As the war in Ukraine captures the international community’s attention, opportunistic criminals are seizing the chance to take advantage of the crisis. In addition to navigating wide-ranging new sanctions against Russia, financial institutions (“FIs”) should familiarise themselves with the types of crimes that fraudsters are likely to commit. FINTRAIL has compiled the following typologies and red flags to assist with preparing and identifying fraudulent activity in light of the Russia-Ukraine crisis.
UK Government’s Commitment to Economic Crime Bill
After months of rising tensions, last week finally saw Russia take definitive action and begin its long-anticipated invasion of Ukraine. The US, UK, EU and others have imposed targeted sanctions on Kremlin-affiliated individuals and banks, and cut off some Russian banks’ access to SWIFT, with more measures still to follow.
Alongside the universal condemnation of Putin’s actions, we believe it is vitally important for the UK to look at its own relationship with Russia and consider how it enables the Kremlin. Demands that this moment should mark a turning point have come from politicians on both sides of the aisle, media outlets of all persuasions, and anti-corruption campaigners. But such demands are not new. The UK Parliament’s Intelligence and Security Committee published a damning report in July 2020 which accused successive governments of allowing dirty Russian funds to infiltrate the UK: “The UK welcomed Russian money, and few questions – if any – were asked about the provenance of this considerable wealth.” Chatham House has published a report entitled “The UK’s Kleptocracy Problem”, and Transparency International has revealed the volume of UK property owned by Russians accused of corruption or linked to the Kremlin (worth in excess of £1.5bn). The US has also raised concerns: a spokesman for the Center for American Progress, a Biden-aligned think tank, has said “there is clear concern in the US government about the influence of Russian money in the UK”.
We welcome the British government’s announcement that it is bringing forward legislation to address Russian corruption by creating a register for the beneficiaries of overseas firms. This will deliver on a government pledge made five years ago to end secret offshore ownership; draft legislation was drawn up in 2018, but has been put on hold ever since. However, momentum must not be lost with the passing of the Bill; every effort must be made to implement its provisions as soon as possible (official sources have warned this could take up to a year).
The government has also promised to make long-overdue reforms to the UK corporate registry Companies House, requiring anyone who owns, runs or controls a UK company to verify their identity. Companies House will also be given new powers to challenge information. Again, this promise is welcome but pressure must be maintained to make sure that this additional economic crime bill is brought before parliament, and that the reform measures are implemented, as soon as possible.
We support the calls of organisations such as Transparency International UK and anti-corruption figures such as Graham Barrow and Oliver Bullough, in calling for the UK government to take this moment to act. It is not a question of uncertainty over how to tackle the problem - there is general consensus on what needs to be done. What is lacking is adequate resourcing and political will. The invasion of Ukraine must be a turning point for these long-demanded reforms.
Beyond the immediate measures promised by the government, the UK should also commit to making progress on the following fronts:
Applying greater pressure to crown dependencies such as Jersey, Guernsey and the Isle of Man and to British oversees territories, such as the British Virgin Islands, to introduce much greater transparency and to introduce unrestricted public registers of company ownership. Transparency International UK has identified 2,189 BVI entities used in 48 Russian money laundering and corruption cases involving more than £82 billion worth of funds diverted by rigged procurement, bribery, embezzlement and the unlawful acquisition of state assets.
Conducting a retrospective review of the 200 “golden visas” issued to Russian millionaires over the past seven years (following the closure of the scheme last week).
Making greater use of Unexplained Wealth Orders, often cited by the government as a significant development in anti-kleptocracy efforts, despite the fact only four have been issued in four years (none under the current government, and none of which were brought against Russian nationals).
Reviewing the number of agencies involved in investigating and prosecuting kleptocracy cases following criticisms that too many agencies are involved (the National Crime Agency, the Serious Fraud Office, City of London police, and local forces).
Financial crime compliance professionals have long called for reforms in these areas, and have shown themselves willing to work with the authorities to achieve them. We hope that the new Economic Crime Bill marks a genuine change in stance, and that all parties involved can work together for maximum effect. We at FINTRAIL and the FinTech FinCrime Exchange are ready to do whatever we can to help support these efforts. It is regrettable that these measures were not taken sooner, but hopefully a meaningful shift in political will can reduce the role the UK plays in enabling not just the Kremlin but corrupt and dangerous regimes the world over.
Suisse Leaks: Swiss banking returns to the spotlight
Yesterday saw the announcement of yet another major financial leak, exposing details of the accounts and wealth of foreign clients of Credit Suisse, allegedly including “criminals, dictators, intelligence officials, sanctioned parties and political actors with outsized wealth”. Credit Suisse has issued the usual rebuttals - that many of the cases are historic, or are isolated incidents not representative of the bank’s overall business. And many believe Credit Suisse is unlikely to be an outlier, with the whole Swiss banking industry thrust into the spotlight.
Having worked in anti-financial crime for multinational banks with a significant presence in Switzerland, I’m acutely aware of the challenges of navigating its infamous secrecy laws, and the difficulties of implementing global financial crime programmes under these restrictions. I’ve also worked with a large number of Swiss compliance staff and relationship managers, and know that most do care about financial crime, and are far from the sinister or negligent figures they are often portrayed to be. Culture, governance and risk appetite obviously vary from bank to bank and can be very hard to assess from the outside, even with vast troves of leaked data. So putting aside the specific allegations against Credit Suisse, what do we need to understand about Switzerland and its legal and regulatory framework to better understand this story?
Switzerland is notorious for its banking secrecy. Its 1934 Federal Act on Banks and Savings Banks criminalises the disclosure of client banking information to any foreign authorities. The first major roll-back of this provision occurred in 2018, when Switzerland started sharing information under the Common Reporting Standard for the automatic exchange of banking information. (Side note: this development came about as the result of another whistleblowing incident, when a banker violated Swiss banking secrecy laws to tell US authorities how UBS Group was facilitating tax evasion by foreign customers.)
However, it is clearly wildly inaccurate to say (as some have done) that this was the end of Swiss banking secrecy. For a start, it is still impossible for countries which are not signed up to the common reporting standard to receive any information from Switzerland. It’s worth noting these are predominantly poorer nations, in many cases those most affected by the kleptocracy and capital flight Credit Suisse is accused of abetting. Notwithstanding this one area of concession, the law remains in place and has been accused of effectively criminalising whistleblowing, preventing people reporting illegal behaviour to the relevant authorities. It also restricts investigations by outside parties, with journalists inside Switzerland at risk of being prosecuted for publishing or even possessing private banking data. It also prohibits the sharing of information within financial groups, meaning Swiss subsidiaries of global banks cannot share any information with their parent bank, making holistic risk management impossible. A telling indicator of the authorities’ overall attitude has to be a legal revision in 2018 (the same year Switzerland started sharing tax information) raising the maximum sentence for breaching the law from six months to three years.
Many commentators believe that recriminations following this latest leak should be directed not just at Credit Suisse, but also the Swiss authorities for creating a lax regulatory environment and upholding laws that punish the exposure of illegal activities. They believe the various leaks and scandals that have emerged over recent years indicate wider failings in banking supervision, with insufficiently rigorous monitoring and oversight. The Swiss regulatory framework has also been criticised for being insufficiently robust. Organisations like Transparency International and Public Eye have said the Anti-Money Laundering Act is too narrow in scope, as it does not apply to parties such as lawyers, fiduciaries, trustees, and other consultants. This contravenes international best practice and the recommendations of the Financial Action Task Force (FATF). The number of SARs filed has also been criticised for being noticeably low given the overall volumes of funds flowing into the country, and the flows from overseas clients and high-risk jurisdictions.
Arguably, responsibility may even go beyond Switzerland itself - to international bodies and standard setters. Like most financial centres in economically developed countries, Switzerland receives positive ratings and assessments in nearly all global financial crime indices, such as the Basel AML Index and Transparency International’s Corruption Perceptions Index. In 2020, the OECD’s Global Forum rated Switzerland as “largely compliant” on issues relating to availability, access and exchange of ownership information on entities and bank accounts, even while contradictorily acknowledging that the availability of beneficial ownership information was not guaranteed. The Global Forum also noted that Switzerland would seemingly not respond to foreign requests for banking information if the request was based on “stolen data” (i.e. a leak) or if the requesting authority “actively sought out” the information outside of an administrative assistance procedure.
The aftermath of the 2007 whistleblowing case and the subsequent pressure by US authorities shows that outside parties can be effective in bringing about meaningful change. There is clearly much more international bodies can do to apply pressure to Switzerland to address specific loopholes and to change the overall tenor of its banking laws. Individual financial institutions can also consider how they treat Switzerland as a jurisdiction, and whether they are content to rely on international indices which do not call out issues around transparency and the availability of information.
FINTRAIL can help financial institutions to assess country risk using objective methodologies that go beyond the usual global risk tables. This can be aligned to custom designed risk-based CDD and ongoing monitoring controls. We also perform enhanced due diligence and investigations on customers, partner institutions and other third parties in jurisdictions where public information is hard to obtain. If you would like to speak to us about this or any other services, please do get in touch: contact@fintrail.com
SWIFT and the Financial Consequence of Russia Sanctions
As the whole world watches in anticipation while Russia continues to militarise near Ukraine’s borders, the financial sector is busy preparing for possible what-if scenarios. In 2014, sanctions were implemented after the annexation of Crimea, with Western powers deploying specific and limited sectoral sanctions designed to target those directly involved in the destabilisation of Ukraine. Now, as the US prepares a more severe “mother of all sanctions” package, more individuals within the Kremlin and parts of President Putin’s inner circle, including Putin himself, are at risk of being added to blacklists. Additionally, some of the harshest measures imposed on Russia, like exclusion from vital global banking infrastructures, are being seriously considered.
Overview: How did the world get here?
The latest conflict, stemming from ongoing disagreements with the imperfect 2015 Minsk peace deal, revolves around Russia seeking assurances that Ukraine will not join NATO. Western powers stand by the military alliance’s open-door policy, which touts the principle of national sovereignty and the right for all nations, including post-Soviet states, to decide for themselves on membership. Last year, Russian troops began mobilising at the Ukrainian border and sparked international criticism. Now in early 2022, an estimated 130,000 troops are believed to be at the border, and military drills with Russian ally Belarus are set to begin.
SWIFT and financial sanctions
As the international community speculates on Russia’s next exact move, retaliatory action in the form of sanctions is being actively discussed. One proposed measure, re-emerging from 2014 discussions, is the exclusion of Russia from the Society for Worldwide Interbank Financial Telecommunications (“SWIFT”).
SWIFT is a critical global electronic payment messaging system that on average handles 42 million daily messages. Barring Russia from the system has been coined the “Nuclear Option,” a move never before made against such a large economy. If implemented, both Western powers and Russia would surely face difficulties. Though it would exclude Russia from an important aspect of the international financial system, which allows it to accept global payments for gas, Russia has already prepared some cautionary measures. The Kremlin has created a domestic version of SWIFT known as the System for Transfer of Financial Messages (“SPFS”), which is made up of 400 member banks, including some from former Soviet states. While it has its limitations, SPFS exists as an alternative that could be incredibly useful during a painful adjustment period.
In addition to the EU’s business and financial interests in Russia, Europe is heavily dependent on Russia’s energy. This dependence is particularly true for key EU decision maker Germany. Excluding Russia from SWIFT would leave many member states vulnerable or scrambling to find a solution to pay for Russian gas. Moreover, fear of destabilisation surrounding the potential exclusion of Russia from SWIFT, is partly because of how it would impact the repayment of debts. Figures from the Bank for International Settlements (BIS) demonstrate that Italian and French banks carry the most Russian exposure, far surpassing that of the US. These factors have made the EU, in particular, wary of furthering this so-called “Nuclear Option”.
Another even more powerful option would be a US move to blacklist major Russian banks. While SWIFT is an important tool, ultimately, it is just that — a tool used for sending messages. Removing Russia from this system would certainly be a blow, but it would allow for loopholes and workarounds. Conversely, if major Russian banks like Sberbank, VTB or Gazprombank were blacklisted by the US, it would make it near-impossible for transactions to occur from anyone in the world. This move, which would result in the makings of a domestic financial crisis for Russia, would undeniably have global implications such as causing certain Western investment funds to fall. However, the US blacklisting of these big banks would have the most extensive and harshest direct impact.
Coordination necessary
Western sanctions effectiveness against Russia relies heavily on timely coordination among the US, EU, and the UK. Without a concerted, unified move, loopholes and asset flight can undermine sanction efforts.
Being a supranational organisation, the EU is required to reach an agreement on a sanctions package among its member states in what can be expected to be a lengthy bureaucratic process. As the UK assembled its own independent sanction regime as part of Brexit, it has been working closely with the US. The UK government has recently announced a new sanctions law that can extend to anyone who provides strategic support to Putin, including in significant sectors like chemical, defence, extractives, ICT and financial services. Critics, however, have noted the deep entrenchment of Russian oligarch wealth in London, which would hinder the effectiveness of such efforts.
As sanction discussions continue, the potential severity of forthcoming measures has settled in, with financial institutions preparing for different situations. Last month, the European Central Bank (“ECB”) asked lenders with significant Russian exposure how they would handle different sanction scenarios. Adding to the stress, financial regulators have warned major banks in the US, EU and the UK to prepare for possible Russian-sponsored cyber attacks, in the event sanctions are triggered by a Ukrainian invasion. However, until sanctions packages and their specific details are officially announced, in what will likely be an abrupt manner, financial institutions will continue preparing for what’s to come — calculating their exposure to Russian flows, reviewing Politically Exposed Persons (“PEP”) lists, assessing beneficial ownership and high-value accounts, and piecing together a reactionary compliance strategy.
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At FINTRAIL, we combine deep financial crime risk management and geopolitical expertise to help you keep your anti-financial crime and sanction programmes in step with current events.
Please get in touch if you would like support with refining, enhancing, or testing your sanctions or transaction monitoring programme. We’re here to support you in conducting due diligence on higher-risk situations, providing context-based training to your analytical team, and helping you navigate the situation as it unfolds. Please email us at contact@fintrail.com.
What to consider when hiring an MLRO
FINTRAIL reviews the recent guidance published by the UK Financial Conduct Authority on suitable applicants for MLRO positions, and offers some insights of our own.
Read this two-page review for guidance on applicants for MLRO or Head of Compliance roles.
FinCrime End of Year Report
On Wednesday, FINTRAIL delivered a webinar on our “FinCrime End of Year Report: Lessons learned in 2021 and development points for 2022”. For those who weren’t able to make the session, here are our key takeaways:
2021 Key Learnings
The FCA sent a Dear CEO letter to retail banks in May 2021, highlighting actions needed in response to common control failings identified in anti-money laundering frameworks. It noted common weaknesses in key financial crime areas, including:
Governance and oversight including mature model with three lines of defence
Risk assessments covering all financial crime types beyond money laundering and fraud, and dynamic and effective customer risk assessment model
Due diligence including ongoing monitoring
Transaction monitoring including tailored rules and thresholds
We noted that these control areas should be considered holistically, as failings in one area will affect the whole programme. For instance, if you do not collect adequate due diligence information you cannot conduct effective ongoing monitoring.
While this letter was addressed to retail banks, the findings are also relevant to the digital financial sector, and align with FINTRAIL’s findings from audits and health checks of FinTechs conducted in 2021. The areas we most frequently identified as areas for improvement were:
Due diligence (including enhanced due diligence)
Screening
Audit, quality assurance and quality control
Governance and oversight
Transparency International UK published a report in December 2021 on the money laundering risks of e-payment firms, which said that the payments industry could become a “major gateway” for illicit funds. In FINTRAIL’s view, many of the risks highlighted are not unique to e-payment firms, and are faced by the whole financial sector. However, the report did highlight specific risks around the regulatory oversight of e-payment firms, and lack of due diligence on their owners and senior managers. We discussed the importance of the ‘tone from the top’ and the right compliance culture, and how a firm with compromised or criminal owners could be used to facilitate financial crime schemes. There is a clear need for the regulator to conduct suitable due diligence on owners and senior managers of firms applying for e-payment licences.
Technology and automation remained a hot topic in 2021, both in terms of the growth of digital banking and in the financial crime space. We reflected on the growth of the regulatory technology (RegTech) space, including greater adoption by conventional financial institutions, and the consolidation of the market through acquisitions. We also discussed how regulators and international bodies recognise the potential benefits of technological adoption but are also highlighting the risks. Firms must adhere to regulatory guidance, and must understand how their technology works and how to identify any gaps or weaknesses. Additionally, the FCA published a paper in 2021 on Implementing Technology Change which considered the need for good governance around the use of technology and outsourcing, and the potential impact of failures on customers. Firms must consider not just if but how to deploy technology, and how to fuse it successfully with human expertise.
2022 Focus Areas:
Effectiveness: Industry bodies and regulators including the FCA and FinCEN have increasingly promoted the idea of focusing on the effectiveness of financial crime controls. The Wolfsberg Group followed up its earlier Statement on Effectiveness with a paper on Demonstrating Effectiveness in June 2021. This offered practical guidance on how firms should assess risk in defined priority areas and demonstrate the effectiveness of their AML programmes in tackling them. While there is no regulatory obligation at this stage, measuring and demonstrating effectiveness is likely to be a focus area for regulators in 2022, and financial institutions should start considering how to articulate it.
The European Banking Authority (EBA) has launched EuReCA, a central EU database containing information on material AML/CTF weaknesses identified in individual financial institutions. This offers further encouragement for firms to ensure their controls are robust and effective, to avoid the ‘naughty list’.
Financial inclusion and the effects of de-risking: The Financial Action Task Force (FATF) issued a paper on Mitigating the Unintended Consequences of the FATF Standards in October 2021, which focused on financial exclusion, de-risking, the undue targeting of non-profit organisations (NPOs), and curtailment of human rights. There is a clear tension between reducing financial crime risks and ensuring equal access to financial products, affecting both individuals (e.g. migrants, those without a fixed address) and entire sectors. The EBA also issued an opinion last year on the consequences of de-risking, clarifying that EU AML.CTF laws do not require firms to refuse or terminate business relationships with entire categories of customers they deem high risk. The UK Treasury Committee’s Economic Crime Report, published on 2 February 2022, recommends the FCA reports annually on numbers of de-risking decisions and on progress to ensure that banks are not unfairly freezing bank accounts and de-risking customers.
Firms are not obliged to offer services to those they deem outside risk appetite, but should be aware of the implications of risk appetite decisions and make conscious decisions regarding inclusion and fair treatment. We recommend firms think through their risk appetite carefully, rather than automatically avoiding high-risk customers, as regulators may start asking them to fully justify de-risking decisions. FINTRAIL has partnered with Tech Nation as part of FinClusion 2021 to issue the FinCrime Principles of Inclusion which provides valuable guidance for designing inclusive FinCrime controls.
Humans versus machines: FATF published a paper on the ‘Opportunities and Challenges of New Technologies for AML/CTF’ in July 2021, which promoted the use of new technologies, but also urged firms to consider how to balance automation with human input and oversight. It stressed that manual review and human input remain hugely important. Regular audits and explainability is key, with firms able to explain how their technology works, and continuously confirming that it is operating as expected.
To stay up-to-date with regulatory developments, news and key reports, sign up to our newsletter and receive our monthly regulatory recap - the FINTRAIL RegCap (www.fintrail.com)
To understand whether your FinCrime programme is developed and mature enough to meet the meets of your business and current regulatory expectations, please speak to us about our Maturity Matrix and audit/health check services.
And if you would like any other support, or to discuss any of the topics discussed, please do get in touch with us at contact@fintrail.com.
FINTRAIL's 2021 Highlights
Before getting to the nitty gritty, here’s an overview of what we’ve worked on over the past year:
FINTRAIL has also made some exciting changes to our business model, allowing us to better execute our vision. Here’s the new structure:
Consult which delivers our global consultancy and advisory work
Insights which produces detailed research, analysis and content creation
Pioneer which provides consultancy support to early stage startups and non-profit organisations
Ventures which invests in new anti-financial crime technology and building internal tooling
To support these exciting developments, we’ve been busy building a strong team at FINTRAIL. In the last 12 months we’ve hired Ruth, Tom and Andy and they’ve already made a huge impact!
Now, the details…
Just as FINTRAIL evolves so do our clients and financial crime regulation. The team have put together some of their perspectives and reflections from the year gone by...
James
Regulatory highlight:
In October FATF produced its High-Level Synopsis of the Stocktake of the Unintended Consequences of the FATF Standards. Acknowledging the negative consequences of anti-financial crime controls, such as de-risking or financial exclusion, can create a vital feedback loop for effectiveness and ensuring the financial system is open to those who need it the most.
Best project:
Being involved in the TechNation Financial Inclusion month was a reminder of the difference we can make and the influence we have as anti-financial crime professionals. It was great to produce the FinCrime Principles of Inclusion and I am looking forward to progressing these further in 2022.
Maya
Regulatory highlight:
There was a flurry of new regulations across the Middle East region last year, but I’d have to single out the UAE for making significant changes with a particular focus on financial innovation. This is reflected for instance in a new regulatory framework for virtual assets, and the issuing of Guidelines for Financial Institutions Adopting Enabling Technologies which set out principles and best practices for using technologies such as APIs, big data analytics and AI, biometrics, cloud computing, and distributed ledger technology.
Best project:
I really enjoyed working with an international bank designing a digital banking product targeting internationally mobile customers from high-risk jurisdictions. Expanding on work done in 2020, we continued to build out a system of controls that were tailored for the specific client base, and easy to implement and run across a small team. This was the perfect example of how two projects are never the same, and how generic AFC controls and procedures are often unsuitable for many firms and service offerings.
Mikey
Art market participants are required to be fully compliant with new UK money laundering regulations as of June 2021. This means having anti-financial crime policies and controls in place including customer due diligence, source of wealth and funds checks, and suspicious activity reporting.
Introduction of the biggest AML reform in the US since the Patriot Act — the National Defence Authorization Act (NDAA). The NDAA increases Bank Secrecy Act (BSA) related penalties, requires disclosure of UBO information as part of the Corporate Transparency Act 2020, brings virtual assets and antiquity dealers into the scope of BSA requirements, and has started to create a pilot program for sharing SARs with foreign branches / affiliates of financial institutions.
Best project:
Partnering with the Plaid FinRise incubator programme to provide training to founders from underrepresented and minority backgrounds on their financial crime obligations and requirements as new fintechs. This was a great opportunity for FINTRAIL to support a community that may not have equal access to compliance education and services, to help foster and further inclusion within the financial service ecosystem.
Greg
Regulatory highlights:
In the crypto world, this must be FATF’s updated Guidance on Virtual Assets and Virtual Assets Providers and its impact on the regulatory landscape worldwide.
On a European level, I would single out the European Commission’s package of legislative proposals to strengthen the EU’s AML/CFT rules presented in July, including the proposal to create a new EU authority to fight money laundering.
Best project:
Working as an interim resource across the 1st and 2nd lines of defence at a clearing bank. It is not very often you get an opportunity to build a bank from scratch. And the team is fantastic!
Jess
Regulatory highlight:
Whilst not quite a big regulatory change, I really liked the Wolfsberg Group's Demonstrating Effectiveness paper this year. It was a brief, to-the-point paper reminding us what the priorities are when building and measuring the effectiveness of anti-financial crime frameworks. Effectiveness is ultimately built on compliance with regulations, providing useful intelligence to law enforcement and having reasonable, risk-based controls against financial crime.
Best project:
Providing a range of support services to agents as they go through the onboarding process with their Payments as a Service Provider. We got to work with a range of products and maturity levels — helping agents build their framework from scratch, whilst also helping others refine their framework and close any gaps to meet their partner's requirements.
Sara
Regulatory highlight:
What has been interesting is observing how businesses in Singapore have been implementing the Payment Services Act (PSA) which came into force in January 2020, and how this is an evolving piece of legislation, particularly in terms of interpretation and understanding.
Best project:
Conducting an AML health check of an alternative banking product. It was interesting to work with a product that offers alternative banking solutions for customers that do not fit the profile of a "typical high street bank customer". They offer financial services for those who are financially excluded from the mainstream by poor credit or those coming to work in the UK temporarily. This also aligns with FINTRAIL's ongoing financial inclusion work.
Go on then. We’ll give you a sneak peak into 2022…
Entering into the new year, we’re excited to get our new business lines Insights, Pioneers, and Ventures fully up and running. We’re continuing to grow the team, with six new team members already, and hopefully more to come. We also look forward to supporting, serving, and working with our clients — new and old!
Sign up to our newsletter to receive ongoing news and updates from FINTRAIL, or get in touch with us directly, here.
Introducing FINTRAIL Pioneer
FINTRAIL Pioneer is here - the latest edition to our service offering designed to help businesses, no matter how small, in the fight against financial crime.
Pioneer will sit within our global FINTRAIL Consult team, leveraging our specialist knowledge and passion for financial crime prevention to start supporting a new range of clients who have previously found it harder to access bespoke and considerate anti-financial crime services.
So what does this mean in practice? Well:
FINTRAIL firmly believes that excellent financial crime prevention starts from the ground up. Anti-financial crime (AFC) controls need to be built into your product and culture from the word go to limit bad actors exploiting your product. To help you, FINTRAIL Pioneer makes our consulting expertise easily available to small businesses, and early-stage startups (we’re talking less than 10 employees, or a balance sheet of around £2million or less) to support you in building a robust AFC program right from the start.
We also understand that financial crime does not limit itself to only the financial services sector, so we’re expanding our Pioneer services to the Not-For-Profit (NPO) sector to support them in delivering crucial work for those most in need, free from the threat of being exploited by financial criminals.
Lastly, our team is driven by a shared passion for disrupting financial criminals and the crimes they facilitate across the globe. Pioneer will be uniquely responsible for directing that passion towards “for good” projects across the industry, offering our services free of charge to projects where we really believe we can make a difference.
We’re really excited about Pioneer, and the difference we aim to make in the AFC community.
So if you are a small business, early stage start-up, or NPO and need support with your AFC obligations, or have a “for good” project you’d love to chat about then please get in touch – we’re all ears.
Introducing FINTRAIL Consult
November marks my third year at FINTRAIL, and whilst three years certainly isn’t a major landmark to be celebrated, upon reflection, the last three years have been an incredible journey. Over the last 18 months alone we have delivered over 200 financial crime projects to support a variety of different organisations. We have also seen the FINTRAIL team grow and develop, and we are in the process of adding another 10+ people to the family.
Yet there is more still to be done. Rob mentioned in his “Change is coming” blog last week, we are making some exciting changes at FINTRAIL to support the industry further. Under the new banner of ‘FINTRAIL Consult’, our consulting team is dedicated to offering a best in class anti-financial crime consultancy service to whoever may need it.
The last 18 months have taught us that collaboration is key to delivering high quality products and services to our clients. We will be joining our teams together under one global banner of ‘FINTRAIL Consult’ whilst continuing to add depth to our consultancy team with both regional and subject matter knowledge. This means our clients will receive a more consistent service and have access to all the knowledge within our team regardless of where they are located.
To ensure we support our client’s aspirations, we have also made some internal changes. Jessica Cath has been promoted to Head of Financial Crime Project Delivery, leading the core consultancy team and ensuring we maintain a high level of standards in the services we provide. Alongside Jess, we have expanded Greg Wlodarczyk’s role to Head of Specialist Financial Crime Advisory and Virtual Assets. We recognise the evolving environment our clients operate within, which means we must also evolve. Greg will be focusing on ensuring the services we provide are progressive and ready to meet new challenges, whilst also working to hire individuals with the right specialist skills.
The new FINTRAIL Consult is looking forward to continuing to work with the financial crime community into 2022 and beyond!
We are always here if you need us - do reach out if you have any questions
Inclusion for Customers with Disabilities
3rd December marks the International Day of Persons with Disabilities. As part of our efforts to address the impact of financial crime programmes on inclusivity, we wanted to take this opportunity to reflect on how fincrime controls may impact those with a disability and how we can avoid creating barriers.
This is not a trivial issue. According to the World Health Organization, over one billion people (about 15 percent of the world’s population), have some form of disability. In the UK, the figure is 14.1 million people. The House of Lords’ Select Committee on Financial Exclusion has found disabled people are likely to be disproportionately affected by financial exclusion, even though UK financial institutions have a legal obligation under the Equality Act 2010 to make reasonable adjustments for disabled customers.
FinTechs can clearly help remove barriers for some customers, such as those with limited mobility or hearing or speech difficulties, who find it easier to access financial services via an app. However, along with actively considering accessibility and inclusive design for their products and processes, they need to be super aware of how their financial crime controls may inadvertently impact customers with disabilities, to ensure they’re not excluded or provided with poorer services.
Fraud controls represent a particular challenge. Many of the controls put in place to keep out fraudsters can also inadvertently block people with disabilities from accessing their own money. Certain means of confirming identity will be challenging with certain disabilities, and features such as accounts timing out may be a barrier. A good approach is to provide options. Different customers may need different methods for activating cards - e.g. ATM activation may not be suitable for those with limited mobility, and customers with visual or dexterity impairments may find using an app difficult and prefer to speak on the phone, which customers with hearing or speech impairments may not. Similarly, while using a pin for card payments is more secure than a signature, it may not work for customers who struggle to remember a pin or have restricted dexterity.
Authentication processes which rely on a cognitive function test (a task that requires a customer to remember, manipulate, or transcribe information) can also be an obstacle. Customers with dyslexia or memory difficulties may find it difficult to remember specific characters from a security password, for instance. Here again, providing alternatives for certain customers can help - ideally offering at least one alternative method such as biometric identification (e.g. fingerprint scanning).
While digital banking reduces most direct customer interaction, financial crime teams will sometimes need to contact customers, e.g. to ask for information at onboarding or in relation to an unusual transaction. Again, disabled customers should be offered suitable options to meet their specific needs. Customers with dexterity problems may prefer to speak to someone over the phone rather than use a chat function, but those with hearing or speech impairments may prefer to type. While providing different communication channels undoubtedly increases operational complexity, it is vital to find ways to facilitate customers with additional needs.
Another issue to consider is how to distinguish between customers whose accounts have been taken over or who are being coerced or manipulated by someone else, and those who require assistance to access their money. Staff should be made aware of this possibility, and given suitable guidance on how to differentiate. Alternatively, customers could choose to have this information recorded on their account. Some firms allow an authorised third party to take certain actions on an account, for instance some providers issue cards for carers who can make limited purchases on behalf of the card holder without gaining unrestricted access to their whole account.
Finally, we as anti-financial crime professionals need to look inwards and consider the composition of our teams. Are we being as inclusive as possible, and are we offering equal opportunities to those with disabilities to work in this sector? As with any issue of inclusion, a more diverse team which encompasses those with disabilities will likely be better at spotting potential barriers and unintended consequences of financial crime controls. Can we do more to make hiring inclusive, and to make sure working arrangements are flexible and accommodating?
In partnership with Tech Nation’s FinTech Delivery Panel, FINTRAIL has produced a set of “FinCrime Principles of Inclusion”, which aim to increase awareness of the tensions between financial crime prevention and financial inclusion, whilst offering practical considerations for those designing or assuring an anti-financial crime frameworks. Find out more and download the principles here.
There are many initiatives underway in the financial sector to support financial inclusion. Without an active effort to consider the inclusion of customers with disabilities, fincrime controls can sometimes unintentionally undermine these efforts. We need to ensure that anti-financial crime measures do not create unnecessary barriers and undermine the industry’s drive towards inclusivity.
Key takeaways:
Offer alternatives for customers with disabilities: e.g. how to communicate with staff or how to activate a card
Train staff on recognising the needs of customers with disabilities
Recognise the difference between third party assistance and account takeover / coercion
More inclusive fincrime teams are likely to create and operate more inclusive controls.
Consider adopting the FinCrime Principles of Inclusion to ensure inclusivity is a key part of your thinking on financial crime controls
If you’d like to learn more, please contact Maya Braine, Head of Insights or email us at: contact@fintrail.com.
Introducing Insights and Research
Last month our CEO Rob Evans announced a series of changes at FINTRAIL. In my totally unbiased view, one of the most exciting is the formation of our new business area Insights and Research. In some senses, this is nothing new - FINTRAIL already produces content pieces, analysis and research for our clients including white papers, best practice guidance, market entry support, and due diligence and intelligence reports. Yet the creation of this team will enable us to do so much more - diversifying the products and services we can offer, highlighting the value our information and analysis can bring, and expanding the team to ensure an even broader range of expertise and knowledge.
One particularly exciting development is our intention to produce more multimedia content, both to spread the good word of FINTRAIL and on behalf of clients. While we’ll still be putting out blogs, articles and white papers, be prepared to see more explainer videos, stand-alone podcast episodes and audio content, and projects with collaborators to deliver quality content on financial crime topics.
In line with FINTRAIL’s desire to support businesses of all stages and sizes, Insights and Research intends to branch into new territory by offering practical, actionable intel in the form of off-the-shelf reports. These will cover topics such as financial crime market entry support, country risk rating products and regulatory overviews, which can add immediate value to companies that are getting started, refining their programme, or developing expansion plans. We want to ensure our insights are not only available to those with the scale and budget to commission dedicated projects, and that we find a way to provide support to all parts of the innovative financial services ecosystem.
We will also be playing a major part in FINTRAIL’s campaigns to support the fincrime community and make a meaningful societal difference. Over the course of the next year this will mean an emphasis on education, raising awareness to protect vulnerable segments of society at risk of being caught up in financial crime including fraud and money muling. Watch this space for further announcements on FINTRAIL and FFE initiatives in this area. We’ll also be continuing our work to promote diversity and inclusion within the financial crime space, and to ensure fincrime controls do not inadvertently create exclusion.
So to wrap up - 2022 is shaping up to be a hugely exciting year and I can’t wait to bring all this to life! We’ve started recruiting and are speaking to potential candidates with super interesting and varied backgrounds (details of open roles here), and it’s been extremely rewarding to see the genuine enthusiasm and excitement they have about where we could take the team. I’m also already having some brilliant conversations with companies who are interested in exploring these offerings, and we have some great projects in the pipeline. If you are interested in learning more and exploring how we can work with you and your firm to produce fincrime content or support your business with research and analysis, please do get in touch!
If you would like to speak to FINTRAIL about this article, please contact Maya Braine, Managing Director at maya.braine@fintrail.com.
FinCrime Principles of Inclusion
Financial exclusion continues to affect thousands of people throughout the world with an estimated 2 billion persons being unbanked across the globe. As anti-financial crime professionals, we may attempt to mitigate all our financial crime risks with the best intentions but how often do we really consider the full impact of our controls and how they affect those who vitally need access to the financial sector?
Those who were able to attend the FINTRAIL/ FinTech FinCrime Exchange conference last week (and listen to our panel on improving inclusivity in anti-financial crime) received a preview of the FinCrime Principles of Inclusion that we have been working on.
These principles have been developed with Tech Nation, as part of Finclusion 2021, with an aim to increase people's awareness around the challenges between financial crime prevention and financial inclusion whilst offering something practical for FinCrime professionals to reflect on when designing or assuring their anti-financial crime frameworks.
This is the first version of the principles and we would love your feedback for future versions. We would also like to thank those of who joined our working group and contributed to these principles.
This is one of many initiatives that have been conducted within November as part of Finclusion21. For more information do visit the Tech Nation website: https://technation.io/about-us/fintech-delivery-panel/finclusion-2021/
The FinCrime Principles of Inclusion can be downloaded via the button below.
Change is Coming.
Over the last 12 months the team at FINTRAIL has been spending a lot of time talking with our industry peers, listening to our clients and partners, and learning how the world of financial crime prevention is evolving. As a result of this we are very excited to announce that change is coming. It is time for FINTRAIL to evolve, just as our clients and the communities we serve are evolving.
We have always prided ourselves on being a forward thinking and proactive business that pushes the boundaries of what we do, provides our clients with the most relevant and credible support possible and, as best as possible, does some good for the community we serve at the same time.
We are making some changes in how we structure FINTRAIL to help us execute our vision. We thought our community and partners may be interested to hear why we are making these changes and what it may mean for them.
We have recognised that our clients value the breadth of global expertise we can offer. We have now worked with over 70 innovative financial service providers around the globe and that breadth of knowledge is unique. We want to be better at harnessing that global experience and making it available to all clients. This means we are dropping our regional consulting alignment, instead consolidating all our consulting engagements under a single Global team that we are catchily referring to as “Consult”. This business is headed by James Nurse, who will oversee an expanded global structure with regional and specialist subject expertise such as virtual assets and data. For our clients this means we enable greater consistency in execution, improves our ability to leverage our global expertise and attract class-leading talent wherever they are in the world, and ensures that clients on a local, regional and global scale have the support they need.
Effectively addressing financial crime requires the best possible information and knowledge. It is not widely known but the team at FINTRAIL have been busy in the background producing detailed research, analysis and content for many of the leading regulatory technology providers and regulated institutions for some time. Additionally we have seen significant increase in demand from our regulated clients for specific market entry, regulatory analysis and investor and client research/due diligence. As such we are launching a new business line that is headed by Maya Braine called “Insights”. This team of financial crime specialists, researchers and analysts is focused on providing clients and partners with dedicated support across a range of existing and new services that support better engagement, better decisions and improved effectiveness.
Every one of the team at FINTRAIL has a passion for financial crime prevention - it is a prerequisite really! This means we want to be able to continue providing relevant support to early stage businesses but also leverage our expertise to assist the Not-For-Profit (NFP) and For-Good parts of our community. We feel this needs a dedicated and specialist approach to do properly, so we have established a new business line named “Pioneer”. Pioneer is also overseen by James Nurse with a team that leverages our company-wide expertise to do some good for the community. This will mean that we remove some of the barriers that elements of our community face when trying to access anti-financial crime support and also drive meaningful change in areas we at FINTRAIL feel passionately about.
There is no denying that technology is key to the fight against financial crime. There is also no doubt that it is extremely difficult for some in the community we support to get access to funds to build new technologies that could have a meaningful impact. This may be for myriad reasons, not least because of race, gender or their geographical location. We want to be at the front of change here and as a result we have established a new business line called “Ventures”. Ventures is initially headed by our CEO Robert Evans and supported by an investment panel drawn from our network and FINTRAIL team to help us put our money where our mouth is. Ventures is FINTRAIL’s investment arm and is focused on two things -
building internal tooling and technology that will enable FINTRAIL to support our clients better; and
investing in and helping accelerate new anti-financial crime technology with a focus on those founders and teams who may ordinarily struggle to access that support but where they have ideas that can move the needle in the fight against financial crime.
Not only will Ventures provide funding for new technology initiatives, but we will leverage our global community and expertise to help provide founders with support and guidance as they feel appropriate.
Lots of these changes are happening in the engine room of FINTRAIL which means we are starting a period of significant recruitment across our business. Roles have either already launched or will be launching in coming weeks across Consult, Insights, the FinTech FinCrime Exchange (FFE) and our Operations teams. Please check out our careers page if you are interested in joining us on this exciting journey.
Over the coming weeks each of the new business line leads will be providing a little more insight on what they have planned for the coming year so stay tuned for that. We will also be reaching out to our clients and partners to talk them through any relevant changes.
As a team we are super excited about the next stage of FINTRAIL’s journey and we look forward to the future with our clients, partners and community.
Black History Month: A Personal Perspective
For those that don’t know me, I’m Martin, the COO here at FINTRAIL. I have chosen to write something about Black History Month, something which I have to admit I was not previously fully aware of and that has only been a more recent focus for me. Before I give an indication of what I want to share, to celebrate and understand the impact of black heritage and culture, I thought I should describe how I have approached diversity and what it means to me and my role.
Since joining FINTRAIL I have been learning from my colleagues and have developed a greater understanding of diversity and the value and impact it brings. My role is to help build and scale our internal structures and processes. Supporting diversity is one of FINTRAIL’s key culture pillars. This focus is employed internally from our recruitment and working practices and the interactions we have that foster team development, to our external work with clients ensuring we are conscious not to introduce bias and remain inclusive.
In terms of Black History Month, we believe celebrating the contributions of [people of colour] and promoting diversity and inclusion should not be limited to October, but should be woven into our activities all year round. Having said that, Black History Month provides a time to amplify that message and to take stock and refocus our efforts for the rest of the year. We also believe we should use Black History Month to do more than celebrate the achievements of a small number of well-known figures, but to focus on the contributions of [people of colour] in every area throughout our society. This also helps us see the importance of the efforts each of us can make, and how every sector, including anti-financial crime, needs to take stock to continually challenge racism and promote diversity and inclusion.
As part of this approach, we have a company-wide Diversity, Equality and Inclusion (DEI) strategy which ensures each team member has personal accountability in reducing racism and other forms of discrimination. The DEI strategy has been delivered externally through blog posts raising awareness and discussing areas we should consider when working within anti-financial crime. Gemma hosted the FinCrime Spotlight podcast where the whole of Season 2 was devoted to racial equality and diversity in FinCrime, gaining perspectives from anti-financial crime leaders from Black, Asian and Minority Ethnic (BAME) communities. FINTRAIL also collaborated with ACAMS to provide 30 BIPOC (Black, Indigenous, People of Colour) scholarship places on their newest certification, the Certified AML FinTech Compliance Associate (CAFCA). We are also exploring plans to offer internships for BAME school leavers who are interested in working within the financial services sector.
When reflecting on what I personally draw from an understanding of black history, given my own history in the military I cannot help but think of those within the Commonwealth who played a key part in both wars and post-conflict reconstruction, including the Windrush generation’s contribution to post-WWII Britain. It is clear to see the value of the efforts of people from around the globe, and how they gave their support during and after the First and Second World Wars. By showing some examples here, I hope to shed more light on the commitment many made (1).
Lieutenant Walter Tull 1888–1918
Walter Tull was the first ever black officer in the British Army and one of Britain’s first black professional footballers.
Walter was born in Folkestone, Kent, one of six children. His father was the son of a slave and had come to Britain from Barbados. By the time he was nine, Walter’s parents had both died and he was moved to an orphanage with his brother, Edward. While there, Walter showed a talent for football and started playing for local amateur side, Clapton FC. He was scouted by Tottenham Hotspur and joined them in July 1909, playing for them until he transferred to Northampton Town in October 1911.
In 1914, he enlisted with the 17th (1st) Football Battalion of the Middlesex Regiment and fought in World War One, promoting to the rank of Sergeant in 1916, and fighting in the Battle of the Somme. In December of that year he returned home having contracted trench fever. Once he had recovered, he was sent to the officer training school at Gailes, Scotland. Walter was commissioned and sent to the Italian Front in May 1917.
He led his men in the Battle of Piave and was mentioned in dispatches for his “gallantry and coolness under fire”. In 1918, he was transferred to France.. Walter was killed in action on 25 March during the Spring Offensive, near the village of Favreuil in the Pas-de-Calais. He commanded such friendship and loyalty that several of his men risked their own lives to recover his body. However, they had to abort the attempts under the heavy gunfire and advance of the enemy. Sadly, after the fighting, Walter’s body could not be found and he has no known grave, although he is commemorated with honour on the Arras Memorial in France. In 1999, Northampton Town F.C. unveiled a memorial to Walter at its Sixfields Stadium.
Lance Corporal Connie Mark 1923–2007
Connie Mark (née Macdonald) was born on 21 December 1923 in Rollington Town, Kingston, Jamaica. Her heritage came from all over the world; she was part Scottish, part Indian, part Lebanese, and part Jamaican. Connie was well educated, and came from a family that strongly supported the Royal family. When she left school she trained as a secretary.
n 1943, at the age of 19, Connie joined the Auxiliary Territorial Service (ATS) of the British Army, working as a medical secretary in the British military hospital in Jamaica with the Royal Army Medical Corps during WWII. She achieved the rank of Lance Corporal, but felt she was not paid correct wages because of racial discrimination. After Connie retired from military life she continued to fight for proper recognition of the role played by Caribbean servicewomen.
Connie moved to Britain in 1954 where she became active in her West London community. She formed the Gladiola Community Club, was treasurer to the Commission for Racial Equality, and was a founding member of the Mary Seacole (2) Memorial Association. She received a British Empire Medal for meritorious service in 1991 and was made a Member of the Most Excellent Order of the British Empire (MBE) in 1993.
If you are interested in joining the FINTRAIL team or want to learn more about our efforts to promote diversity and inclusivity within anti-financial crime, please check out the rest of the website or get in touch with me or one of the team to learn more.
Footnotes:
(1) Courtesy of the MOD Medium blog
(2) Mary’s story is also remarkable - Mary Seacole Trust
Banner photo: THE SOMME OFFENSIVE ON THE WESTERN FRONT, 1916 : The British West Indies Regiment in camp on the Albert - Amiens Road, September 1916. By Ernest Brooks - This is photograph Q 1202 from the collections of the Imperial War Museums (collection no. 1900-09), Public Domain.
Fraud scores: get a feel for your own
Consider these few questions to learn more about everyday signals of fraud online and get thinking about how they factor into your fraud scoring.
I usually make online purchases in the evening.
I use a VPN when making online purchases.
Yes
No
I get sucked into a browsing black hole when visiting a site.
Yes
No
I visit a site a few times before committing to a purchase.
Yes
No
I share my device with others.
Yes
No
It's pretty normal for me to spend around 75-150USD when I shop online.
Yes
No
I let my device auto-fill all of my details when I check out.
Yes
No
I follow accounts on social media that provide investment advice, including advice on cryptocurrency investments.
Yes
No
I enter contests on social media.
Yes
No
I have sent a DM to buy goods or services that I've seen advertised on social media.
Yes
No
I use a VPN when making online purchases.
Yes
No
I get sucked into a browsing black hole when visiting a site.
Yes
No
I visit a site a few times before committing to a purchase.
Yes
No
I share my device with others.
Yes
No
It's pretty normal for me to spend around 75-150USD when I shop online.
Yes
No
I let my device auto-fill all of my details when I check out.
Yes
No
I follow accounts on social media that provide investment advice, including advice on cryptocurrency investments.
Yes
No
I enter contests on social media.
Yes
No
I have sent a DM to buy goods or services that I've seen advertised on social media.
Yes
No
Answer mostly Yes?
You’re doing exactly what platform providers expect of you.
Fraudsters know this, and have even published guides that outline how to look more like you online. If you have safe access to the dark web, just look up a guide to card cashing for more (or contact us for an example). Many fraudsters are less careful, though, and those signals can be worked into your fraud score.
You may be risking making yourself a bit of a victim, especially if you answered Yes to the last few questions. There are many resources available to help protect yourself!
Answer mostly No?
You’re a bit of an enigma. Most people act a bit different than you online.
If you answered No to the last few questions, you’re probably being cautious on social media. Smart!
Using a VPN, though, is not a sign of riskiness or even fraudulent behaviour: fraudsters often favour anonymous proxies, and this is probably reflected in your fraud score.
Same with some of the other earlier questions: those are just normal online signals that fraudsters may try to mimic (or not!).
Everyday fraud signals
Here are some more signals that companies often incorporate into their fraud scores. As SEON says, fraud will look uncanny valley compared to good users or transactions and the differences can often be spotted via everyday, relatively accessible red flags:
Fraudsters try to overfit an identity—for example, by matching a fake email address to a stolen identity. Legitimate users are not often so super fitted (or, put simply, are less predictable). Who'd want to be Jack or Jill number 52 @gmail.com?
Social media checks are valid: most fraud attempts will be linked to a fake identity with less than 2 social media profiles.
Social media profiles that aren’t aged, or have few connections (or too many, indicating bot activity), can also be signals.
Monitor logins and login attempts from different countries and proxies. A common fraudster mistake is to set up an account from a VPN or proxy but later click the account activation without the same protections in place.
Virtual SIMs or throwaway numbers can be a telltale sign. Platforms can be a signal, too: Telegram use is proving popular among scammers and fraudsters, for example.
Aged accounts are considered more valuable for account takeovers than a new account, which will usually undergo more checks.
Fraudsters will “leapfrog” across platforms once successful with one account. A hacked Google account can be used across numerous other platforms, for example.
Cut and paste activity in form fields, in addition to autofill, can be a signal.
The right provider can help you make sure you’re taking advantage of this readily available data. To chat more, reach out to contact@fintrail.com, or our subject matter contributors, SEON, at info@seon.io.
Cryptocurrency in Conflict Zones: Risks and Opportunities
For the past two weeks, the world’s attention has been firmly fixed on Afghanistan. One critical challenge, both for those fleeing and those left behind, is access to money. The banking system is on the verge of collapse, with many branches closed and those which are open quickly running out of cash. There are long-term concerns for what Taliban rule will mean for the economy and for people’s livelihoods. In the face of this uncertainty, a small but increasing number of Afghans are reportedly turning to cryptocurrency as a way to shore up their savings, evade Taliban oversight, and maintain international access.
There have been similar developments in other conflict zones and politically unstable countries. According to a Guardian article earlier this year, Libya, Palestine and Syria neared the top in online searches for bitcoin and other digital currencies, and there are reports of growing usage in troubled countries including Venezuela, Iran, Zimbabwe and Lebanon. Many of these countries have a substantial middle class with moderate levels of savings and financial literacy and high internet penetration rates - the ideal conditions for crypto adoption. The phenomenon has gained scholarly attention; Boston University convened a task force in 2015 to explore how cryptocurrencies could provide assistance in conflict zones. So how realistic is this idea? And what financial crime challenges would wider adoption bring in its wake?
Unlike in developed markets, where crypto adoption was initially driven by ideology and later by speculation, in fragile states adoption is mostly driven by practical need. Virtual currencies can offer solutions to a number of critical problems:
Inflation: despite the inherent instability of crypto assets themselves, they can be a good hedge in jurisdictions afflicted by severe currency depreciation. Both Venezuela and Iran have witnessed increasing crypto adoption in the face of dramatic inflation - in Venezuela’s case, peaking at 10,000,000% in 2019. Wealthier individuals in such countries have previously turned to stock markets and physical assets such as gold and property to protect their wealth, but crypto offers a more accessible option to those with smaller amounts to invest.
Circumventing sanctions controls: crypto is sometimes the only solution for those in sanctioned countries who cannot move money abroad any other way. Many small businesses and freelancers in Iran, for instance, choose to be paid in crypto as they are not able to receive international bank transfers or use services like PayPal.
Avoiding currency controls in countries with restrictions on the amount of currency that can be moved abroad. For instance, during the Lebanese financial crisis which broke out in 2019, customers’ savings were effectively frozen by banks imposing informal capital controls and blocking transfers abroad. New regulations were introduced in May 2020 to permit foreign currency withdrawals, but these were limited to $50 to a few hundred dollars a month, with transfers abroad capped at $50,000 a year for “necessary matters” only. Growing numbers of Lebanese citizens are choosing to keep their savings in cryptocurrency to maintain control and prevent losing it to bank- or state-imposed restrictions.
Uncensored: while the lack of centralised control was originally a purely ideological plus point, in conflict zones this is often of practical importance. The censorship-resilient system reassures users who have lost faith in their national financial systems and want to keep their assets out of reach of the authorities, and safe from seizure, freezes or other restrictions.
Price and speed: Perhaps most obviously, crypto offers faster and cheaper overseas transfers. While this is a positive anywhere, it’s especially useful in unstable countries which have large diasporas and are heavily reliant on remittances (e.g. Somalia where remittances account for a huge 23% of GDP). It is also a key consideration in countries deemed to be high risk and “derisked” by global banks, where the local banking network is poorly connected internationally, resulting in higher fees, longer waits, and greater inconvenience.
Nevertheless, there are still clearly numerous barriers to more widespread adoption. Top of the list in most emerging markets is a lack of awareness, and unreliable access to the internet. In high-risk and fragile states, there are additional barriers in the form of access to the banking system. Crypto may seem like a good solution for the unbanked, but not being able to use a bank account or credit card to trade restricts the type of platforms available. Users may also lack the ID documents required to open accounts with the larger exchanges.
For this reason, crypto activity in fragile countries rarely takes place on international, centralised exchanges. It is mostly driven by decentralised P2P exchanges, which do not require KYC and allow users to buy and sell in cash - either through local crypto-to-cash brokers or in-person payments. Social media is also increasingly used to match local buyers and sellers. These platforms help customers avoid restrictions imposed by larger exchanges such as geoblocking; under pressure from their banking partners, a growing number of exchanges have banned users based in Iran, for instance. In other instances, users buy and sell crypto with the help of friends or family based abroad with fiat bank accounts and credit cards, who can purchase and hold crypto on the user’s behalf. In a creative blend of the old and the new, hawala dealers can also facilitate purchases, either by sending or receiving money from friends and family overseas, or by letting people cash out by selling their coins to the dealer in exchange for local currency.
Conflict zones are inherently high-risk for financial crime including arms trafficking, sanctions evasion, corruption, and terrorist financing, and P2P activity on decentralised exchanges only exacerbates these risks. The absence of KYC controls and the use of cash are ideal for criminal actors as well as civilian users. Having associates or hawala dealers making purchases and holding crypto on behalf of a user in a fragile state clearly obscures the true owner and source of the funds. The use of P2P exchanges is also risky for users themselves, as they are more exposed to fraud and theft when making cash payments or using exchanges without escrow services.
Unsurprisingly, governments in conflict-affected and fragile states are unlikely to be too concerned with developing the cryptocurrency regulatory environment. The onus therefore falls on financial institutions to find ways to monitor developments and address the risks posed. One clear lesson is the need to understand the broader context, looking at political and security developments to predict and engage with peaks in demand. Widespread adoption remains unlikely, given the numerous challenges around infrastructure, trust and education. Nevertheless, it is clear that crypto will remain an appealing option for some, as long as the traditional financial system fails to offer a better alternative. Finding ways to reduce the risks and integrate these users into a regulated crypto ecosystem could provide new options for financial inclusion for the most vulnerable.
If you would like to speak to FINTRAIL about any of the issues raised in this article, please contact Maya Braine, Managing Director for the Middle East and Africa at maya.braine@fintrail.com. We work with FinTechs in Saudi Arabia and the wider Middle East region to build out their financial crime compliance controls, secure banking partnerships, select and integrate RegTech vendors, perform health checks and audits, provide interim compliance support, and run training.
FINTRAIL and Pride
Throughout June, many of you might have been wondering where FINTRAIL’s commentary on Pride month was; we’ve posted before about the importance of diversity in anti-financial crime in helping to ensure effective but inclusive controls in any given AFC framework, and making sure LGBTQIA+ issues are encompassed as part of this is no exception. So, we thought it was time (in July 😣) to update you on where we are.
We held off marking Pride month with the addition of the rainbow symbol to our logo because we wanted to ensure that we were not guilty of rainbow washing; if we post about anything related to diversity, we want it to have tangible impact (even if it is small). What we realised as part of our discussions about Pride month was that we haven’t - in complete honesty - taken much specific action around LGBTQIA+ issues. While we are in the process of updating our parental leave policy to make the terms we use more inclusive and of course have very strong anti-discrimination policies, these feel like small, relatively standardised approaches.
We are clear that this needs to change. We are starting with a summary of some of the great initiatives that other organisations are working on and using that to inspire our own action:
Tide - we were really excited to see that Tide will be making regular donations to the Human Dignity Trust, a charity that works with LGBTQIA+ activists around the world to defend human rights in countries where private, same-sex, consensual sexual activity is criminalised. We also enjoyed Tide’s series on LGBTQIA+ founders, which you can read here.
Daylight - Daylight’s whole approach is tailored towards the specific needs of the LGBTQIA+ community and it’s great to see this business thriving in the US where - in some states at least - these communities have been marginalized to the extreme. Daylight’s products are designed specially for the LGBTQIA+ community, and aren’t simply “LGBTQIA+ friendly”.
Mastercard True Name campaign - having a name on your card that doesn’t reflect your true identity is a dehumanizing experience. This campaign from Mastercard demonstrates the challenges particularly the Trans community face in this regard and it’s great to see proactive action being taken by such a huge global brand.
Some of the early ideas we are exploring at FINTRAIL include:
Holding a lunch and learn session on pronouns, to help ensure the team is equipped with the knowledge to recognise and use appropriate pronouns.
Running a book club session focussed on books by LGBTQIA+ authors, to help us better understand the issues faced by the community both past and present.
Developing a simple check-list for firms, to make sure that their anti-financial crime policies are not accidentally (or inherently) biased against the LGBTQIA+ community.
Selecting a charity that supports LGBTQIA+ issues and donating or running fundraisers to support them.
We would love to hear from you about what initiatives we could support that would have a positive impact among the LGBTQIA+ community. Please add your suggestions in the comments below.
Marking ‘Juneteenth’ with FinCrime Opportunities
On Saturday 19th, members of the FINTRAIL team will be celebrating ‘Juneteenth’. Also known as ‘Emancipation’ or ‘Freedom Day’, the day - the name of which combines the month and the date in which it falls - marks a major milestone in Black history.
President Abraham Lincoln issued the Emancipation Proclamation on 22 September 1863, declaring that “all persons held as slaves” in the Confederacy “are, and henceforward, shall be free.” But the theoretical freedom the Proclamation afforded took time to enforce, dependent as it was on the advances of the Union Army even after the end of the Civil War in April 1865.It was not until 19 June, 1865, that the troops of the Union Army were able to march into the Texan city of Galveston, and announce that slavery in the state - the last of the Confederacy to retain it in law - was at an end.
From that point on, the date became a day of celebration in Texas, with people of all backgrounds coming together in parties, festivals and educational events. Eventually, the date became an official Texan state holiday in 1980, and one that then spread to over 40 other US states, and increasingly beyond the US too. But although it is primarily a celebration, the day has also served as a vital reminder; that the words of a proclamation, however resonant, cannot make a society fair; it takes action from all of us to translate words into reality.
We at FINTRAIL are committed to playing our part in this ongoing endeavour, with the promotion of Diversity, Equality and Inclusion essential to our core values. We are therefore delighted to have worked closely with the Association of Certified AML Specialists (ACAMS), to develop the Certified AML FinTech Compliance Associate (CAFCA) Scholarship Program, announced today. The program will support 30 Black, Indigenous and People of Color (BIPOC) professionals who wish to undertake CAFCA, and enhance their careers in FinTech compliance. The Scholarship will cover a full waiver of fees and the costs of both training materials and the course examination.
Speaking to ACAMS, Robert Evans of FINTRAIL, expressed his delight in being able to support the initiative, coming at such an important time; “we couldn’t be prouder,” he said. Speaking to the practical spirit of Juneteenth, he emphasised that the scholarship was part of the firm’s wider effort to make a real and not just a rhetorical difference. “Diversity is of paramount importance to the long-term sustainability of the FinTech industry,” he noted, “and this scholarship program is a step forward in helping to ensure that the sector’s compliance teams are able to meet the demands of a rapidly evolving and highly diverse sector.” He encouraged BIPOC professionals to “seize the opportunity.”
You can find out more about the program at https://www.stg.acams.org/en/resources/diversity-equity-inclusion/scholarships, and apply at ACAMS.org by completing an application form and submitting a short video. Good luck - and happy Juneteenth.
Is FinTech Saudi Arabia’s new oil? Some financial crime considerations
Firstly, a quick summary. There has been a lot of buzz about Saudi Arabia embracing FinTech as “the new oil”, a key pillar of its ambitious economic reform programme designed to move away from a dependence on crude oil. It is competing with its neighbours, especially the UAE and Bahrain, to become a regional FinTech hub, encouraging the best talent and most promising start-ups to make Riyadh their home. The government has launched numerous initiatives including FinTech Saudi - a joint venture by the central bank (SAMA) and the Capital Markets Authority (CMA), a regulatory sandbox, and the CMA FinTech Lab among others. The government’s Vision 2030 sets a target for moving away from cash and increasing cashless payments to 70%. Next year will see the launch of the FinTech Saudi Hub in the King Abdullah Financial District, and new regulations on FinTech activities. Most major Saudi banks have also initiated FinTech programmes and invested large sums in digital transformation to explore new opportunities and stave off the competition.
But behind the positive headlines, is the regulatory environment and compliance culture in the Kingdom ready for such large-scale change? And how can Saudi Arabia embrace FinTechs and digitisation while guarding against financial crime threats?
Regulatory Environment
There are many components to establishing a thriving FinTech ecosystem, not least a conducive regulatory environment. FinTechs have only been able to receive licenses in Saudi Arabia since January 2020, when SAMA issued its first licences to non-bank financial institutions (STCPay and Geidea). In the same month SAMA introduced the Payment Services Provider Regulations (updated in August 2020), and in February 2020 it issued guidelines for digital-only banks. These guidelines stated digital banks had to meet the requirements of existing regulation plus demonstrate compliance with AML/CTF regulations “in a fully digitised environment”.
Despite the positive moves, there are still a number of grey areas where FinTechs need more clarification to understand their regulatory obligations. Interaction with the regulator is extremely useful, but is difficult for small start-ups who lack the communication channels and existing relationships of major banks. This is where initiatives like FinTech Saudi can play a really helpful role, acting as an aggregator for queries and serving as an intermediary for the whole FinTech community.
RegTech
Like most markets, Saudi Arabia professes that it is keen to embrace RegTech as a way to improve efficiency and effectiveness in tackling financial crime. The digital banking guidelines published in 2020 describe banks operating “in a fully digitised environment”, which appears to open the way for using RegTech for processes like e-KYC. However, more details are needed around what is allowed in practice and how the regulations are to be interpreted. For instance, the use of facial biometric technology is still not permitted in financial services, which limits onboarding tools such as selfie and video verification (although banks are testing the water around biometrics - Riyad Bank has started using voice authentication, and Al Rajhi Bank has rolled out self-service terminals featuring fingerprint biometrics). Another complication is data storage; Saudi regulations place restrictions on the hosting, transfer and storing of customer data outside the Kingdom, restricting the use of many compliance platforms and tools.
Open Banking
Looking ahead, the next hot topic is open banking. SAMA has announced an open banking framework which is due to go live in the first half of 2022. This will compel financial institutions to allow third parties access to customer data (with the customer’s consent), resulting in greater competition and innovation. So far, Bahrain is the only Gulf state to have adopted open banking, although individual financial institutions in the UAE have introduced open banking APIs.
This development will supercharge the growth of the FinTech sector and create both challenges and possibilities in relation to financial crime. Saudi banks can learn from their international counterparts that have developed security measures to protect their open banking APIs from fraud, such as multifactor authentication (MFA), but opening up their systems to third parties does inevitably create new fraud risks. For money laundering, open banking can theoretically be a game changer; data can be shared across multiple providers, enabling each institution to form a more complete picture of customers and their transactions. However, this only works if they change their KYC and monitoring controls to capitalise on this possibility.
FinTechs and other market entrants will also have to play catch-up to prevent an unequal playing field; banks have spent years developing rigorous controls under strict regulatory supervision, whereas new firms will have less experience in financial crime risk management, and regulators may struggle to effectively monitor the increasing number of small companies. Money launderers and fraudsters are extremely good at identifying and targeting weak links, so it’s important for the whole financial sector to apply the same high standards. Ultimately, regulators need to reconsider what data can be shared between institutions and how, to improve customer experiences and develop a holistic understanding of customers to improve financial crime detection.
Recruitment and hiring
A final challenge in both Saudi Arabia and the wider GCC is finding the right compliance talent for an increasingly digital world. The ideal candidates would be people with experience in FinTechs and digital products, but given the lack of such expertise in Saudi Arabia, that would mean recruiting people from other markets like the UK who wouldn’t necessarily understand the regional context or local regulatory nuances. The next best thing, then, is people who thrive on change and are happy to challenge received wisdom and upend the traditional way of doing things. They want to engage with their peers and with the regulators to share insights, ask questions and develop guidelines that will help the sector grow responsibly. For the right people, it’s a hugely exciting opportunity!
Final Thoughts
The next couple of years will be critical for the Saudi FinTech sector. One factor that will determine how quickly new firms can get up and running is if they can assure regulators and banking partners that their compliance programmes are sufficiently robust and that they can successfully balance customer experience with suitable risk controls. Saudi firms can look to international counterparts for guidance and ideas, although they should be aware that even these firms don’t have all the answers, and more developed markets still face real challenges around fraud and money laundering. Nonetheless, benchmarking against international best practice will provide reassurance to regulators and partners, and show a level of sophistication beyond the baseline of meeting minimum regulatory requirements.
However, it is not just FinTechs themselves who need to be open-minded and ready to learn to get the sector off the ground. Regulators also need to be receptive to new ideas, technologies and ways of working, and should be prepared to seek expert advice in areas where they may lack experience, such as cryptocurrencies. The good news is that SAMA and other government bodies in Saudi Arabia genuinely seem prepared to do this, and to work collaboratively with the private sector to encourage growth and work through the details to ensure the regulatory environment permits FinTechs to thrive while successfully minimising financial crime risks.
If you would like to speak to FINTRAIL about any of the issues raised in this article, please contact Maya Braine, Managing Director for the Middle East and Africa at maya.braine@fintrail.com. We work with FinTechs in Saudi Arabia and the wider Middle East region to build out their financial crime compliance controls, secure banking partnerships, select and integrate RegTech vendors, perform health checks and audits, provide interim compliance support, and run training.
Stephen Lawrence: 28 years on
28 years later. Has anything really changed? Well, no. Black and underprivileged people as innocent as Stephen Lawrence continue to be murdered around the world; whether that be in police custody as in the case of George Floyd, which sparked global unrest and the Black Lives Matter¹ movement rising in prominence, or as a result of local council and wider governmental failings, as in the case of the Grenfell Tower Fire - a 24-storey council home to numerous non-white families.
Irrespective of the cause, what remains consistent is the painful process that loved ones of victims have to undergo to get justice. With corrupt police conduct running rife through the Stephen Lawrence case, the continuous fight from his parents Doreen and Neville saw the Macpherson Inquiry² lead to an overhaul of Britain’s race relations legislation. Additionally, the "double jeopardy rule" was reformed, which almost 20 years later, in 2012, led to two of Stephen’s five murderers being sentenced to life in prison.
Macpherson's most controversial finding was his use of the term "institutional racism" which he explained as the "collective failure of an organisation to provide a professional service … through unwitting prejudice, ignorance, thoughtlessness and racist stereotyping which disadvantage minority ethnic people". It is also described in the report as a “corrosive disease” which is evident in society today given the assumption that black victims of violence are themselves involved in criminal activity.
An incident mirroring this prejudice involves Alexandra Wilson, a black Barrister, who is often mistaken for a defendant when in court. In her book “In Black and White”, she covers these experiences and also highlights how the mistreatment of black people in the legal profession negatively impacts how justice is served to our Black, Asian and Minority Ethnic (BAME) populations in the UK. These prejudices don’t end here however, within the anti-financial crime space today we see barriers for BAME individuals accessing financial services, a lack of BAME representation in the industry past senior management roles, a huge disparity between how banks and FinTechs approach diversity and how they factor it into their AFC control mechanisms.
Next Steps
So, how do we combat institutional racism? Undoubtedly, to discriminate on the grounds of race is against the law. Be that as it may, this isn’t wholly felt throughout the black community. As such, a vast variety of authors have assembled from different backgrounds and ethnicities in an effort to clear up any misconceptions and inconsistencies around racism. They have put pen to paper and have written books to tell their side of events and have their voices heard in an attempt to ultimately help white people understand and deal with their privilege. A company wide FINTRAIL book club was held in October 2020 that marked Black History Month; we read a range of books with the aim of challenging/altering our own perspectives on race related issues.
Books read, so... Job done? Absolutely not. No matter the amount of content we read on anti-racism, fundamentally, we need to practise it. We need to support non-white perspectives within our teams, be cautious when considering demographic factors when evaluating customer risk and be self aware of our own unconscious biases with regards clearing/investigating screening or monitoring alerts. These suggestions along with others in this FINTRAIL blog post highlight some very practical steps we can take within the world of anti-financial crime to combat systemic racism. Further, via a podcast series, FINTRAIL also sought out BAME anti-financial crime professionals to discover the moments in their careers that shaped them as a professional. On these podcasts, we discuss what more we can do to promote racial diversity within our industry as well as how we can support and learn from racially diverse voices.
How else then are the FINTRAIL team exploring diversity issues? In addition to the above, we have a company-wide dedicated Diversity Equality and Inclusion (DEI) strategy. This ensures each team member has personal accountability in reducing racism. A few of our next steps include partnering with an organisation to promote AFC internships for BAME school leavers, widening of our candidate pool when hiring and the creation of an internal DEI forum for team members to openly discuss adversity. We’d love to hear what you are doing either individually or as a firm to combat racism.
If you are interested in speaking to the FINTRAIL team about the topics discussed here or any other anti-financial crime topics, please feel free to get in touch with Ishima Romain, Analyst or email us at contact@fintrail.co.uk.
¹https://blacklivesmatter.com/ (US) and https://blacklivesmatter.uk/ (UK)
²https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/277111/4262.pdf