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Reuters: Collaborations Between Regulators and Industry Most Effective in Addressing Financial Crime, Says Consultant

Asian regulators are relying increasingly on collaboration with the industry to address issues and risks, and such partnerships have proven to be most effective in addressing financial crime challenges, a consultant said.

Partnerships between regulators and the industry have been notable in Hong Kong and Singapore, two of Asia’s leading financial centres, in recent years. The Monetary Authority of Singapore (MAS) has actively engaged the industry in a number of initiatives which include the KYC utility, Project Ubin which involves the use of blockchain, the establishment of the Anti-Money Laundering/Countering Terrorist Financing Industry Group (ACIP), and most recently the formation of Conduct and Culture Steering Committee for which the country head of DBS Bank has been appointed its chairman.

MAS’ collaborations with the financial industry is not an entirely new practice and can be traced back to 1997 when the Financial Sector Review Group was set up to recommend strategies to grow Singapore’s financial sector, said Wong Nai Seng, executive director, risk advisory at Deloitte in Singapore.

Regulators can’t do it alone

Partnering with the industry is very much part of MAS’ approach to supervision as set out in its four principles of financial sector oversight, Wong said. The four principles that underpin MAS’ approach are a risk-focused approach, stakeholders’ reliance, a disclosure-based approach and enterprise support.

“The four principles reflect the philosophy and thinking of how MAS wants to supervise the industry. It supports partnerships and works with the industry to promote the safety and stability of the financial system. This recognises that regulators can’t do it alone… By working with different stakeholders, you crowd-source ideas and develop solutions with them,” he said.

Public/private partnerships see greatest benefits in financial crime

In the area of financial crime, collaborations between regulators and the industry have allowed both parties to reap real benefits, said Brandon Daniels, president of global technology markets at Exiger in New York.

“Financial crime compliance is designed to find potential criminal abuse of the regulated financial market, and so it is to the best interest of banks and regulators to have an open conversation on what techniques are working in the context of financial crime and those that aren’t,” he said.

Minimal outcome: 99% illicit funds unaccountable

Neither financial institutions nor regulators will stand to benefit if the former have to spend a significant amount of effort and investment and yet provide minimal outcome to regulators and law enforcers — a situation that is happening worldwide, Daniels said.

The minimal outcome is most evident from the fact that the global financial industry has not been able to trace 99 percent of illicit funds despite the fact that financial institutions have spent tens of billions of dollars in the area of financial crime. Partnerships between regulators and the industry will therefore allow for open conversation on where the investment in financial crime can be better spent, Daniels said.

Regulators will also benefit from such collaborations which will allow them to gain early insights into the challenges faced by financial institutions in managing financial crime risk, according to Daniels.

“In many cases, regulators have been put in a position where they have to police the compliance processes more than the compliance outcomes,” he said.

More open data sharing; controversy

Partnerships between regulators and the industry will also see more open data sharing, allowing both parties greater access to each other’s data, Daniels said.

“If you put everyone, the law enforcement agencies and the industry on the same side, there is more information sharing and therefore a better chance of identifying potential money launders or sanctioned entities,” he said.

But the sharing of information between regulators and the industry has also caused controversy in certain jurisdictions, particularly in the UK. A lack of trust among the general public in financial institutions has prompted lawmakers such as Kevin Hollinrake MP and anti-corruption groups to lament that public/private partnerships would stifle the UK government’s ability to effectively create policies that would hold banks accountable. UK banks have little interest in seeing strong financial crime policies and enforcement, they said.

Such comments came in the wake of the UK government’s and the National Crime Agency’s plan to set up the Economic Crime Strategic Board to refine the way in which UK accesses and manages financial crime.

“There is a contingent [in the UK] […] post-crisis [that] doesn’t feel comfortable that institutions have their best interest at heart, and I can’t dismiss that scepticism. They believe that regulators are supposed to hold the banks accountable. I agree, a part of a financial regulator’s remit is to hold banks accountable for misconduct; but that is not their entire purpose. Holding banks accountable is one thing, but you can’t make it such that banks become insolvent or have no opportunity to grow because of stifling costs. If banks don’t survive, it is also not a public good. I think the UK government is taking progressive steps forward to foster an open environment, [and to have an] understanding [that] there must be a balance between accountability and sustainability,” Daniels said.

He pointed to two important aspects of the role of regulators: their responsibility in coming up with protective measures to manage risks in the financial system and their duty to ensure the soundness of the financial market, including ensuring financial institutions are growing and healthy to support the needs of the general public.

Positive experience of Singapore and Hong Kong

The experience of ACIP in Singapore and similar partnerships in Hong Kong clearly demonstrated the benefits of such public/private partnerships, Daniels said. The financial institutions in both jurisdictions involved in such partnerships were inspired to think of new ideas in solving financial crime.

“I really believe that Singapore and Hong Kong are leading the way in terms of how their public/private partnerships can be effective while the regulators still maintain their role as independent stewards of the financial market,” he said.

– Writen by Patricia Lee, chief correspondent, banking and securities regulation, Asia

This article first appeared on Thomson Reuters Regulatory Intelligence


Fighting financial crime in practice
Read more from Reuters in Exiger’s series of articles for AML professionals:

  • Advanced Analytics Used for Tackling AML Issues Have Yet to Replace Banks’ Legacy Systems
    Data analytics has the potential to uncover financial crime – but how are banks implementing it on the frontline?
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  • Greater Awareness of Personal Data Privacy Law Heightens Conflict with Financial Crime Regulation
    How can banks safely navigate the ‘grey zone’ that exists between how they leverage data for due diligence and how they fulfil their data privacy obligations?
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  • 1% Illicit Funds Uncovered in Financial System Raises Question About Whether Banks Need to Do More
    Less than 1% of illicit money flows typically gets seized and frozen given today’s AML controls – so how do you trace the other 99% awash in financial markets?
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The risk landscape is constantly changing. Hear about the latest with Exiger.