2024 Predictions: Sanctions, FOMO and Corporate Transparency

2023 was an eventful year, marked by new regulations and legislation, technology advancements, and political strife. We continued to work together and strengthen as a community to combat financial crime. New legislation included the introduction of the Economic Crime and Corporate Transparency Act in the U.K. The U.K. regulator (FCA) also issued several ‘Dear CEO’ letters. In this ongoing, rapidly changing geopolitical environment, there was a number of detailed reports on the state of financial crime around the globe including a FATF paper on the misuse of citizenship and residency and the Europol report “The Other Side of the Coin”—a detailed European-wide financial crime threat assessment.

These are my predictions for 2024:

Prediction 1: Focus on Preventing Sanctions Circumvention

Sanctions evasion will be a hot topic this year. Since 2022, there has been an unprecedented increase in the number of individuals and corporates added to sanctions lists around the globe. As of December 18, 2023, the U.K. has added a total of 1,681 individuals and 269 entities to their sanctions list under the Russian regime. The EU has added 1,800 individuals and entities. This sizeable increase has shone the light on sanctions evasion. Many extremely wealthy oligarchs or politicians who are sanctioned have significant personal and business interests around the globe, with property, businesses, and assets stored and located in global locations.

There is a need and desire of these individuals to continue to operate in the way they conducted business prior to being sanctioned: Some of them transferred or ‘sold’ their businesses to third parties and attempted to move assets like super yachts, to locations out of a sanctioning jurisdiction’s reach.

In an effort to evade sanctions, many individuals continue to use third parties and third countries, such as United Arab Emirates and China, who have not applied sanctions on many of the individuals and businesses sanctioned by western countries. Though it’s always been an issue, the priority of addressing sanctions evasion has escalated due to the sheer number of newly sanctioned individuals and businesses and the tightening of sanctions legislation (U.K. Economic Crime Act 2022.) Consequently, sanctions evasion has become a bigger headache for the regulated sector that they’re actively trying to address today.

This year, there will be a greater adoption of network analytics and focus on information sharing to aid in assessing potential sanctions evasion; especially with the introduction of the U.K. Economic Crime and Corporate Transparency Act 2023. A better understanding of corporate structures and relationships will help FIs address the challenges of sanctions evasion. Using the latest advances in technology will also help them determine whether corporate customer and counterparty activity is expected behavior or whether it’s atypical, either from the nature of the business, jurisdictions of operation, or volume or value of transactions. To tackle sanctions evasion, firms need to take a more detailed approach to understanding their customers transactions this year from a sanctions evasion standpoint. 

Prediction 2: Corporate Transparency 

Corporate transparency remains a major challenge and will continue to be front and center in the private and public sector. Lack of corporate transparency poses significant challenges. In fact, the Europol report released in 2023 “The Other Side of the Coin” that states “80% of the criminal networks active in the EU misuse legal business structures for criminal activities.” Unfortunately, criminals will continue to set up corporate structures until rules and regulations change that increase transparency and auditability of all corporate entities.

There are competing forces when it comes to corporate transparency. On one side there is the drive for greater transparency, as outlined in the 4^th and 5^th EU Money Laundering Directives and the U.S. Corporate Transparency Act enacted by U.S. Congress in 2021. These measures show the efforts legislators have taken to increase corporate transparency and make it easier for FIs and relevant stakeholders to identify ultimate beneficial owners (UBOs). However, on the other side, individuals who want the confidentiality, protection, or secrecy that corporate ownership can bring are fighting to retain these corporate ownership benefits. An example from November 2022 illustrates the challenge financial crime fighters face:  A European businessman appealed to the European Court of Justice (EoJ) to have his information removed from the public register, claiming a threat to his safety and his information. He cited that public access to this information constituted “a serious interference with the fundamental rights to respect for his private life and to the protection of his personal data.” He won this case sending shockwaves through the financial crime community. The ruling wound back the progress made towards corporate transparency as laid out in EU legislation.

Corporate transparency, or more to the point, understanding who owns and controls corporate entities, will be a top priority in 2024. This is historically a critical area of weakness in fighting financial crime. With the recent introduction of the UK Economic Crime and Corporate Transparency Act which required ID verification of directors and controllers of U.K.-incorporated companies, as well as giving the U.K. Companies House greater powers and the focus on the use of golden passports by criminals and corrupt officials, it’s more challenging for firms to perform accurate Know Your Customer (KYC) checks. Currently, authorities are taking steps to address this issue.

Over the next year, FIs will seek to modernize their KYC and data intelligence solutions to help with identifying UBOs and understanding of corporate structures. I believe there will be new legislation and regulations around corporate transparency, including how:

• U.K. Companies House enacts the new legislation
• The EU authorities will respond to the EoJ case from end of 2022

The Corporate Transparency Act goes live in the U.S. this year, and I suspect other countries will follow in tightening their position on corporate transparency—so watch out for new developments in this space.

As for the misuse of citizenship and residency by investment, also known as golden passports, firms and regulators are paying closer attention to mitigating this risk. This year FI’s will review what additional KYC checks need to be performed and begin to implement new systems and processes to counter challenges posed by golden passport. This  delves deeper into golden passports.

Prediction 3: AI FOMO

The buzz around Artificial Intelligence (AI) is reaching a crescendo. Firms are asking what AI-powered technology they can implement now to help them be more efficient and effective. Every inquiry asks for network analytics. Customers expect vendors to have anomaly detection technology. These technologies have proved to make a difference. AI technology delivered by NICE Actimize has shown up to 75% reduction of false positives and up to three times increases in identification of true positive activity. Machines can analyze information much faster and with greater accuracy than humans, thus the benefit of this technology is significant, not just from a cost perspective, but also in terms of effectiveness.

The race for technology acceleration heated up further in 2023 with the introduction of generative AI as an efficiency technology that reduces manual efforts and human errors. One of the key use cases for this technology in financial crime is auto generation of the SAR/STR narrative. Another one is summarising key information about an alert or gathered information. This will be a technology in focus in 2024. I believe many FIs will start adopting this technology en masse from the middle of this year.

There’s been a step up in focus for information sharing, especially since the U.K. Economic Crime and Corporate Transparency Act opened the gateway for greater information sharing between private-sector organizations. This comes hot on the heels of information-sharing initiatives around the world such as COSMIC in Singapore.

Implementation and use of advanced technology in financial crime is no longer a nice to have, it’s a must-have. Regulators are expecting FIs to innovate and identify potential use cases using advanced technology to improve their financial crime programs. One example where there is acceptance from regulators is in the U.K. With the FCA regularly running tech sprints, encourage firms to continue to push the envelope of what is possible to fight financial crime. Many regulators around the world, including in Singapore, Estonia, and the U.S. are encouraging the use of advanced technologies in a compliant, explainable way. FinCEN in the U.S. has an innovation initiative where they state:

“Responsible innovation is an important part of safeguarding the U.S. financial system against new and evolving threats to the nation’s security and the financial system relating to money laundering, terrorist financing and other serious financial crimes…”  Estonia has also released guidance to regulated firms in the country, strongly recommending that they use an “…IT system…” to monitor customers and transactions, with the scope of the requirements being such that only an advanced system would meet the expectations. Advanced technology usage comes with a caveat: it must have effective governance and appropriate controls to ensure bias doesn’t creep in and there are checks and balances in place to ensure the system doesn’t miss suspicious activity. This is why rules-based systems, which act as a check and balance and benchmarking tool, won’t be replaced by AI systems, at least not in 2024!

Ultimately, FIs don’t want to be left with the Fear Of Missing Out (FOMO) in 2024, for two reasons:

1. Successful implementation of advanced technology in compliance will not only save costs and make a system more effective, but also make it more efficient at identifying risk or suspicious activity. It can also act as a business enabler, making an FI more competitive by speeding up customer risk assessment and monitoring, reducing customer friction.
2. Peer comparison. If an FI is the only one among peers that’s not using newer technology in their compliance program, and their alert and reporting volumes and quality is significantly worse than peer organizations, it can have an adverse effect on the organization. It introduces a heightened risk that activity is being missed, and that regulators could increase their focus on the FI’s financial crime and compliance program. Many regulators now have innovation hubs to research and assess new technologies, including how they can be implemented in compliance and how they can be used as benchmark tools for supervisory visits. 

Prediction 4: Renewed focus on High-Risk Money Laundering Areas

In my opinion, there has been little attention when it comes to money laundering risk in certain areas: capital markets, international trade and Environmental, Social and Governance (ESG), that is set to change this year.

Capital Markets

This was an area of focus a few years ago following the publicity around the ‘Mirror Trading’ scandal and the release of regulators’ reports in 2019, including the U.K. and U.S. thematic reports about money laundering in capital markets.

FIs have been quietly assessing their risks in the background, but there has been little overt action by the regulators in this area. However, it remains a high risk of money laundering area given the vast sums of assets and money which can be moved internationally through the markets very quickly. The U.K. still sees this as a threat and capital markets, wealth, and asset management are still marked as high risk in their National Risk Assessment. The report states “…the scale of money laundering through the capital markets remains unclear due to the difficulties in identifying it among the huge volume of transactions…”. This intelligence gap alone makes it high risk and worthy of greater focus.

In November 2023, the U.K. regulator (FCA) released a ‘Dear CEO’ letter to wealth management and stockbroking organizations. In this document, they laid out their expectations of these firms, including advising them to:

• Not take a tick-box compliance approach to AML
• Have effective systems and controls in place to detect suspicion
• Ensure the compliance staff, especially the Money Laundering Reporting Officer (MLRO), has the right experience, skill and independence.

I think the FCA is making a statement to the industry that there’s still a significant risk, and they’re paying closer attention to in 2024. I believe we’ll see stronger regulatory scrutiny of firms operating in this space. As a result, there will be an increase in the need to modernize compliance systems to detect suspicious money laundering activity through the markets and several FIs urgently renewing their risk assessments and monitoring systems!

International Trade

Trade-Based Money Laundering (TBML) is one of the main conduits criminals use to launder their illicit wealth but also illegal goods around the globe. It’s estimated that trillions of dollars are laundered using trade-based money laundering. A joint report released early last year by Global Financial Integrity, Fedesarrollo, Transparency International, and ACODE highlight the scale of this huge problem. As part of the research, they looked at known criminal cases between 2011 and 2021 where trade was involved. They discovered that laundering through trade amounted to USD 60 billion. In 17% of cases, there was a direct or indirect link to Colombia, where the illicit trade was linked to either drugs or illegal mining. The trading included invoicing or shipping a multitude of goods including food products, cosmetics, vehicles, animals, perfumes and household items, with the most noted commodity being cars. The chances are many of these products were either not shipped or the goods were not as described.

TBML is interwoven into the fabric of money laundering and criminal enterprises. They almost always use corporate entities on both sides of the trade. This facilitates all crimes where goods are involved, from drugs, counterfeit items through to wildlife, illegally mined goods and environmental goods such as illegally acquired timber and fauna. That’s just the tip of the iceberg. TBML often goes hand-in-hand with corruption with officials and individuals such as dock workers, transport workers, and customs officials being corrupted to facilitate the crimes. Criminals give these people financial rewards for facilitating the shipment of goods.

Increasing adoption of information-sharing technologies combined with new technologies that are used in building and analyzing relationship networks has made TBML an area of focus for both FIs and the authorities. I believe in 2024, we will see new notices on TBML by regulators and relevant groups and an increase in inquiries from firms looking to modernize their systems in ways that make identifying TBML easier and faster.

Environmental, Social and Governance (ESG) Issues

Crimes in this category, such as wildlife crime, are pervasive. While there has been significant focus on this heinous crime with a few partnerships and initiatives established to counter it, other environmental crimes such as illegal mining, fishing or logging don’t appear to have the same focus or level of scrutiny. Environmental crime is the third largest crime annually behind drugs and counterfeiting yet it’s not often discussed. Although identified in legislation in many countries as a priority crime and known as a predicate crime to money laundering, environmental crime is frequently pushed down the list below drugs, human trafficking, and other crimes. However, it’s a crime that has a massive impact, and one requiring greater focus because environmental crimes cause irrevocable damage to communities, animals, ecosystems, and the planet. In the recent COP28, the UNODC stated that ESG was an urgent priority area, and that illegal deforestation and mining were critical threats which need to be addressed to fight climate change and prevent environmental disaster. See this post to learn more.

With the UNODC focus and extensive reports outlining the scale of environmental crime, firms are taking necessary action. This year, I believe ESG and compliance teams will start collaborating internally, enhancing universal understanding of customers, their supply chains and the potential criminal risks this poses. Technology will also play a part, with FIs seeking enhanced monitoring of ESG risks and suspicious activity, both at a customer and transactional level. 

Prediction 5: Strengthening Regulations/ legislation

We are seeing accelerating regulatory tightening and ever greater scrutiny and strengthening legislation in the space of financial crime around the world. 2024 will continue this trend.

This year, we will finally see the much talked about AML Authority (AMLA) in the EU go live. The AMLA is a new approach to fight financial crime across Europe. This new authority is going to be responsible for monitoring, supporting and coordinating the application of regulation across the EU, and will facilitate information and intelligence sharing between member states. The purpose of the AMLA is to provide an integrated and centralized response to fight financial crime and ensure unification of regulation and regulatory compliance across member states, although regulatory enforcement will still be conducted by each member states’ regulatory authority. If not already established, all FIs that will potentially be affected by the authority should assess how this impacts their compliance functions or their businesses and adapt accordingly.

The U.K. is in the early stages of implementing the Economic Crime and Corporate Transparency Act and the significant change to Companies House. Once they go live, such as new IDV requirements of directors and controllers, it will likely impact how FIs conduct KYC and ongoing monitoring of U.K. corporate entities. Also, the new information sharing gateways will be tested in 2024, and it will be interesting to see how widely adopted these gateways are by U.K.-regulated organizations. Are you ready for these changes?

The new reimbursement requirement under the Payment Systems Regulator (PSR) will come into force this year. The PSR mandate relates to reimbursement of losses to a consumer because of APP fraud, where both the sending and receiving bank of the fraudulently obtained funds will have to split the reimbursement 50/50. It’s worth mention: Any successful fraud is money laundering; therefore, the receiving bank will have to start monitoring inbound payments for potentially fraudulent activity from the sending bank and the originator. This means greater convergence between fraud and AML like never before. It will also increase the requirement for real-time transaction monitoring, especially in AML, which has historically been batch monitoring, after the event. The significant increase in liability of the receiving bank, which previously did not exist, will result in all FIs looking to strengthen or even modernize not only their fraud monitoring but also their AML monitoring this year.

The other challenge with this new regulation is the threat of organized crime groups utilizing this new regulation to defraud the system. They accomplish this through collusion: they create a fraudulent event, where the originator and beneficiary of the transaction are known to each other, but one raises a fraud claim with the bank and pockets not only the original fraudulent transaction, but also the bank refund. This threat has been identified as a concern and will require FIs to collaborate closely, not only between their fraud and AML teams, but also with KYC teams—as criminals will need bank accounts or controlling access to bank accounts to facilitate this crime. Organizations should also look at their KYC and monitoring systems to ensure they’re fit for purpose, integrated, and have the correct models to detect this activity.

January 1, 2024 kicked off FinCEN’s requirement to report beneficial ownership in the U.S. This is the most significant change because of the AML Act of 2020. It requires that many corporations, LLCs, and other entities are now required to report directly to FinCEN the individuals who ultimately own or control them. It aims to stop criminal abuse of shell companies and provide better transparency of the individuals behind many these entities. Access to the information will be a phased approach starting with government officials; however, there are plans to allow this information to be released to FIs in various cases. The obligations of FIs around collecting and monitoring beneficial ownership information has not changed; therefore, most firms will continue with their current processes and procedures.

It’s going to be another busy year in the world of AML and CTF, but exciting and positive changes are afoot. If all goes to plan, these measures will shift the dial in favor of the defenders committed to preventing, and ultimately stopping, all kinds of financial crime.

If you want to strengthen your systems with technology powered by AI and machine learning, contact an expert from NICE Actimize today.