"There is no excuse for failing to comply with the Fourth AML Directive"

August 2017 Kompli-Global

How has the market reacted to the Fourth AML Directive from your perspective?

I’m slightly bemused by a lot of articles complaining that people haven’t had very long to cope with the regulations because, although they were only published on 22nd June 2017, the Fourth Anti-Money Laundering Directive was published in June 2015. Admittedly a few of the details remained to be ironed out, but HM Treasury published draft regulations and we’ve been through two consultations since; one ended last November and the other one in April this year. There’s been very few changes since then, so it’s very surprising that people are saying, “we have not had long enough to comply.”

Has a large percentage of the industry struggled to meet the deadline, and do they have an excuse for that?

I don’t know that they have struggled to meet the deadline, but it has no doubt been challenging for some. All regulated entities now need to focus on ways to streamline how they meet the challenges more efficiently and cost effectively. I’m sure that many financial institutions will have been preparing for the regulations for many months. There is no excuse for failing to comply – the Regulators will offer advice and assistance but blatant failures will not go unpunished.

What are the key changes with the new regulations in your opinion?

There are several other aspects of the Fourth Money Laundering Directive, which alter or extend the law. One key change is that UK Politically Exposed Persons (PEPs) are now included within the Regulations, which they weren’t within the Third Money Laundering Directive.

The scope and extent of what regulated entities need to do for Customer Due Diligence (CDD) has also changed. Many of the changes look quite subtle. The particular emphasis in the Fourth Anti-Money Laundering Directive is on adopting a risk-based approach rather than being as prescriptive as the Third Money Laundering Directive. The legislators feel that better practical steps will be taken to avoid money laundering and terrorist financing if firms themselves are forced to consider the risks each of their products and services create. Regulated firms also have to assess the risks associated with selling their products and services to that particular customer.

That is the area that we at Kompli-Global are most interested in.

It’s the first time that companies are being explicitly told to document these risks. Assessing the risks includes looking for adverse information, and making connections between these data. To do this consistently and effectively, businesses have to set up systems in an effective and proportionate way, depending on the size and the nature of their business.

The final Risk Factor guidelines have just been published by the European Supervisory Authorities. They are aimed at credit and financial institutions, and explain the factors that those institutions should apply when assessing risk associated with business relationships and occasional transactions.

Was an update to the regulation necessary?

Absolutely beyond doubt because it’s been ten years since the 2007 regulations came into force and many developments have occurred since then. In particular, the Financial Action Task Force (FATF) recommendations of 2012 needed to be taken into account, and money launderers and those who finance terrorism have become much more sophisticated in those ten years. Therefore, it made complete sense to try and update what was already in place.

In the UK in particular, FATF, the international anti-money laundering organisation, carries out evaluations on a country-wide basis and the UK is due to be evaluated later this year, with the resulting report published next year. The UK Government is very keen to make sure that the minor criticisms of the UK made in the previous evaluation have been addressed to show that the UK is a good and safe place to do business, particularly with Brexit on the horizon.

Is it clear what the AML landscape in the UK will look like post-Brexit?

It isn’t yet clear. What is clear is that having implemented the Fourth Anti-Money Laundering Directive, the UK isn’t likely to become softer in enabling money to be laundered.

It’s important from a business point of view that this is the case. The UK has been a key driver of anti-money laundering legislation around the globe and I don’t expect that position to diminish. If anything, it will increase after Brexit as we conduct more trade on a global basis, including with countries with lower standards of anti-money laundering infrastructure. The UK will be pushing those countries to do more.

Does that mean the introduction of a piece of UK legislation that directly mirrors the EU directive?

Yes, I believe so. I couldn’t say precisely how that will happen – it may be that blanket legislation will enact many items of EU legislation but, given that the regulations we’ve got came into force because the EU passed the Fourth Anti-Money Laundering Directive, there will have to be some legislation which says those regulations are now enforceable under different primary legislation. I wouldn’t see any lessening of any of those anti-money laundering legal provisions, in fact I expect it to be quite the contrary.

How does Kompli-Global fit into the picture with the 4th Anti-Money Laundering Directive in mind?

Essentially, the service that we’re offering is a search platform to enable regulated entities to more thoroughly search for adverse information on potential partners or clients than they would otherwise be able to do. At the moment these entities still be use traditional search engines, which is hit and miss and lacks consistency. We have created a bespoke search platform which is specifically designed to meet anti-money laundering legislation.

You can input a person’s name and the company of which they are a director, and then carry out a single search using about 500 stem words such as “financial crime”, “money laundering”, “scam”, or “judgement”. The searcher can then know if the person has been involved in activities that might give you some cause for concern, and which they might want to consider in more detail.

Our aim has been to create a search platform that gives access to published information. Our platform – kompli-IQ searches unstructured data rather than just structured data so it much more thorough than other search engines.

Our approach gives an enormous advantage over manual searching, in part because the search platform uses artificial intelligence to rank the results. For example, broadcast media and reputable newspapers are given more weight than blogs. The legislation says that you must consider the extent to which the information is credible, but all returned searches should raise questions. In the past companies have been hesitant in asking clients to explain adverse information about them, these search results will mean that companies will be more inclined to do that.

Manual searches are not efficient and lack consistency, which is a key requirement of the legislation; also, the amount of data which has to be searched is vast and increasing all the time. Technology can make searches fast and efficient, saving costs and manpower. It means staff can concentrate on the activities they do best – assessing and mitigating the risk.

Obviously if your search using our platform uncovers no results – and we expect that to be the case in relation to the vast majority of customers – this will enable companies to onboard customers more quickly, which is equally important today.

Are we at the tip of the iceberg of how AI can assist in AML?

Artificial intelligence is very significant as a weapon in the fight against money laundering. Many financial institutions are only now coming to terms with the availability of that technology. The technology can still be expanded further but I don’t think it is right to say that we are still at the early stages of its capability. What I do think is that we’re probably at the early stages of financial institutions being able to adopt it as a matter of routine.

Are there any other technology trends that will affect how companies will or should operate in relation to anti-money laundering?

Open Banking and the advent of PSD2 is going to affect banking significantly. The drive of the legislation is going to force banks and other financial institutions to adopt new technologies, and I think the question will be whether those financial institutions actually buy RegTech companies or partner with them. I have no doubt that the whole technology sector will affect banking and the way in which banks comply with legislation, because there isn’t going to be less legislation around and everybody wants to see more competition in the market. We’re at the beginning of a technological revolution in banking; banks will need to react to the drive for better customer experience while also complying with the regulations.

This article first appeared in bobsguide