"Cutting off the funds " is one of the most effective weapons in the arsenal of authorities trying to deal with terrorists and other organized criminals. The international nature of such criminal organizations forces them to move money between various countries and requires international transfers and currency swaps.
Often this necessitates the use of legitimate financial intermediaries in the middle in order to get the funds across. To avoid detection, these criminals use a variety of techniques to make the transactions seem innocuous - fake IDs, shell companies, decoy businesses and so on. Such things are not easy to detect and this is where the Anti-Money Laundering (AML) and Counter Terrorism Financing (CTF) regulations come in.
Most countries in the world today have some directives and guidelines to prevent use of the banking system by criminals and terrorists - these rules make up the AML/ CTF laws and regulations. Additionally, most banks have their own internal set of guidelines as well, which are usually even more strict than the local legal requirements. Still, government AML laws help tremendously as the authorities try to plug the gaps based on their investigative experiences with ongoing terrorist activities.
The enhanced AML directive will help to cut off terrorists financial resources
The EU has been one of the more active bodies in trying to keep it's AML directives relevant and up to date. The recent amendments seek not only to restrict the use of the banking and financial system by criminals, but also to serve as a mechanism of detecting any suspicious activity in the first place and highlighting it to the authorities in a timely manner. In addition to this, the EU has to ensure that all of this is done without violating the rights of its citizens. Here are some examples of how the changes to the AML directives will help in the fight against money laundering and terror financing:
- Using the eIDAS frameworkto properly identify and verify parties related to any transactions. eIDAS provides secure electronic identification and trust services and may be used for various activities like opening of bank accounts, verifying and tracking transactions etc. The 2016 amendments bring it closer to being the most effective AML tool.
- Bringing virtual currency exchanges under the purview of AML laws, which obliges them to implement preventive measures and report any suspicious activity to the authorities. The challenge here is to do it in a way which does not compromise the other advantages of virtual currencies - like speed and low cost of transactions and this has been acknowledged by the regulators.
- Reducing the threshold of anonymous pre-paid cards, making them ineffective tools for illicit activities.
- Empowering the Financial Intelligence Units of the Member States by allowing them access to better and more timely information from all obliged entities. This would serve to reduce the delays in time-critical investigations. The eventual goal is to have an automated system so that information is available instantly.
- Standardizing the approach across Member States towards high risk countries.
- Improving access to beneficial ownership information. Many corporate entities have convoluted ownership structures and banks are mandated to find the ultimate beneficial owners/ natural persons who control a company. This is very complicated and time consuming process and sometimes requires accessing data on dozens of related companies spread across countries and even continents! Improving access to this information, even if within the EU, would indeed make the process a lot more smoother and effective.
Regulators have to strike a balance between improving compliance while minimising additional costs/ delays to the end customers. The fight against money laundering and terror funding is an ongoing one, but with the right tools, it's a fight that can be won.
References and Further Reading
eIDAS & 4th Anti-Money Laundering Directive - a short update(2017), by Andrea Servida
Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (2015), by the European Parliament and the Council of the European Union
- Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (2016), by the European Commission
- Selected articles on Authentication (2014-16), by Heather Walker, Luis Balbas, Guillaume Forget, Jan Kjaersgaard, Dawn M. Turner and more
- Selected articles on Electronic Signing and Digital Signatures (2014-16), by Ashiq JA, Guillaume Forget, Jan Kjaersgaard , Peter Landrock, Torben Pedersen, Dawn M. Turner, Tricia Wittig and more
- REGULATION (EU) No 910/2014 on electronic identification and trust services for electronic transactions in the internal market and repealing Directive 1999/93/EC (2014) by the European Parliament and the European Commission
- Recommendations for the Security of Internet Payments (Final Version) (2013), by the European Central Bank
- Draft NIST Special Publication 800-63-3: Digital Authentication Guideline (2016), by the National Institute of Standards and Technology, USA.
- NIST Special Publication 800-63-2: Electronic Authentication Guideline (2013), by the National Institute of Standards and Technology, USA.
- Security Controls Related to Internat Banking Services (2016), Hong Kong Monetary Authority