Understanding Recent AML Regulatory Changes in Asia Pacific

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1 Co-organizer: Understanding Recent AML Regulatory Changes in Asia Pacific Presenter: Justin Baldacchino Head of Compliance and Risk Governance, Asia National Australia Bank 1 February 2013 Asia Full Day Seminars 1 Asia Pacific Region - 1

2 Meeting the demands of the new Hong Kong AML-CTF Ordinance The Number of Demands: 2

3 Meeting the demands of the new Hong Kong AML-CTF Ordinance Background: Following an evaluation of Hong Kong in 2008, the Financial Action Task Force ("FATF") identified deficiencies in the Hong Kong anti-money laundering ("AML") and counter-terrorist financing ("CTF") regime. The customer due diligence ("CDD") and recordkeeping requirements for financial institutions ("FI") did not have statutory backing (i.e., the guidelines were not sufficient for FATF purposes); The financial regulatory authorities lacked supervisory and enforcement powers; There were no criminal sanctions or supervisory sanctions to deal with cases of non-compliance; and Remittance agents and money changers were not subject to a regulatory regime. 3

4 Meeting the demands of the new Hong Kong AML-CTF Ordinance Today: Hong Kong's new anti-money laundering (AML) statute was introduced on 1 April The new ordinance consolidated the territory's existing AML laws and regulations into one comprehensive piece of legislation. The statute applies to the financial services sector, and also to designated non-financial business and professions. Specifically, it applies to banking, deposit-taking, securities, insurance, remittance agents and money changers. The new ordinance did not alter the territory's suspicious transaction reporting (STR) requirements. The AMLO has codified existing customer due diligence (CDD) and record-keeping requirements; empowered the relevant regulators with supervisory authority; and provided supervisory and criminal sanctions. The new law has now imposed basic CDD for all financial institutions, and legal sanctions for CDD breaches have increased institutional risks. The AMLO has broken new ground because, for the first time, remittance agencies and money changing services will be regulated by the city's Customs and Excise Department 4

5 Meeting the demands of the new Hong Kong AML-CTF Ordinance STEP ONE: Customer Due Diligence The Guidelines list the steps that should be taken when carrying out CDD and provide examples of relevant information that should be obtained, including identifying and verifying the identity of customers, beneficial owners in relation to customers, and persons acting on behalf of customers (e.g., authorized account signatories and attorneys). As part of the verification process, the performance of a company search for companies incorporated in Hong Kong is mandatory. Continuous Monitoring The Guidelines set out the different aspects of the business relationship that may be considered, and FIs are expected to adopt a risk-based approach to such monitoring, depending on the risk profile of the customer. Suspicious Transaction Reports The Guidelines provide comprehensive guidance in relation to the identification and reporting of suspicious transactions, setting out the general principles that apply once knowledge or suspicion has been formed. 5

6 Meeting the demands of the new Hong Kong AML-CTF Ordinance STEP TWO: Pre-existing Customers FIs must consider if any action needs to be taken in relation to their existing customers with whom the business relationship had been established before the AMLO came into effect. Staff Training A clear and well articulated AML/CTF training policy should be implemented and FIs are expected to monitor the effectiveness of staff training. This should be specific to what the staff needs to carry out their particular roles within the FI with respect to AML/ CTF, with a focus on training new staff prior to their commencing work. Criminal Charges and Civil Sanctions The AMLO gives focus to the AML/CTF regulatory regime by introducing criminal charges or civil sanctions for non-compliance with requirements imposed under the AMLO. Conclusion The AMLO and the Guidelines will function alongside existing AML legislation and are intended to fortify the current AML/CTF regulatory regime. 6

7 Meeting the demands of the new Hong Kong AML-CTF Ordinance Re-focus on what is done now but do it better: 7

8 Adhering to AML regulatory shifts in SG, India and the Philippines Singapore: The Monetary Authority of Singapore ( MAS ) is heavily involved in regulating money laundering in Singapore, especially in the context of financial institutions. It works closely with the Financial Action Task Force ( FATF ). Given that the MAS regularly issues guidelines, notices and regulations that are indirectly Enforceable will mean that adhering to these regulatory shifts will see institution requiring the time and money to ensure regulatory requirements are managed. It is important that institutions keep in close contact with their MAS relationship team to ensure that the maximum amount of time is provided to institutions to meet shifts in the AML landscape. Also it is important that institutions take up involvement in any industry consultations and to ensure that senior management and the business is made aware of up and coming AML requirements. In late October 2011, Singapore set out to criminalise the money-laundering of proceeds from tax offences. The MAS conducted a public consultation before proceeding with the expected policy changes comments were requested by the MAS on 9 December This will see MAS considering imposing harsher penalties on existing money laundering offences. 8

9 Anticipating AML regulatory shifts in SG, India and the Philippines India: India s Intention is to become a full member of the Financial Action Task Force (FATF) Unlike relatively mature regulatory countries, Indian AML regulations do not place stringent compliance requirements on banks. Indian banks are yet to come up the curve in compliance with global AML standards and hence this limits their business expansion in these economies. In Anticipating and adhering to the regulatory shifts it will require Indian Banks to focus on issues such as: 1. Legacy data sourcing issues, migration of KYC data from physical account opening forms to the newly established electronic systems. This is, however, in contrast to the situation faced by the private sector and foreign banks. 2. Indian Banks need to optimise there ability to transaction monitor. Better scenario design with statistically validated thresholds is required to be focused on and in general taking the next step to automate Processes. The Industry lacks adequate number of skilled and certified AML professionals. The workforce is a big operational challenge. Improper allocation of training budgets and poaching of skilled staff is an issue in anticipating these regulatory challenges.implementation is the biggest challenge in AML. Designing and executing an effective implementation program remains the biggest impediment to success. AML spend is a huge issue with the focus on cost cutting being a major issue in Given recent fines in the industry senior management need to focus on and ensure that appropriate spend is allocated for AML program s. The industry has witnessed a significant increase in the past three years across all banks in India. 9

10 Anticipating AML regulatory shifts in SG, India and the Philippines Philippines: President Benigno S. Aquino signed into law, on June 19, 2012, the Act To Further Strengthen The Anti Money Laundering Law, which will boost the Philippine government s campaign for greater accountability and transparency in fiscal transactions. Placing more focus on financial institutions to do what is needed to anticipate the up and coming regulatory shifts. The government will strengthen the Republic Act (RA) 9160, or the Anti-Money Laundering Act (AMLA) of 2001, by restoring the authority of the Anti-Money Laundering Council (AMLC) authority to freeze assets allegedly proceeding from criminal activity. The AMLC may also inquire into or examine any deposit or investment with any banking institution or non-bank financial institution, when it has been established that there is probable cause that they are related to an unlawful activity. The reforms will go some way towards convincing the Financial Action Task Force of the Philippines compliance with international anti-money laundering standards. The will see a huge focus on such international practices becoming the norm in future for the Philippines and therefore anticipation will be based on setting up for practices that are seen by foreign banks in the Philippines. Main focus will be around CDD, monitoring and sanctions. The FATF encourages the Philippines to address its remaining deficiencies and continue the process of implementing its action plan. In particular, the FATF strongly encourages the Philippines to enact the pending legislative amendment on AML. 10

11 Adhering to sanctions requirements, regional and international Sanctions: In 2012 we saw fines being the hot topic for ensuring that financial institutions devote as much time as possible to focus on sanction requirements are adhered to. Some of the largest ever recorded fines for sanctions breaches were paid. This saw the largest banks in the world take severe reputational and financial hits for not adhering to minimum regulatory controls. Breaches were all slightly different in nature but all had an issue with culture when it came to ensuring appropriate controls were in place. Main issue for HSBC was weak anti-money laundering and counterterrorist financing in conducting enterprise-wide, risk-based assessments of potential money laundering risks, given its products, clients, and geographic reach. The Bank s failure to adequately assess risk negatively impacted the effectiveness of its transaction monitoring, which already suffered from additional systemic weaknesses. Standard Chartered Bank had to pay $100m to resolve claims that it provided "inadequate" responses to bank examiners and insufficient oversight of compliance to US sanctions, bank secrecy laws, and antimoney Laundering rules. The settlements were on top of the $340m paid to New York's Department of Financial Services in August ING Bank agreed to pay a record penalty of $619 million for illegally moving billions of dollars through the US banking system on behalf of Cuban and Iranian clients. 11

12 Adhering to sanctions requirements, regional and international Focus should be placed on the following area to ensure sanction requirements are met: Product Risk. Some of the Bank s products and services involved significant anti-money laundering risks, including but not limited to: correspondent accounts, wire transfers, automated clearinghouse ( ACH ) transfers, banknotes, lockboxes, clearing of bulk traveler s checks, bearer share accounts, pre-paid cards, foreign exchange, cash letters, international pouch activity, and remote deposit capture. Customer Risk. Some Bank s lacked detailed written policies, procedures, and controls which effectively risk rated customers. Bank s risk rating methodologies were not designed to evaluate customers based on specific customer information. Deficiencies prevented the Bank from performing adequate analysis of the risks associated with particular customers. Country Risk. The Banks lacked adequate country risk rating processes reasonably designed to capture readily available information about countries AML/CFT risks and failed to ensure uniform compliance. Transaction Monitoring. Banks failed to implement and maintain an adequate transaction monitoring regime reasonably designed to detect and report money laundering and other illicit activity. The transaction monitoring procedures failed in number of ways and saw human involvement that led to dishonest conduct. 12

13 QUESTIONS? 13