KPMG recently hosted the last session in the 16th series of the KPMG AML Roundtable. The Roundtable which has been running for 16 years, brings together a group of MLROs and compliance officers from various subject persons to discuss current topics in the AML/CFT space. During the session held in February, four speakers took it in turns to provide insights on 21 AML/CFT topics affecting Maltese subject persons.
The topics included both those emanating from the local environment as well as those that have more of an international flavour intended to provide participants a sense of the direction of travel, in this highly regulated environment.
Moneyval and Malta’s grey listing
Clearly top of the list and the talk in all business circles, is the final verdict on Malta’s performance in the AML/CFT space. Whilst it was acknowledged that a lot has been done to address the shortcomings, the jury is still out on whether this is enough to prevent a grey listing. The implications of a grey listing and the way forward (if there is no such listing) generated some noteworthy comments from participants.
Are we to expect more fines in 2021?
The market is still reeling from the shock of the financial penalties levied by the FIAU in 2020 and the question that arises is whether 2021 would see more of such hefty fines being levied. While it was acknowledged that the FIAU is still catching up with the backlog of reports, with every new enforcement action, the market is becoming more knowledgeable on the expectations of the regulator.
Overturning of financial penalty decisions by the Court of Appeal
Quite a few subject persons who were meted a pecuniary penalty have appealed the penalty through the courts. So far some have been overturned and others confirmed. The FIAU has however indicated in public fora that it aims to go more for remedial action as a means of getting subject persons to comply rather than apply punitive measures such as penalties. This remains to be seen.
More inspections and more scrutiny
In 2021, we are to expect that the number of AML/CFT inspections and the level of scrutiny to continue unabated. The MFSA has reinforced its AML unit capabilities and AML is now a key part also of prudential supervision inspections. Over the course of the year and continuing into 2021, we have seen a huge ramp-up in investigations by the Financial Crime s Investigations Department.
Sectoral guidance
The issuance of sectoral guidance to supplement the Implementing Procedures remains largely a work in progress, with several guidance yet to be completed. The need for this sectoral guidance is acutely felt and the general feeling is that more resources should be dedicated to this worthwhile exercise to see as much guidance as possible being issued over this year.
Market rationalisation
It will be interesting to see over the coming months how the market will react to this increased regulatory compliance burden. Small practitioners are definitely going to feel the brunt of all this added regulation and we may see some consolidation in the market. This highly-regulated environment coupled with reduced profits as a result of the pandemic may push some companies over the edge.
De-risking by banks
Banks have gone through some form of de-risking over the last few years with the result that some sectors are being financially excluded by banks in Malta. This stems from the fact that banks are hugely conditioned by the rules laid down by their correspondent banking partners. In the meantime, banks have geared up their AML systems and although in a post pandemic environment they will seek to woo business back, their requirements have increased greatly.
Remote working challenges for the MLRO
It appears that remote working is here to stay and one of the topics analysed the implications of this for the MLRO. How will friction between team members be identified? What about confidentiality of data if people are taking calls in their kitchen or living room? How can you deal with weak connections through VPN? These considerations will not go away with the pandemic.
Accelerated digital transformation
One of the effects of the pandemic is to force a digital transformation and there is no turning back now. This is also hitting the AML space, with electronic signatures and digital verification of clients swiftly a must in the near future.
Local AML resources
The MLRO pool in Malta is very limited and companies are experiencing difficulties to find MLROs, pushing companies to source their MLROs abroad, obviously at a much higher cost to the business.
Time for another National Risk Assessment
The sector is still working with an NRA that is essentially 7 years old, since the one and only NRA drawn up in Malta is based on 2013 data. The effect of an outdated NRA is being felt in the market with certain sectors still being given a label according to this NRA. A new NRA has become an imperative.
EU Commission and AML
The EU Commission has put forward a series of measures designed to continue strengthening the AML/CFT framework. There is talk of a single rulebook and EU level supervision amongst others. It remains to be seen which entity will be taking on this role at EU level.
6AMLD
2021 has to see the implementation of the EU 6th Anti Money Laundering Directive. The main changes include a harmonised definition of predicate crime as well as enhanced punitive measures. Talks have already commenced on a 7AMLD.
Ultimate beneficial ownership registers
The purpose of a UBO register is to foster a greater culture of transparency. However there exist different interpretations as to what constitutes a UBO. Moreover, for as long as this initiative remains widely a European one, and is not adopted globally, the overarching outcome will not be achieved.
AML/CFT training
This is going to take centre stage over the next few years as increased AML requirements are cascaded through the business. Training is required to be carried out from the board of directors downwards and should be targeted, relevant and regular.
KYC compliance challenges
What will the post pandemic environment provide by way of compliance challenges? In the UK, the FCA has released a guidance document on how retails financial organisations can perform digital authentication to accept scanned documents and selfie matched photos to verify identities. When will Malta follow suit?
Expansion of KYC
What is included in the definition of KYC is being stretched to include getting an understanding of the client’s business, the jurisdictions to which they are linked and in certain cases an understanding of their client base. Where will this stop?
AML technology developments
The next year will also see firms investing heavily in AML technology as the compliance burden increases. We are on the cusp of understanding the potential of the use of distributed ledger technologies and artificial intelligence to lessen the burden of increased compliance.
New AML risks on the horizon
2020 has seen a massive rise in cryptocurrencies in Eastern Europe and the Middle East. The ECB is analysing whether to launch a digital euro. The pandemic has driven a risk in counterfeit medical equipment and pharmaceuticals. Covid benefits and government loans are being used to mask AML activity. Are we ready for these new risks?
More fraud and hacking systems
Hackers attack every 39 seconds, on average 2,244 times a day and the pandemic has created the perfect environment for this to proliferate. Fraudulent crimes and hacks are exposing the limitations of legacy systems.
The growing importance of sanction screening
Slowly but surely businesses are becoming aware that irrespective of whether they are subject persons or not, they are required to screen their suppliers and clients for sanctions. Some of the larger institutions like banks are beginning to have dedicated personnel and departments responsible for sanctions screening. The risks of non-compliance are too high.
Alex Azzopardi, director, Risk Consulting Advisory, Deborah Cassar, senior manager, Risk Consulting Advisory - AML Services, KPMG in Malta
The 17th Series of the AML Roundtable will start towards the end of June. If you would like to attend contact Sarah Galea (assistant manager, KPMG Learning Academy) on sarahgalea@kpmg.com.mt or 2563 1061.