Many STEP members will have been on holiday over the past few weeks. If so, they may have missed some important indicators of how the authorities plan to use the Risk Based Approach in anti-money laundering regulations aimed at tackling illicit money flows.
One of the most significant technical developments in the revised FATF Recommendations published in 2012 was a new methodology formalising procedures regarding the so-called Risk Based Approach (RBA). As part of the RBA, all national governments are now required to conduct National Risk Assessments (NRAs) and STEP has been working closely with some of the teams putting together NRAs. All financial institutions are also expected to undertake their own risk assessment as part of the RBA.
Even before the UK NRA has been completed, a key UK regulator, the Financial Conduct Authority (FCA) has published a list of ‘high risk jurisdictions’ for AML purposes. The FCA is not suggesting that financial institutions it regulates should stop dealing with anyone from a jurisdiction listed as high risk. It is nevertheless making it plain that in supervisory visits, regulators will expect regulated entities to be able to demonstrate clear mechanisms for managing the risk in any business originating from such jurisdictions.
What is really striking, however, is the length of the FCA’s high-risk jurisdiction listing. While the inclusion of Cayman on the list has provoked a lot of comment – and talk of an application for judicial review from the Caymans, the real issue is that the FCA is deeming over 90 jurisdictions to be ‘high risk’. Among these are a string of major economies, including Brazil, India and China.
Alongside this development in the UK, and just as significant, is a powerful reminder from the US of the sort of penalties regulators can impose for perceived failures in applying the RBA. Standard Chartered recently reached a settlement with US regulators, which not only imposes a USD300-million fine, but also effectively bans the bank from acting for high-risk customers in Hong Kong and the UAE. The regulator’s allegation was that the institution had failed to demonstrate adequate risk management processes in the relevant jurisdictions, and in the wake of the bans it is now reported that the bank is looking to scale back its exposure to the UAE.
There could be some significant implications for STEP members. Recent years have been marked by strongly growing business flows from Brazil, India and China as the BRICs and other developing economies have boomed. Practitioners with clients from these areas should consider if their own risk management processes will be acceptable to regulators in their home jurisdiction if they were to follow the trend in the UK and US of deeming such economies ‘high risk’.
Just as importantly, it is worth asking how financial institutions are likely to respond to the new regulatory emphasis on the RBA. The penalties being imposed on banks for any breach of the regulations are now such that many banks are likely to take an extremely risk-averse approach. They may well seek, like Standard Chartered in the UAE, to scale back their exposure to business connected with any jurisdiction considered to be high risk. Others may continue to accept business from such jurisdictions, but will be looking at risk management plans that imply much tougher customer due diligence procedures in these areas. In addition, financial institutions that continue to do business in jurisdictions perceived as high risk will probably also be looking for wider margins to compensate.
Trustees focused on international business flows, particularly from developing economies, could therefore shortly see some interesting conversations with both their anti-money laundering regulators and their banks.