Developments in LCB/FT: Review of the ACPR Conference

Developments in LCB/FT: Review of the ACPR Conference

Developments in LCB/FT: Review of the ACPR Conference 2560 1707 Quanteam

The ACPR conference held on November 17 featured a round-table discussion on developments in AML/CFT. It provided an opportunity for exchanges between representatives of the ACPR, the FATF and the French Treasury.

Speakers discussed the challenges facing governments and institutions subject to AML/CFT regulations, against a backdrop of geopolitical tensions, the reinforcement of European measures and international standards, and technological developments.

While a twelfth set of sanctions is being prepared in connection with the war in Ukraine, the number of people or entities listed because of this conflict already represents almost half of the freeze measures applicable in France.

Political authorities are now also focusing on the fight against circumvention of these sanctions, which will require increased vigilance on the part of operators and companies not currently subject to AML/CFT, no doubt with the help of financial institutions.

In addition, technological innovations such as crypto-assets, instant payments and virtual IBANs, which can be used for legitimate purposes, create new problems and can even be used as a means of concealment or circumvention.

In this article, we take a look back at the issues at stake, the findings and the work or developments in progress that were discussed by the various speakers.

Increasing the number of entities subject to sanctions and combating circumvention

While the ACPR representative emphasized that financial institutions had shown themselves to be reactive when previous sanctions were introduced, the DGT representative, Head of the Office for the Fight against Financial Crime and International Sanctions, pointed out that the subject was constantly evolving, and that these institutions were faced with new issues, created for example when companies that had been wait-and-see decided to cease or withdraw their activities in these territories.

He also emphasized the political priority given to combating the circumvention of these sanctions, which goes beyond assets or financial transactions, but also concerns the supply of goods that are banned from export but still reach Russia, or even the battlefields, via "rebound countries".

This priority is reflected in the European Commission's recent publication (September 7) of guidelines for operators to support them in this fight.

According to the DGT representative, this objective will require financial institutions and other players subject to LCB/FT to help spread this culture of end-beneficiary identification among non-regulated players, while of course continuing to implement the necessary measures themselves to identify the beneficial owners of a transaction or an account.

The ACPR representative, Deputy Director of Anti-Money Laundering and Counter-Terrorism, also spoke about the controls to be carried out on credit institutions and insurance companies in 2022 and 2023.

The results of this campaign will be summarized in a forthcoming ACPR publication, but it highlighted findings on the following themes:

The responsiveness of the players, already mentioned.

The importance of external service providers and their customers' control of relations with them, whether for obtaining lists or the detection tools themselves.
In particular, problems with lead times and data quality were noted.

It is essential for customers to set the right parameters for their tools, between setting them too strictly so as not to identify sanctioned entities, and using too approximate a search so as not to enable relevant alerts to be processed correctly and efficiently.

The need for quality, comprehensive customer data.

European regulatory developments

The participants all stressed the need for coordination and convergence in the work carried out by the various authorities and international organizations. While the ACPR, DGT and FATF took part in the round table, they stressed the importance of collaboration with IOSCO, the Financial Stability Board, the IMF, the Basel Committee and their counterparts.

At present, one of the major challenges facing the development of the AML/CFT system is obviously the preparation and adoption of the AML 6 package and the creation of the AMLA. While common positions have already been reached on certain subjects, many points are still under discussion in the European trialogue (Parliament, Council of the Union, Commission), and will often have precise, concrete impacts.

The current priority is to finalize the text that will create the AMLA, particularly as it will have to define numerous application texts. An important step in this direction will be the development of a common methodology for determining which entities will be under the direct supervision of the AMLA. Following agreement 18 months ago at Council level, discussions are continuing to reach agreement with Parliament. Ideally, it should be possible to conclude these negotiations before the end of the current term of office, but to date this seems difficult to achieve.

This round table was an opportunity to point out that Paris submitted its bid a few days ago to host the new authority, and that this location offers a number of advantages: attractiveness for high-level profiles, quality of the French AML/CFT system which is among the best rated according to the FATF, and the fact that Paris is already the city of the FATF, hosting not only its secretariat but also 2 to 3 plenary meetings each year.

Two key conditions for the successful implementation of AMLA were identified: Anticipation and coordination.

  • Anticipation should make it possible to draw up a large number of texts in a very short space of time. The draft regulation creating the AMLA provides for over fifty level 2 texts. Some of these will be adaptations of existing texts, but it is essential that the work carried out should enable options to be prepared now, from which the AMLA will be able to choose once it has been legally established. Among the most important topics and sources of discussion, the speakers mentioned :
    • The risk analysis methodology, which requires the convergence of risk classifications and ratings. In addition, Parliament is proposing to adopt an assessment based on residual risk, rather than inherent risk. If this approach is adopted, we will need to agree on a common assessment of systems to mitigate inherent risk.
    • The way in which entities within the same Group, and the Group itself, which may present different levels of risk, are assessed. This point ties in with the questions on which entities should be placed under direct supervision.
    • The need for good quality data for this risk analysis. This implies being able to compile these data so that financial establishments have the time to obtain or produce them, and to set up transmission, probably to the national authorities in the first instance.
  • Coordination is obviously necessary during the preparatory and transition phases, but it will remain necessary thereafter for the day-to-day business phase. This has been the case for the Eurosystem and the Single Supervisory Mechanism. At this stage, the authorities exchange a great deal with each other to create a common culture. But this coordination should come naturally, as it is already de rigueur in other contexts: for example, over 50 European authorities meet in the AML/CFT supervision unit format, covering banks, markets and insurance. Prudential authorities should also be included in this coordination, and they have useful information at their disposal.

The work of the FATF and the revision of standards

Over and above the European challenge represented by the introduction of AML 6 and AMLA, the Executive Secretary of the FATF gave an update on work in progress and recent developments in the standards published by the Task Force.

One of the fundamentals of the fight against money laundering, terrorist financing and the evasion of sanctions is the transparency requirement for identifying the beneficial owner of a transaction.

The FATF has just adopted a first set of guidelines designed to reinforce this obligation and help apply the corresponding standards, and a consultation is underway on the instruments that can be used to conceal the identity of beneficial owners.

At the conference, the Executive Secretary of the FATF indicated that a report was due to be published in the next few days concerning "Golden Passports" and the possible abuses and risks they presented for circumventing sanctions. The report was published on November 22.

Another very important project for the FATF concerns the "travel rule", i.e. the information that must accompany international transfers of funds in order to identify the beneficiary and even, in certain cases, the purpose of the transaction, in order to help the various players involved in the chain to exercise their vigilance.

Recently, the standard on the recovery of stolen or laundered assets was also revised. The aim is to improve the recovery rate, which was below 2%, so that these funds can be used for economic development, and to reinforce the value of setting up an anti-money laundering regime for member countries. Indeed, the return on investment in relation to the cost of such a system can be extremely high, and contribute to sustainable economic growth.

Nevertheless, in its work the FATF aims to avoid unexpected or unintended consequences, including:

  • That some jurisdictions apply standards abusively, even going so far as to prohibit certain practices deemed risky, rather than mitigating this risk. This applies in particular to NGOs, whose most legitimate activities may be penalized by restrictions put in place to avoid problematic actions or transactions involving other NGOs.
  • That financial inclusion is reduced, making it impossible or too costly for some people to remain within the formal financial channels.

The FATF's actions also cover the evaluation of anti-money laundering systems, and it is developing the way in which these evaluations are carried out:

The reports will be more focused on the risks presented by the country under evaluation, and will provide more targeted recommendations to enable rapid upgrading of its AML/CFT system. A new cycle of mutual evaluation of its member countries will be launched in 2024, and the periodicity of such a cycle should be reduced to six years, compared with ten to eleven years in the past.

Technological developments

At the forefront of technological developments, the conference dealt at length with the subject of digital assets: a round table devoted to the supervision of these took place in the afternoon, and dealt extensively with the forthcoming implementation of the MICA regulation.

However, the round table on AML/CFT developments pointed out that regulatory provisions were evolving from a simple registration of NSPs, imposing requirements in terms of AML/CFT, good repute and management skills, to a reinforced registration.

In the meantime, the ACPR has supported these players by educating them, adapting its annual questionnaire for the ongoing monitoring of AML/CFT systems, drawing up principles for specific obligations in this sector, and carrying out on-site inspections at around ten PSANs.

During the round-table discussion, however, PSANs were asked to ensure that their applications were of the highest quality, and to exchange views with the ACPR in order to benefit from support, gain a better understanding of their expectations, and thus be able to respond to them and enable their applications to be considered more quickly.

Still on the subject of crypto-assets, the speakers recalled that both the FATF and the European Union had addressed this area very early on, as early as 2019 in the FATF standards and even before the launch of the5th Directive.

For the future, the AML 6 package includes a text that will be applicable at the end of 2024 and will extend the "travel rule" to these digital assets.

 

The round table also addressed developments such as instant payments and virtual IBANs.

The former are being developed to bring speed to operators, but this speed must not be at the expense of compliance with AML/CFT obligations or the freezing of assets and other sanctions.

The European Commission has proposed that institutions issuing and receiving such transactions should filter the customer base data, not the transaction data itself.

Virtual IBANs, on the other hand, can be used for legitimate purposes, but can also conceal from intermediaries who the sender or beneficiary of a funds transfer is, or even the country in which the account is held.

Possible solutions include a register of virtual IBANs, based on the FICOBA model, or the requirement that a virtual IBAN be associated with the same country as the master account to which it corresponds.

In conclusion...

The speakers at this round table, and more generally during the afternoon session, emphasized that risk management and AML/CFT are at the heart of the actions of regulatory and supervisory authorities, and that recent changes in the macro-economic context have demonstrated the resilience of players in the sector.

In response to a question about a recent ruling by the French Supreme Court (Cour de Cassation) that a breach of AML/CFT obligations may constitute unfair competition on the part of an organization that does not comply with them[1], the answer was that such a decision was good news, and that it reinforced the obligation to have an AML/CFT system in place, and to make the necessary investments, with a second "angle of attack".

an article written by...

Loïc BERTRAND

Co-director of the Risks, Compliance and Regulatory practice

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