Money-laundering and compliance failures within large banks and institutions dominated the financial news in 2018, especially in Europe, with companies as diverse as ING, Rabobank, UBS and Goldman Sachs (Source), all making the headlines.
Investigations into Danske Bank exposed a $235 billion money laundering scheme that allowed suspicious levels of wealth to flow unchecked through European banks between 2014 and 2015.
To help you not fall foul of the regulations in 2019, we have gathered a list of top 9 compliance trends this year and how they may impact how you do business.
More Ultimate Beneficial Owner Information Required
The Fourth Money-Laundering Directive (4MLD) may have only recently been implemented across Europe, but the European Parliament has already announced that it will be adopting the Fifth Anti-Money Laundering Directive (5MLD), which EU Member States will be required to implement into national law by January 10th, 2020.
The 5MLD is more radical than the 4MLD, adding distinctly new advice and guidance that was not included in the 4MLD. One of the most important updates is the increased transparency required in relation to company ownership and ultimate beneficial owners, which is set to intensify in 2019.
Although the new Beneficial Owner Registers is not due to be completed by the end of 2020, affected businesses will need to start thinking now about how they can incorporate new Beneficial Ownership checks into compliance and client onboarding processes.
2. Complex Sanctions Landscape to Continue
The United States is expected to continue to increase its strategic offensive against China with tariffs, sanctions and regulations, whilst applying pressure on Europe to follow suit in imposing harsher sanctions (source).
Iran will continue to be isolated through US Sanctions, with the intention of weakening the country from within and helping to strengthen its relationship with Saudi Arabia. Despite European governments discontent and unease with Prince Mohammed bin Salman's leadership, (particularly the assassination of Jamal Khashoggi) the Western powers are yet to respond with sanctions, however, this may change in 2019.
This new geopolitical dynamic has the potential to create enormous headaches for the UK and European businesses attempting to navigate an increasingly complex regulatory landscape.
3. Crypto-Currency and AML Regulation
The crypto industry has acquired a formidable reputation as a conduit for money laundering activity due to the lack of regulatory scrutiny or oversight. However, the joint HM Treasury-Financial Conduct Authority and Bank of England Crypto Assets Taskforce released a report in 2018 (source) that stated it will take forceful action to address the use of crypto assets for illegal activity.
The FCA confirmed to the Financial Times on 30 December 2018 that it was investigating 18 businesses involved in the sale of cryptocurrencies and has also issued alerts and warnings about dozens of companies suspected of cryptocurrency investment fraud (source).
To achieve greater transparency in the Crypto industry, the UK government is expected to develop a robust regulatory response in 2019 which will address potential risks, going far beyond the requirements set out in the 5MLD and providing the most comprehensive responses internationally to the use of crypto assets for illegal activity.
Under 5MLD, crypto-currencies will have a legal definition. Virtual currency platforms and wallet providers will also become regulated entities and face the same CFT/AML regulations applied to financial institutions under the 4th Money Laundering Directive.
2019 will see established crypto firms conduct more comprehensive client due diligence and implementing more comprehensive compliance processes, in preparation for the 5MLD.
4. Investment in Automated AML & KYC Compliance
We will continue to see more companies invest in automated RegTech solutions in 2019 to ensure their company can continue to scale with an efficient client onboarding process and that ever-increasing compliance regulations will not stifle the ability to drive growth.
5. Right to Work & Rent Checks Post-Brexit
UK employers are already obliged by law to perform Right-to-Work checks on EU and international citizens, as they are with all their prospective and active employees. This will not change next March even in the event of a no deal Brexit (Source). EU citizens will continue to be able to provide the same proof of their Right-to-Work by showing a valid Passport, National Identity Card, Biometric Residence Permit or Working Visa.
The Home Office has confirmed that employers do not have to differentiate between EU citizen that have just arrived in the UK and those who have been living in the country for a number of years.
The property industry is also unsure on how a potential no-deal Brexit will affect Right-to-Rent checks for EU Citizens. The Government is yet to release official guidance on what letting agents and Landlords will need to do, should a no-deal Brexit be the outcome of the process. The lack of clarity from the Government has already caused problems, as a number of landlords are already averse to letting their properties to non-UK nationals due to the risk of being found in breach of the Right-to-Rent rules post-Brexit (source). The Government is under increased pressure to give clear guidance on post-Brexit Right-to-Work and Right-to-Rent checks.
6. Combating Financial Crime with Intelligence Sharing
When it comes to combating financial crime, financial services firms and institutions have acknowledged that collaboration and intelligence-sharing is the most effective line of defence if they want to protect their clients and industry as a whole from threats and non-compliance. Although financial services firms compete for each other's clients through their product offerings and services, they are in fact interconnected and reliant on each other. That is why The Financial Action Task Force (FATF) has made intelligence sharing a top priority for 2019 and they have made it a key requirement for an effective AML/CFT framework.
The success of the Joint Money Laundering Intelligence Taskforce in the UK, a partnership between law enforcement and the financial sector for exchanging intelligence on money laundering and economic threats, has already demonstrated how effecting sharing of information between two entities can be.
In 2019, intelligence-sharing is likely to expand beyond the financial services sector with other regulated businesses being expected to begin thinking about how they could share more information to help combat financial crime.
7. Enhanced Due-Diligence of High-Risk Countries
In the run-up to the 5MLD, 2019 will see increased attention on high-risk countries. Clients or transactions engaged in high-risk countries will be subject to enhanced due diligence when performing onboarding checks.
Compliance teams will need to ensure KYC is not a simple “tick box” exercise during the onboarding phase, and ongoing monitoring processes will need to be implemented to manage changes throughout the customer lifecycle.
8. Open Banking & PSD2 Deadline
Open Banking was created to enable innovation, transparency and competition in the UK financial services market, by making it easier and safer for individuals and SMEs to share the financial information held by their banks with third parties.
Although the Open Banking revolution has been slow to get off the ground due in part to a lack of consumer awareness, we can expect to see some real game-changing products and solutions begin to emerge in 2019.
On 14 September 2019 next, there will be the introduction of the European Banking Authority’s Regulatory Technical Standards on SCA (strong customer authentication) and SCS (secure open standards of communication) (Source). These regulations will dictate how banks allow access to customer data to the authorised third parties they integrate with. These new technical protocols will be integral for banks and FinTechs to be able to access APIs and develop platforms that enable experimentation and innovation to take place, such as a “sandbox” environment. Additionally, the new regulation should accelerate industry-wide collaboration on the standardisation of APIs and make the process easier for all parties.
Over the next 10 months, FinTechs and Banks will need to work towards the next PSD2 deadline, if they are not ready this could be a major blocker to continued innovation for the Open Banking initiative.
9. MiFID II in 2019
In the coming weeks, months and years, MiFID II will continue to impact financial services firms and FinTechs, strategically and operationally, as they look to continue to grow.
Unfortunately, there still remains uncertainty surrounding a post-Brexit world. Will the FCA start to clamp down on non-compliance?
MiFID II has the potential to have a powerful and positive impact on the financial industry in multiple ways, however, to ensure collaboration and innovation further guidance from regulators are critical for 2019.
Disclaimer: Our blogs are provided for general information and reference purposes only. They do not constitute legal or other professional advice and should not be relied upon as such. Any reliance you place on the content of this blog is strictly at your own risk and we will not be liable for any loss or damage arising out of, or in connection with your use of it. You should seek appropriate professional guidance about your own specific circumstances before taking any action based upon this blog.
If you are affected by any of the impending trends or would simply like more information, please contact the NorthRow team to learn how we can help ensure you remain compliant in 2019.