability to legal persons.
A piece of regulation under further scrutiny was the upcoming FATF AML Standards for Cryptocurrencies. The FATF already announced in February 2019 that it had set out more detailed implementation requirements for effective regulation and supervision/monitoring of virtual asset services providers through a new Interpretive Note. Article 1 of the proposed draft clarifies that “for the purposes of applying the FATF Recommendations, countries should consider virtual assets as “property,” “proceeds,” “funds”, “funds or other assets,” or other “corresponding value”. Countries should apply the relevant measures under the FATF Recommendations to virtual assets and virtual asset service providers (VASPs).
EU versus US sanctions
The current discrepancy between the US and the European approach to Iran sanctions was underlined during the discussion moderated by Tom Keatinge, the director of the Centre for Financial Crime & Security Studies at the Royal United Services Institute in the UK (RUSI). The panel addressed the European response to US sanctions. Firstly, in August 2018, the EU Commission announced that an updated version of the so-called Blocking Statute in support of Iran nuclear deal had entered into force. The update to the regulation relates to the extraterritorial sanctions which the US had re-imposed on Iran in May 2018. According to the EU press release, “the Blocking Statute allows EU operators to recover damages arising from US extraterritorial sanctions from the persons causing them and nullifies the effect in the EU of any foreign court rulings based on them. It also forbids EU persons from complying with those sanctions, unless exceptionally authorised to do so by the Commission in case non-compliance seriously damages their interests or the interests of the Union.”
Secondly, France, Germany and the UK established the so-called Instrument in Support of Trade Exchanges (INSTEX) in January 2019. This is a new channel for non-dollar trade with Iran. INSTEX was meant to bypass US sanctions by enabling transactions with Iran given that SWIFT, the main international payment system had decided to remove Iranian banks from its network due to pressure from Washington. The panel questioned the effectiveness of the EU’s countermeasures. Moreover, US experts claimed that enforcement for banks was there to stay, and that a potential broadening of the scope of sanctions could eventually include additional industries. Finally, because sanctions misalignment is a strategic threat, the individual cases should be escalated to senior management, in addition to raising the shareholders’ awareness of the risks. An in-depth due diligence investigation is a must when dealing with such cases.
Non-financial sector
A panel focused on the non-financial sector including trust and company service providers as well as the diamond industry and the real estate sector, discussed the customers risk exposure resulting from PEPs and corrupt practices as well as the risks linked to these non-financial products risks (anonymity, opacity, layering of beneficial ownership, and nominee shareholding). KYC best practices and industry initiatives were presented.
Despite being a heavily regulated industry, a series of risks face the diamond sector in particular due to the supply chain risks linked to high-risk countries. In order to mitigate the risks in the sector, FIs that consider onboarding Belgian diamond companies should begin by making sure the companies are officially registered. Moreover, diamond traders should submit their yearly AML report to authorities in order to prove AML compliance. The Antwerp World Diamond Center (AWDC) is the sector body and it should be contacted for background information on companies. According to expert advice, every diamond transaction should be documented with detailed invoice, with a Kimberley Process (KP) certificate (for rough diamonds), and with a contract when it involves a complex transaction. If question marks remain then an in-depth investigation should be undertaken.
With regard to the real estate sector, transactions from high-risk countries and the concealment of ultimate beneficial ownership as well as links to PEPs were identified as key risk factors.
Managing high-risk clients
Berlin Risk’s managing director, Jennifer Hanley-Giersch, took part as a panellist discussing the management of high risk customers, what risk assessment models are available specifically for identifying high risk clients and what level of investigation is necessary in order to manage reputational risk exposure effectively.
Managing high risk clients poses one of the greatest challenges to organizations, both in terms of their regulatory and legal exposure, but also reputationally. With high risk clients it is not sufficient to identify the UBO, as that might not serve to mitigate the risk appropriately. It is important to have an in-depth understanding of who the customer is, including countries of operations,wider business interests networks and political associations, as the transition from medium risk to high risk is often fluid.
The rating methodology for high-risk customers should follow a carefully crafted and balanced approach. It must be sufficiently granular, whilst also being manageable at the same time and it should also be in line with the organisation’s overall risk appetite and risk tolerance.
Berlin Risk’s takes a differentiated approach to enhanced due diligence and assessing the risk attached to high-risk customers, aiming to support the development of more tailored risk mitigation measures. Various Anti-Financial Crime RegTech solutions, depending on data availability and quality, may offer a starting point. However, dealing with high risk clients requires sharp analysis, in-depth knowledge of the countries, sectors, political and business networks, including local expertise and advanced judgment skills in order to provide the level of insight necessary to support sound strategic decisions.