How RegTech can support the AML/CTF Supervision Regime. Neil Jeans Director & Co-founder AML Accelerate

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1 How RegTech can support the AML/CTF Supervision Regime Neil Jeans Director & Co-founder AML Accelerate

2 AML/CTF Environment Multiple environmental pressures present regulators with significant challenges in supporting and supervising regulated entities. Regulators are also often under-resourced to provide effective supervision and oversight of regulated entities. To date many regimes AML/CFT regulatory focus has predominantly been on larger (Tier 1) financial organisations which are seen as systemically important. There is a growing recognition that Tier 2 financial organisations to date have been subject to less regulatory focus, and consequently businesses covered by AML/CFT obligations in many countries are struggling to achieve effective compliance with AML/CFT laws and regulations. Countries are also expanding AML/CFT regimes to include other gatekeepers. This will see many more businesses across a diverse range of sectors needing to comply with AML/CFT obligations, and will place additional strain on the existing finite resources of AML regulators. Across all FATF Members, FATF Mutual Evaluations have identified significant challenges regarding supervision: 26% (9 out of 31) are Partially Compliant regarding the supervision of FIs. 31% (11 out of 35) are Partially Compliant regarding the supervision of DNFBPs. 46% (14 out of 35) are Non- Compliant regarding the supervision of DNFBPs.

3 FATF Mutual Evaluation Methodology - Supervision The FATF sets clear expectations regarding the supervision of AML/CFT compliance through the 40 Recommendations and Mutual Evaluation methodology. Supervision (Immediate Outcome 3) Supervisors appropriately supervise, monitor and regulate financial institutions and DNFBPs for compliance with AML/CFT requirements commensurate with their risks. Supervisors provide financial institutions and DNFBPs with adequate feedback and guidance on compliance with AML/CFT requirements. Over time, supervision and monitoring improve the level of AML/CFT compliance, and discourage attempts by criminals to abuse the financial and DNFBP sectors, particularly in the sectors most exposed to money laundering and terrorist financing risks. Criteria For Assessment How well do the supervisors identify and maintain an understanding of the ML/TF risks in the financial and other sectors as a whole, between different sectors and types of institution, and of individual institutions? With a view to mitigating the risks, how well do supervisors, on a risk-sensitive basis, supervise or monitor the extent to which financial institutions and DNFBPs are complying with their AML/CFT requirements? To what extent are supervisors able to demonstrate that their actions have an effect on compliance by financial institutions and DNFBPs? How well do the supervisors promote a clear understanding by financial institutions and DNFBPs of their AML/CFT obligations and ML/TF risks?

4 Recent FATF Mutual Evaluation Results Supervision The effectiveness of supervision is a key building block of any AML/CFT regime. R.26 Regulation and supervision of financial institutions R.28 Regulation and supervision of DNFBPs IO th Round Mutual Evaluation Results C LC PC NC C LC PC NC HE SE ME LE Compliant Largely compliant - There are only minor shortcomings. Partially compliant - There are moderate shortcomings. Non-compliant - There are major shortcomings. Compliant Largely compliant - There are only minor shortcomings. Partially compliant - There are moderate shortcomings. Non-compliant - There are major shortcomings. Supervisors appropriately supervise, monitor and regulate financial institutions and DNFBPs for compliance with AML/CFT requirements commensurate with their risks. High level of effectiveness - The Immediate Outcome is achieved to a very large extent. Minor improvements needed. Substantial level of effectiveness - The Immediate Outcome is achieved to a large extent. Moderate improvements needed. Moderate level of effectiveness - The Immediate Outcome is achieved to some extent. Major improvements needed. Low level of effectiveness - The Immediate Outcome is not achieved or achieved to a negligible extent. Fundamental improvements needed. 4th Round FATF Mutual Evaluations have identified significant challenges regarding supervision: 25% are Partially Compliant regarding the supervision of FIs. 80% are Partially Compliant regarding the supervision of DNFBPs. 61% need major improvements in supervision effectiveness. 25% need fundamental improvements in supervision effectiveness. Jurisdiction (click on the country name to go to the report on IO3 R.26 R.27 R.28 Armenia ME LC C PC Australia ME PC PC NC Austria ME C C LC Bangladesh ME PC LC PC Belgium ME PC LC PC Bhutan LE PC C NC Canada SE LC C PC Costa Rica ME LC LC NC Cuba SE LC LC PC Ethiopia LE LC C PC Fiji ME LC LC PC Guatemala ME C LC PC Honduras ME LC C PC Hungary ME LC LC PC Italy ME LC LC LC Jamaica ME PC PC PC Malaysia SE C C LC Norway ME PC LC PC Samoa LE PC PC PC Serbia ME PC LC PC Singapore ME LC C PC Spain SE LC C LC Sri Lanka LE PC C NC Sweden ME PC LC LC Switzerland ME LC LC LC Trinidad and Tobago ME PC LC PC Tunisia LE NC LC PC Uganda LE NC NC NC United States ME LC C NC Vanuatu LE PC PC PC Zimbabwe LE PC LC PC

5 How Can RegTech Help Understanding ML/TF Risks How well do the supervisors identify and maintain an understanding of the ML/TF risks. RegTech can help supervisors identify and maintain an understanding of the ML/TF risks in the financial and other sectors as a whole, between different sectors and types of institution, and by individual institutions. RegTech solutions are becoming available that provide the structured and consistent application of ML/TF risk assessment methodologies. Solutions are able to collate and provide consolidated views of the assessed ML/TF risks between different sectors and types of institution, and between different regulated entities within the same co-hort. Solutions are also able to support the benchmarking of ML/TF risk by individual regulated entities.

6 How Can RegTech Help Monitoring the Level of Compliance Supervise or monitor the extent to which financial institutions and DNFBPs are complying. RegTech can support supervisors ability to monitor the extent to which financial institutions and DNFBPs are complying with their AML/CFT requirements. RegTech Solutions are developing that will support the application of consistent AML/CTF programs and controls by regulated entities based on their ML/TF risks and legal and regulatory requirements. Solutions, due to automation and structured data collection and management, could be able to provide supervisors with insights into how regulated entities are responding to AML/CFT requirements and ML/TF risks.

7 How Can RegTech Help Measuring the Impact on Compliance Supervisors are able to demonstrate that their actions have an effect on compliance. Support supervisors being able to demonstrate that their actions have an effect on compliance by financial institutions and DNFBPs. RegTech Solutions are developing that will support the structured amendment of AML/CTF programs and controls by regulated entities based on changes to ML/TF risks and legal and regulatory requirements. Solutions because of centralized ML/TF risk, compliance program and related data management, could also be able to provide supervisors with insight into how regulated entities are responding to changes in the ML/TF environment and AML/CFT requirements over time.

8 How Can RegTech Help Support Regulatory Messaging Supervisors are able to demonstrate that their messages regarding compliance expectations are getting through. Help supervisors promote a clear understanding by financial institutions and DNFBPs of their AML/CFT obligations and ML/TF risks. RegTech Solutions can provide a structured way of engaging with regulated entities about regulatory requirements and expectations Solutions, as they provide structured, automated and scalable channels to regulated entities, could also be able to provide supervisors with insights and understanding to regulated entities about AML/CFT and approaches to addressing AML/CFT obligations and ML/TF risks.

9 The Partnership Approach The partnership approach that exists within AML/CTF should be extended to other stakeholders to support supervisory objectives. AML/CTF has always been a partnership between: Government Regulators Law Enforcement; and Regulated Entities AUSTRAC have recently launched the Trusted Partner approach for regulated entities which limits the supervisory burden on trusted regulated entities. This could be extended to cover other stakeholders in AML/CTF: Vendors; and Solutions What can RegTech do for Regulators? Incorporate regulatory feedback on content and product features into solutions. Publish announcements to customers on changes to AML/CFT law and regulation to assist with industry awareness, particularly regarding regulatory expectations. Provide regulators with anonymized data analytics from the highlighting trends/outliers & insights regarding assessed ML/TF risk, frequency of refresh of programs/controls, and the adoption of changes to requirements/standards. Help focus on potential non-compliance by saving time currently spent in reviewing and providing feedback on levels of compliance (i.e. if a regulated entity is using a trusted solution there is an acceptable assumed level of compliance). What does RegTech want from Regulators? Assist in the design and support of development of solutions by providing timely and insightful feedback. Participate in Open Data Sharing Programs for non-sensitive data held by the regulator. Public recognition of Solutions that support regulatory and supervisory objectives.

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