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FinTech Regulator Environment
AML and Terrorist Financing
In this paper I am going to talk about legislation on Anti Money Laundering – Terrorist Financing and potential effects of the legislation on the operation of FinTech company.
In the first part of the work I am going to explain the reasons of the legislation on AML – TF and present Irish regulatory bodies and laws and regulation.
Second Part will give explanation on the main compliance requirements contained within legislation
In the third part the main training requirements within AML – TF legislation will be elaborated and propose the one that suit the best in the scenario of the FinTech company.
This paper will be concluded with the other relevant information that would have impact on the FinTech company and conclusion on overview of the impact of AML-FT legislation on the FinTech company.
Money Laundering and terrorist financing general
Money laundering and terrorist financing are in domain of financial crime that has impact on the global economic environment.
Money laundering is a term that describe the meaning when criminals are trying to put in legal circulation the money that was earned with illegal activities. In simple words money laundering we can describe as turning ‘illegal’ money to ‘legal’ money.
The process the money can be laundered is complex and may involve physical goods and assets. By laundering money criminals have option to accumulate ‘illegal’ money and use for the personal benefits or they can use that money to finance further criminal activities.
Terrorist Financing is a term that explains funding of terrorist activities. Doesn’t explain the source of the funds but rather for what funds will be used which. Funds that support criminal activities can have one source or mix of legal and illegal sources to fund the terrorist activities.
We can say that both phenomena are the part of the same imperfections in financial systems that allow non-transparency in financial transactions.
1.Introduction to AML – TF provisions in Irish Law
Legislation on money laundering in Ireland is based on pointing defensive measurements to reduce the risks of money laundering, and in cases when money laundering is happening how to act on that and which measures should be made.
In 2010 Ireland adopts Criminal law recommend by European Union which includes transferring the Money laundering and terrorist financing low from EU directive to Irish Law. Act 2010 brings provisions on crime in financial transactions and terrorist financing that covers: law against money laundering , financial services and insurance industry, customer due diligence, transaction reports that are suspicious, internal policies and procedures, training of the employees, management and board members; monitoring and keeping records of the transactions.
Act 2010 trying to minimize risks caused by laundering of illegal funds, in order to do that Act point a number of obligation on wide range of businesses that could be involved including accountants, auditors, tax advisors, credit and financial institutions and organizations, retail intermediaries, investment firms and asset managers, private members clubs, legal professionals including solicitors and barristers, trust and company service providers and anyone who trades in goods respecting transaction involving payments to the customer in cash of total at least 15 000 Euro.
Act 2010 clearly state the that businesses should be supervised by Authority bodies and organisations in order to ensure that legislation on AML-TF will be adopted and respected.
Authority bodies include Minister for Justice, Central Bank of Ireland, Law Society, Professional Accountancy bodies, the Property Services Regulatory Authority and other. Competent authority applies the measures to minimize the risks including risk assessment, controls and other. By the low designated person is obligated to report any suspicious transactions to Garda Revenue.
Penalties for the one who are involved in money laundering or helping the criminal activity to be executed would face a fine and depend on the case up to 14 years in jail, which show the seriousness in the approach to this type of criminality.
The Act 2010 on AML – TF had been supported in 2013 by Criminal Justice Act which improves the legislation on anti-money laundering and financing terrorist activities especially areas that includes:
Customer Due Diligence – occasional transactions, required verification, obligation to apply detailed Customer Due Diligence in high risk situations, when applying Customer Due Diligence on politically exposed person the approach should be adjusted.
Improving processes for discovering money laundering activities.
Changes to allow requesting documentation overseas. (specific conditions)
Central Bank of Ireland and the Minister of Justice are allowed to give directions to designated persons requiring from them to take particular actions in order to comply with Part 4 if the 2010 Act.
Domestic Policy on Anti – money laundering terrorist financing
In 2016 Ireland published its first National Risk Assessment on Money Laundering and Terrorist financing. The assessment was designed to identify, expose and understand the money laundering and terrorist financing risks in Ireland and to design measures that would answer on them.
National Risk Assessment (NRA) is a result of engagement and cooperation with the number of Government bodies.
The purpose of assessment is to assist the government bodies like law enforcement, intelligence agency, law enforcement agencies and the public to understand money laundering ML – TF risks and to design the effective strategies to respond on them.
The National Risk Assessment in relation to Ireland point following areas: Main threats, financial service sector, non-financial sector, legal entities, cash and other payment methods and terrorist financing.
The result of the research and NRA is analysis on business sectors and rating their risk to be involved in money laundering and terrorist financing. Though if rating is lower does not necessary mean that sector does not contain number of cases.
National Risk Assessment – Ireland, page 4
In 2017 Ireland published Mutual Evaluation Report which is the result of cooperation Irish government bodies and the Financial Action Task Force (FATF). FATF is intergovernmental policy making organisation established by G7 in order to supervise their members to adopt laws and regulations on anti-money laundering and financing terrorism. implementation of legal regulatory and operational measures which will help to fight against financial criminal activities.
The Report is a proof that Irish Government bodies are following International standards when is about combat against money laundering and terrorist financing which gives credibility to country itself and indirectly effect positive on the economy and security of the country which has impact globally.
2.The main compliance requirements contained within legislation
Irish regulation set the main compliance requirements that Financial organisation or company should comply to, in order to minimize the risks of potential criminal behaviour. Applying required compliance gives to organisation credibility and current regulation in Ireland demand from organisation applying anti-money laundering and terrorist financing regulative in order to keep the licence which is required to operate on the current financial market.
In 2015 Central Bank of Ireland issued the report in which they state the main points company should follow in order to comply with the legislation.
Some of the key points are: 1. Business Assessment of ML – TF – The main part of every compliant framework is adequate control of all potential risks. The central Bank expect that risk assessment includes identification of risks. Relevant risks categories (country risk, industry risk, customer risk, product risk and distribution risk)
Risk assessment must be documented, board of directors must give approval, policy must be implemented and reviewed regularly, as well new lines of business and project should be part of the assessment. Regulation request to document methodology which was used with all the details to avoid manipulation. Risk assessment should be reviewed by Senior management on regular basis, at least annually and regulatory body should be informed on all the measures and controls that were taken. The risk assessment should cover all the points of the AM – TF Act 2010.
2. Roles and responsibilities – The Board of directors have a power to delegate responsibilities to management and the board is responsible for compliance with the CJA 2010 legislation and must ensure that structure is sufficient to financial organisation.
Central bank expect that Management roles and responsibilities are clearly defined and documented. Establishing organisational structure should be made to clearly reflect responsibilities. Senior Management and the Board of directors should be engaged in all the level of the process, monitoring of applying Anti money laundering and terrorist financing legislation, finding resolution and evaluating current measures and actively looking for improvements and measures that could be applied in cases of industry developments and their impact on business.
Board members, and senior management should have knowledge on the Financial company, product, service or the system that company provide. Their responsibility should be acknowledged, and they should be aware of their duties and responsibilities.
3. Policies and procedures – Investment company must adopt legislation, policies and procedures to prevent or detect Criminal activities and follow CJA 2010 recommendations. Central Bank has high expectations on maintain and apply every detail of the policy, guided and supported as it is stated for every specific business unit.
Policies and procedures should be available to all the staff and process should be clearly defined ready to be reviewed regularly on all the levels, by management or board members. Staff working on the implementation of the policies and procedures should have appropriate level of expertise and knowledge on the subject. Very important part for transparency and positive approach is to able that company policies and procedures are reviewed and test independently.
4.Reliance on third parties to undertake due diligence – When reviewing CJA 2010 we can see in Section 33 and arrangement with 3rd party company can be done but there are rules that should be respected in order to keep that cooperation valid. 3rd party company will be responsible for the results, positive or negative of the applying due diligence. When singing the contract 3rd party should allow to Investment fund to be inspected and reviewed as often as it is required. Official contract should be signed where it should be stated that outsource company should provide and inform investment fund about any suspicious activities. By the CJA 2010, investment fund can relay on outsource company only for initial due diligence, monitoring and testing should stay in scope of the investment fund.
5. Outsourcing – Investment company has to sign a contract with outsource provider with clearly stated duties and responsibilities. All the outsourcing arrangements should have in place Service Level Agreement (SLA) for all AML – TF arrangements. Outsourcing company act as the extended arm of the Investment fund. Contract should specify duties and responsibilities of the teams that working on supervising outsourced arrangement. Outsource company is responsible for their part of work and Investment fund should ensure that they have placed programme that would monitor and measure that procedures are applied.
6.Management Information – MLRO (Money Laundering Officer Report) should be produced at least on annual basis and classify the effectiveness of the Investment fund on the applying the AML – TF policies. Management Information report ensure that Board and Senior Management level are informed of potential risks. MI contain qualitative and quantitative data that lead to inform of potential risks. MI should be checked and tested regularly to ensure that it follow the purpose.
7. Lines of defence – In Section 54 of the CJA 2010 policy include the recommendation that designated person should adopt policies and procedures which includes assessment and management of risk of ML – TF and internal reporting controls. The Central Bank recommend ‘three line’ model of defence for Investment fund company. Three line of defence should be coordinated within the company and they include in first line Business units, Risk, Compliance and Internal Audit to ensure effective control and oversight. Second and third line are using risk – based approach and reviewing and testing AML- CF controls.
8.Customer Due Diligence – Investment funds are required to identify the customer before starts any kind of business relationship with the customer. New addition to CJA 2010, 4th EU Money Laundering Directive state that all companies are required to keep their data base accurate and transparent, available to authorities.
We can split Customer Due Diligence in two phases: 1. On boarding new customers – Central Bank expects policies and procedures that are risk based to be applied on customer of higher risk. Detailed operational requirements for onboarding should be structured. Procedures in cases when Investment fund will not accept new business arrangement or want to terminate existing agreement should be clearly set out.
2.On – going monitoring of customers – Central bank recommend independency when reviewing customers and not base their investigation on their sales potential. Customers should be re categorized once material is updated. Well rounded monitoring program and a risk-based approach is the element that would keep high standards. Investment fund should ensure that staff assigned to work on applying policies has the knowledge and experience adequate to the project they are working on.
3. The main training requirements contained within legislation
When talking about training requirements we can say Act 2010 demand appropriate training of company employees on money laundering and terrorist financing fields. Company should provide case study and examples that are relevant to the Investment firm.
On the market todays we can find many online training programs on AM – TF which can be used repeatedly until staff is able to pass the required tests relevant to the industry.
Company should invest in additional trainings specifically made for the role of employee. This type of training can be face to face or creating specific video material that can be used for the niche in which person is working on. Staff roles and type of training can be organised in level of exposure to financial crime as low, medium or high and based on that training material can be created. Factors which are influencing on risk level would be the amount of contacts with customers and handling client data.
Beside online trainings company should create internal training methods which include training sessions, workshops, paper-based workbooks, staff meetings and training videos.
Policies on AM-TF are recommending constant reviewing of the requirements which should adapt on specific needs of the FinTech company and accurate communication with the staff which can be done via e-mails,or sharing information with Team Managers who would then pass on the information to the staff.
We can say that good practice of training on AML-TF would include annual check-up of the knowledge of the staff and constant update on points relevant to Fintech company. Training should include High level managers and members of the board down to the staff working in transactions, operations, accountants and other staff involved in money transaction.
4. Any other impact that AML – TF provisions that are relevant
As a Fintech company management should be aware of the main vulnerabilities of the Fintech company. Each Fintech company is different and type of the product they offer, however following that we could spot the main weak points. Some of the main points that are common in financial sector would be trade execution services, which can include high speed and anonymous trading; wealth management services; corporate finance activities.
We have to say that Fintech companies generally does not offer cash payments which significantly decrease money laundering risks, money is transferred electronically, and identification is required.
Fintech companies the one that would go under PSP, API standards and which can focus on only one type of regulation are quite straight forward from regulation point of view. Big number of Fintech are involved in the mix of industries very often supporting existing banks, card companies where is involved cash would be subject to comply with other regulations as well.
By Central Bank Report in 2017 regulatory agencies spot over 22 000 suspicious cases of ML-TF of which only 6 cases have been prosecuted. This information is telling us how difficult is to discover and prove on the court money laundering. Regulatory bodies still didn’t find effective way to successfully process money laundering crime which still give lots of space for the professionals in the field to improve the system.
Fintech companies could be a game changer in AML-TF field, as automation is the way which could lead to better efficiency of the regulatory system.
- Arthur Cox, (December 2015) Central Bank Report on AML in the Irish Funds Sector, Available online at: http://www.arthurcox.com/wp-content/uploads/2015/12/Central-Bank-report-on-AML-in-the-Irish-Funds-Sector-Dec-2015.pdf
- Financial Services Authority, (March 2018), Review of firms’ implementation of a risk-based approach to anti-money laundering (AML), Available online at: http://www.arthurcox.com/wp-content/uploads/2015/12/Central-Bank-report-on-AML-in-the-Irish-Funds-Sector-Dec-2015.pdf
- Department of Finance, National Risk Assessment for Ireland, Money Laundering and Terrorist Financing, Available online at: http://www.justice.ie/en/JELR/National_Risk_Assessment_Money_Laundering_and_Terrorist_Financing_Oct16.pdf/Files/National_Risk_Assessment_Money_Laundering_and_Terrorist_Financing_Oct16.pdf
- Members of the Funds Working Group ICQ, (summer, 2016), AML/CFT and Financial Sanctions Compliance in the Irish Funds Sector, Available online at: https://www.acoi.ie/download/Summer-2016-funds-ICQ-article-AML-CFT-Financial-Sanctions-Compliance-in-the-Irish-Funds-Sector.pdf
- Central Bank of Ireland, (2015), Report on Anti-Money Laundering/Countering the Financing of Terrorism and Financial Sanctions Compliance in the Irish Banking Sector, Available online at: https://www.centralbank.ie/docs/default-source/regulation/anti-money-laundering-and-countering-the-financing-of-terrorism/legislation/report-on-amlcft-fs-compliance-in-the-irish-banking-sector.pdf?sfvrsn=4
- Department of Justice and Equality, (2016), Annual Report on Money Laundering and Terrorist Financing, Available online at: http://www.cpaireland.ie/docs/default-source/Technical-Resources/Law-Regulation/annual-report-on-aml-2016.pdf?sfvrsn=0://www.cpaireland.ie/docs/default-source/Technical-Resources/Law-Regulation/annual-report-on-aml-2016.pdf?sfvrsn=0
- Matheson, (2018), Fourth Anti-Money Laundering Directive, Available online at: https://www.matheson.com/images/uploads/brexit/business/Fourth_Anti-Money_Laundering_Directive.pdf
- FATF, Mutual Evaluation of Ireland, (2017), Irelands measures to combat money laundering and the financing of the terrorism and proliferation. Available online at: http://www.fatf-gafi.org/countries/d-i/ireland/documents/mer-ireland-2017.html
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