“Contactless Finance” Increases Financial Crime Risk

With the emergence of new technologies and new forms of financial assets, financial services continue to innovate and develop. The new crown epidemic has accelerated the development of “contactless” financial services. In this context, anti-money laundering supervision is faced with challenges in identity verification and network data security.

The 13th Asia-Pacific Anti-Money Laundering/Anti-Financial Crime Annual Conference of ACAMS (Association of Accredited Anti-Money Laundering Professionals) was held online from April 23 to 24, with the theme of “Proving the Effectiveness of Regulatory Compliance” to discuss how to accurately research and judge under the epidemic Changes in risk, take appropriate response measures to enhance the effectiveness of anti-money laundering work.

In an exclusive interview with a 21st Century Business Herald reporter, Zhu Liqiao, Assistant President of the Hong Kong Monetary Authority, said: “The focus of anti-money laundering work is to prevent, detect and deter, and the current anti-money laundering work should continue to adopt the ‘risk-based’ regulatory principle. , strengthen anti-money laundering supervision in three aspects: technology, data, and cooperation.”

Epidemic catalyzes digital financial services

The outbreak of the new crown epidemic at the end of 2019 disrupted the development pace of all walks of life in society. The requirements for epidemic prevention and control and the popularization of online services have brought new problems to the financial industry.

Zhu Liqiao pointed out that the epidemic has brought challenges to the resource allocation and wind management capabilities of financial institutions. First of all, financial institutions need to focus on anti-epidemic work during the epidemic, protect the health of employees and customers, and pay close attention to new risks and suspicious transactions. Secondly, Internet commerce and online shopping have become more popular, and the number of online fraud cases has also risen sharply.

At the same time, under the general trend of digital transformation in the financial industry, the new crown epidemic has further accelerated the development of “contactless” financial services. Zhu Liqiao said: “Remote account opening and online financial transactions bring convenience to customers, but at the same time, they are easily used by criminals to become puppet accounts, increasing the risk of financial crimes.”

“Contactless financial” services are characterized by “non-face-to-face”, and their supervision focuses on identity verification. Li Na, director of anti-money laundering compliance strategy in Greater China of the Association of Recognized Anti-Money Laundering Professionals, pointed out to reporters that for customer identification, FATF (Financial Action Task Force) proposed that “effective customer identification is the key to preventing risks”. She said that the establishment of a suitable digital identity recognition system will help to efficiently solve the problem of customer identity recognition under the new business form.

Zhu Liqiao believes that for banks to provide remote account opening and online services, they should comply with relevant regulatory requirements (including identity verification and identity matching), the reliability of identity verification technology, and the comprehensiveness of bank risk assessment. Three main principles .

According to Zhu Liqiao, more than 90% of Hong Kong retail banks have fully or actively prepared to provide remote account opening services to customers, and have taken appropriate risk management measures according to their own circumstances, most of which use financial technology to supervise sandboxes and chat rooms Communicate with the HKMA about the application of technology solutions as early as possible, and launch them into the market after full trials.

Adhere to “risk-based”

The epidemic is the catalyst for digital financial services, but the widespread use of new technologies is the trend of the times, and the challenges it brings are not limited to “contactless” finance.

Zhu Liqiao said that technological progress has greatly increased the speed and breadth of financial transactions, but it will also increase the difficulty of preventing and detecting suspicious transactions. Under this circumstance, the financial crime activities of fraudsters are facilitated, and the risk of being impersonated when conducting customer due diligence online is also relatively high. Network and data security are also facing challenges, and various risks are closely linked. Therefore, It must be possible to make a comprehensive risk assessment from a macro perspective.

Among the 40 Recommendations issued by FATF, Recommendation 15 mentions that countries and financial institutions should identify and evaluate the development of new products, new business practices, and the use of new or developed new products and existing products. money laundering or terrorism financing risks that may arise from the technology in the

In addition, Zhu Liqiao pointed out that the key to dealing with these new challenges is also to make good use of new technologies, which requires regulators to provide guidance to financial institutions at both the policy and business operation levels. The first is to adhere to the “risk-based” regulatory principle emphasized by FATF at the policy level, maintain close communication with financial institutions, emphasize that risks are dynamic, and formulate wind management measures that can flexibly respond to new situations; the second is in business operations. On the one hand, financial institutions are encouraged to communicate more with scientific and technological experts, and jointly discuss the positive role that innovative technology can play in anti-money laundering work.

According to Zhu Liqiao, Hong Kong’s banking industry has made considerable progress in adopting anti-money laundering compliance technology. At present, more than 60% of banks have begun to adopt technology solutions such as robotic process automation, natural language processing, and codeless workflow; 53 banks Banks are using or are actively considering the use of non-traditional data for analysis, and 70% of them have discovered suspicious relationships and transactions that were previously unidentifiable; 19 banks are using or actively considering network analysis.

High risk of virtual currency money laundering

In the world of digital finance, virtual currencies, virtual assets, etc. represented by Bitcoin have always been factors that financial institutions are vigilant against that may lead to potential money laundering. According to the “2022 Cryptocurrency Crime Report” released by blockchain data analysis company Chainalysis, from 2017 to 2021, the cumulative amount of money laundering using virtual currency reached about 33 billion US dollars; in 2019, the amount of money laundering using cryptocurrencies reached 10 billion US dollars, That figure is also as high as $8.6 billion in 2021.

In this regard, Li Na pointed out that ACAMS and RUSI (UK think tank) jointly released a survey report on “cryptocurrency risk and compliance”. The results showed that the public’s attitude towards virtual currency or virtual assets is relatively negative, and most of them are Investigators believe that virtual currencies are more likely to be used for money laundering and terrorist financing.

She believes that to deal with the risks brought by virtual currencies, the first thing is to improve relevant information, especially for the collection of relevant information on small varieties of virtual currencies and the tracking of currency flows, as well as to fill the gap for the booming DeFi (decentralized) Finance) and NFT (Non-Fungible Tokens) cognitive gap, the second is to reach a consensus on virtual currency in various countries, based on this, to reach a consensus on regulation and achieve consensus in the industry.

At present, there is no unified definition of virtual assets in the international community, but with the reaching of relevant consensus, the understanding of this field will continue to improve.

In March 2018, the G20 Finance Ministers and Central Bank Governors meeting issued a joint communiqué, stating that virtual assets do not have the key attributes of “currency”. A number of international organizations and central banks and regulatory agencies in most countries have also made it clear that virtual assets other than central bank digital currencies, regardless of whether the word “currency” is used in the market appellation, do not have the basic attributes and functions of legal tender.

In 2019, the release of the Libra white paper attracted the attention of the financial community. International regulatory organizations such as the Financial Stability Council and the Basel Committee, in accordance with the requirements of the G20, all focus on the global stablecoin represented by Libra, and conduct follow-up studies from different perspectives.

Zhu Liqiao said that mutual cooperation is an important part of anti-money laundering supervision, and the concept of territory in the Internet is relatively vague, “but cross-border financial transactions have always been high-risk activities, and stricter control measures must be adopted, and global Regulators from all over the world work together. Therefore, we must strengthen the cooperation of local, Asia-Pacific and international stakeholders to improve the overall effectiveness of the anti-money laundering ecosystem and prevent, detect and curb the global impact of money laundering and financial crime. Threats and financial loss.”

She pointed out that in the face of risks related to innovative technologies and virtual assets, the HKMA will closely monitor international developments, maintain communication with the industry, and continuously update the guidelines according to the actual situation.

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