After just coming off an almost 6-year jaunt as CAMLO for a major crypto exchange and being in the trenches of AML and ATF programs all that time, I’ve seen my fair share of regulatory missteps, debacles, and debauchery in the space. But the recent case of Binance, spearheaded by its CEO Changpeng Zhao (CZ), really stands out for me. I, along with many others could see it coming, but kept asking, when!

Their guilty plea to the U.S. Department of Justice, culminating in a combined $4.35 billion in fines, is not just another headline its vindication that the law will eventually catch up to you. It’s a stark reminder of the high stakes in our field for the smaller players versus the larger ones.  As another compliance officer put it to me the other day, and I will paraphrase, “we are seeing the ‘Too Big To Fail’ (TBTF) scenarios now playing out in the crypto space.  Remember, not one bank executive went to jail during the 2007-2008 US financial crisis, and my bet is that we will see the same for CZ and his cronies.”  I certainly hope this is not the case as that would be a very say day and only put more credence on corporate greed to get to that TBTF level as fast as possible, no matter what it takes.

Where Binance Fell Short

The charges against Binance and CZ spanned anti-money laundering, unlicensed money transmitting, and sanctions violations. But these aren’t just checkboxes in a compliance form; they’re the bedrock of trust in our industry. Binance’s admission of these failures speaks volumes about the gaps in their AML and ATF frameworks.  I would hope this isn’t the case for many others, but sadly, I will have to admit that there are many in the crypto spaces that put greed and profits above AML/ATF compliance.

The Devil is in the Details

KYC/KYB Lapses: Every seasoned compliance officer knows that KYC and KYB aren’t just regulatory buzzwords; they’re essential tools. Binance’s inadequate implementation of these processes was a critical error, leaving the door open for misuse of their platform.

SARs – The Missed Alarms: SARs are our canaries in the coal mine. By not filing over 100,000 SARs, Binance didn’t just miss a few alarms; they ignored a symphony of warning bells.

Reaction Over Action: Waiting for law enforcement to knock on your door before taking action is a classic case of too little, too late. Proactive compliance is key, something Binance learned the hard way.

The Gap Between Claims and Reality: Claiming to fight financial crime while facilitating billions in illicit funds is like trying to put out a fire with gasoline. Binance’s contrast in public claims and actual practices was, frankly, disheartening.

The Shifting Sands of Compliance Tools

As an AML/ATF compliance professional, I’ve always advocated crypto companies leveraging tools like Chainalysis, Elliptic, Ciphertrace, Breadcrumbs, or the like. They’re not just tools; they’re lifelines in maintaining integrity of dealing with crypto transactions. Binance’s initial adoption and subsequent rejection of some of these tools, as they started revealing the company’s own compliance failures, was a disappointing pivot. It’s a classic example of favoring convenience over commitment.

The same could be said for OFAC and sanctions screening and ongoing monitoring requirements, using such real-time low-friction tools powered by AI and decisioning technologies as KYC2020’s DecisionIQ would have saved Binance time and effort, as well as ensure they didn’t deal with known terrorist persons or entities.  Another grave mistake that could have saved them billions, literally!

The Ripple Effect for others

Janet Yellen’s comments on adhering to U.S. financial system rules aren’t just for show. The consequences Binance and CZ faced are real and severe. In the world of compliance, there are no shortcuts.  This is another shot off the bow from the regulator, and those that are TBTF may take head, but probably not enough as they will most likely have the money to bail themselves out.  Is the smaller players that will receive the brunt of this call as they will be scrutinized not only by their regulator, but their partners, banks, and examiners, to the point many will probably concede and go out of business.

A Word to the Smaller Players

You might not be operating on the scale of billions like Binance, but the lessons are just as relevant. Robust KYC/KYB processes, timely SARs filing, proactive compliance, and transparent practices are not just for the big players. They’re the foundation for anyone in this industry who wants to have a great business over one that values greed above all else.

The Binance saga is more than a cautionary tale; it’s a blueprint for how not to navigate the intricate world of financial compliance, or how to navigate it if you take away the lessons learn. For those of us who are not in the TBTF regulated entity category, it’s a clear signal that compliance is not a burdensome chore but the backbone of sustainable and ethical business. Let’s take these lessons to heart and strive for a higher standard in our increasingly scrutinized industry.  Let’s raise the bar and not succumb to the greed factor!  Let’s really do right by our clients and do our best to combat ML/TF.

The good news is that this message is not lost, and there are plenty of Cryptocurrency players that have compliance and responsibility to fight financial crime in their ethos.  Take for example CoinChange and why/how they adopted a culture of compliance without compromising their business goals.

Read the Coinchange Success Story – Streamlining Compliance with KYC2020 and watch the Video

While we at KYC2020 had already development multi-language support in our data and screening technology, our product team recognized that we had a great deal of dependency on the translation and transliteration APIs that were being used to standardize all source documents into a common language, i.e. English (Roman character set).

Having established English as the standardized language, we were not translating any source document to Arabic (or other non-roman script), hence if the source document DID NOT have the name in the original Arabic script, it would not be available in our data. This meant that clients searching in Arabic script matched 100% where source document had the name in the original Arabic script but relied on the translation APIs (from Google and such) to then fuzzy search in English. This was obviously not always precise. We realized that technology and the product team could not solve the problem and that’s when it showed up on my desk as the lead at KYC2020 in Global Regulatory Affairs.

This led me to relooking at the files available from the OFAC, a division of the U.S. Treasury Department to see if there was a solution. To my surprise, it turns out that in January 2015 they had already released a format of the SDN list that supported the jointly developed standard by the United Nations (U.N.) and the Wolfsberg Group of International Banks. Those efforts created a universal sanctions list format that was to be efficiently used by governments worldwide to enhances sanctions compliance screening in multiple languages.

And it turned out the OFAC’s SDN list is a shining example of the use of this new standard!

The OFAC’s Advanced SDN XML file supports multiple languages without the need for translation or transliteration and brings with it several advantages.

1. Standardization: Using XML a schema allows for a consistent structure that facilitates the interpretation and automation of screening individuals, entities, vessels, and countries.
2. Rich Data Points: The data contains information such as multiple aliases, addresses, IDs, and other sundry information to effectively evaluate the data.
3. Linked Relationships: Relationships between entries provides insights into affiliations and connections to other individuals, entities, vessels and countries in the same file.
4. Easily Updatable: The format allows for updates to be done in a seamless manner thus ensuring the latest information is captured and maintained with the most minimal amount of disruption to the previous version.

As mentioned in the January 2015 Treasury Department’s press release, the multi-lingual support provides enhancement and has implications into the following for entities who must screen this list.

1. Wider Accessibility: Worldwide regulated entities can now screen against the SDN list without language barriers.
2. Increased Accuracy: With more accurate language standards built in, there is less reliance on translations or transliterations which reduces the chances of misinterpretation. This ensures that the sanctions information remains accurate across all languages as provided.
3. Efficiency: Direct multi-language support streamlines sanctions screening and allows those who operate in multiple countries or regions to reduce, and in many cases eliminating the need translation or transliteration.

From an Anti-Money Laundering (AML) perspective, this development to me is very monumental in many ways.

1. Universal Compliance: Irrespective of the client’s operational language they can now ensure compliance with OFAC regulations as screens are now universal.
2. Efficiencies: Without having to do translation or transliteration, screening becomes faster and more precise so that any language input will find the other equivalents.
3. Enhanced Due Diligence: With entries available in various languages only one check is needed to cover the variants in usual systems that redo these names in other languages.

The addition of the Advanced SDN XML dataset in KYC2020’s screening toolbox enhances existing multi-language support, simplifies processes for international entities and fortifies the global stand against money laundering, terrorist financing, and other financial crimes.

Going forward, our team at KYC2020 will be looking to other sanctions lists that use this standard to do the same thing, so stay tuned, exciting times are coming!

Want to find out more? Click here and sign up for this and all the other offerings at KYC2020.

For more than 30 years, the Financial Action Task Force (FATF) has been the global standard by which many countries have wholeheartedly adopted the measure to combat Money Laundering and Terrorist Financing(ML/TF). Since the FATF first started in the late 1980’s, many countries have come a long way in adopting FATF regulations and limiting the spread of ML/TF. While the primary G37 members have strict adherences and enforcement to the FATF 40 “Recommendations”, other members follow the guidelines with more leniency. When FATF was first founded,  there were only 7 pages of the 40 “Recommendations”. A mere 7 pages!  On the other hand, there are now a staggering 127 pages printed In the recently published June 2019 version of the “Recommendations”. Let that sink in.

Similarly, the original version only mentioned “policies” once, while in the latest version these policies are mentioned 30 times. This means that new “policies” were added almost 10 times per decade, resulting in about 42 new pages per decade.  This progression is not lost on most Compliance Officers, nor is it unexpected whenever regulations come into play.  So, when one may I ask, “Why is an AML Policy so important?” The answer to the question comes down to, its required by law!

Seriously though, WHY! Apart from the legal aspect there are many more important reasons why AML policy is becoming so crucial.  To be able to combat ML/TF risk, one needs to understand the risk which can come from all types of criminal individuals and organizations.  From the lone wolf to the entrepreneurial criminal enterprises, criminals launder trillions of dollars in drugs, human trafficking, bribery and the like according to a UN study in 2011. The FATF states “The possible social and political costs of money laundering, if left unchecked or dealt with ineffectively, are serious. Organized crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments.”

For some companies it can be complicated to build and maintain an AML Policy. AML regulations are constantly being updated as seen by the FATF example over a 30+ year period. In addition, some of these businesses operate in more than one jurisdiction, and often there is more than one regulator. If you think you have what it takes to build your own AML Policy, take our CAMLO quiz and see if you have what it takes.

If not, our team at KYC2020 has set out to create a tool to help with the development and support of an AML policy.  It was built with templating in mind to have a base to start with and then customize for each entities specific lines of business.  The first version was focused on FINRA regulated entities in the US.  Now we have two more in production for Money Service Businesses (MSB) and Dealers in Virtual Currencies (DIVC) in Canada and the US. The AML Policy template mechanism is structured to allow for flexible sections and content to be tailored to the specific activities of the Regulated Entities (REs).

Once a template is chosen, the RE works through the various sections answering the questions related to the particular component of a standard AML Policy, while customizing the components and sections specifically related to their business.  Once done, the RE can request to have a certified CAMS (or equivalent) person review it and provide additional feedback or suggestions on updates and changes.

When the RE is satisfied with the results, the AML Policy can be frozen, and version control kicks in.

As with FATF and their 40+ recommendations, it is the same idea with the RE’s AML Policy.  It will be a living breathing document that expands and changes over time.   The constant transformation of the document is a good thing, it demonstrates that the REs AML regime is maturing over time to deal with new risk, regulations, and changes to the business to fight ML/TF.

Want to find out more about our AML Policy tool?  Click here and sign up for this and all the other offerings at KYC2020.

Finding the right candidate with AML/CTF expertise is critical to being able to develop and implement an ongoing AML/CTF compliance program for your business.  Besides this, what other qualities should you be looking for in an individual that you seek to appoint as your company’s CAMLO?

Here are 5 key aspects to think about when looking to bring on the right person for this vital position.

1. Do they understand your sector?

Find a CAMLO that understands your sector.  There are many types of reporting entities and various obligations based on risk associated with your products, services, delivery channels and geography.  Their knowledge will ensure that the appropriate level of Know Your Customer (KYC), Enhanced Due Diligence (EDD), Reporting and Record-Keeping, ongoing monitoring, training, and effectiveness reviews are maintained and up to date with your policies and procedures.  Measures and controls will be based on your company’s vulnerabilities and risks, so finding a CAMLO with an understanding of your type of business structure and functions enables them to develop and implement an AML/CTF compliance program that effectively fulfills your obligations.

2. Do they possess critical thinking skills?

A CAMLO has many complex duties and an effective AML/CTF compliance program is mandatory by law and regulations.  This demands a carefully thought-out risk based program that is tailored to achieve mandated objectives and goals. Cookie cutter programs only work so far, but a seasoned CAMLO with critical thinking skills will be able to gather and dissect the information that is necessary to formulate the proper risk assessment for your business and move on from there and with a plan of action. Critical thinking is vital in many tasks including assessment of inherent and residual risks, drafting and maintaining of policies and procedures, and managing the process of organizing reviews and reports to share with bankers, regulators, examiners, and law enforcement.

3. Are they trustworthy and ethical?

Your CAMLO must be given the right to have full of oversight of your business, with access to all kinds of confidential information, and the authority to request aspects of your operation be changed where needed to meet your regulatory requirements.  They must assess and will contribute to the management of your internal and external activities, partnerships, and all other relationships your organization maintains.  They must understand the details of these business relationships in order to make appropriate recommendations for enhancements to meet the AML/CTF compliance requirements of your business.  Look for a CAMLO that understands matters such as privacy, discretion, and confidentiality. This includes someone that holds business ethics, integrity and trust issues as important elements of their own value system.  A professional with knowledge and belief in these business virtues is likely to be vigilant and take their commitment in defending your business from non-compliance issues much more diligently, if or when they occur.

4. Are they a positive influence?

A CAMLO plays a big role in establishing the way your internal and external relationships are ultimately informed and managed in regards to policies and procedures. They must effectively guide staff through communication and training in order to get them on board as part of your lines of defense.  They must distribute and enforce many of the measures and controls that define the way you and third parties do business together, while also ensuring the necessary KYC, EDD, reporting and record-keeping, training, and ongoing monitoring is implemented for all your relationships.  Your CAMLO must have a direct line to your Board or most senior level management in order to effectively and efficiently communicate matters that relate to AML/CTF aspects of your business. You want to find a CAMLO that is able to influence stake holders and that recognizes the importance of how their administration is perceived.  A CAMLO that considers relationship building and themselves as an influencer can inspire your staff, vendors, and other connected parties to relate, to share, and to team-up where needed to essentially implement the necessary AML/CTF measures and controls to meet regulatory requirements.

5. Do they have a passion for learning?

The laws are ever changing, technology and systems are constantly evolving, criminals and nefarious organizations are incessantly challenging the fringes of regulated entities.  New products and services are rapidly being brought to markets, and with the evolution of globalization and the internet, new financial crime schemes are more insidiously penetrating vulnerable businesses.  Find a CAMLO that is a visionary, who thinks ahead and plans based on what is upcoming while reflecting on what has happened in the past.  Someone who stays up to date with emerging trends, that has a desire to learn and an appreciation for innovation. This type of person is likely to seek new tools that could be implemented for the development and maintenance of a robust AML/CTF compliance program.  If your CAMLO has a passion for learning their enthusiasm will benefit your business by keeping you in compliance and less of a target for the bad actors.

Conclusion

While there are many other aspects to consider when appointing your CAMLO, considering these 5 key aspects will surely help you find that right fit!

Alternatively, you may be thinking of designating yourself as the CAMLO.  Be forewarned, it requires extensive work, preparation, and ongoing upkeep to ensure your business does not fall into non-compliance of AML/CTF regulations. KYC2020 offers a quiz to help you assess your basic knowledge of AML/CTF laws and regulations by your business type.

Take the quiz and find out whether you should even consider putting on the CAMLO hat and taking on the additional responsibility and liability.

Use Cases Included:

• CIBC presenting a use case for AI/ML for streaming the onboarding process to near 89% that of human capabilities.
• KYC2020 use case on how using its DecisionIQ reduced the overall burden of reviewing false positives from 8 hours down to 30 minutes.
• AML professionals reported that AI/ML from AML had many applications in non-compliance functions including training, marketing, sales, and improved customer service.
• That all solutions are not a 100% replacement of human functions, rather, and an enhancement to extend beyond human insights.

There seemed to be a consensus among attendees that adaption of AI/ML tools will continue to move slowly. When asked about some of their reasons they said:

• A limited understanding of AI/ML application in the context of AML compliance programs.
• The idea that AI/ML is a “black-box” that isn’t easy to understand for executives, regulators, and compliance officers.
• The scrutiny of AML compliance programs by regulators to be able to demonstrate an understanding of what the AI/ML is doing to come up with the results.
• The actual cost savings and/or efficiency benefits brought on by using AI/ML.

To the last point, a recent report by PwC indicates that “While many favour the use of technology in combating fraud and/or economic crime, 37% of respondents believes that it produces too many alerts or false positives. This can lead to customer friction – a growing challenge for organizations as they seek to strike the right balance.” This balance is the key to delivering on the promise that AI and ML will reduce alerts and false positives.

Surmounting the False Positive Problem

While designing DesicionIQ, KYC2020 encountered similar challenges. We needed to determine what constituted the “right balance.” That meant we had to cast a wide net while KYC searching to insure we caught the maximum amount of hits. We needed to create AI/ML models that emulated the process a person would go through to clear the false positives. The difference being on a significantly larger scale than a human would be capable of reviewing. And in a matter of seconds.

But making a screening decision isn’t the only thing that matters here. Our CAMS(tm) certified AML specialists made sure that our system’s decision process are easily auditable in the same way you’d audit a human’s. To accomplish that, DecisionIQ provides all of its decision processes in a clear, readable “Proof of Work (POW)” format. The files are securely stored and easily accessible by compliance staff, auditors, or anyone else.

A Penny Poorer, a Pound Richer

Next-generation solutions that use AI/ML systems deliver overall cost savings and a more effective compliance regime. It can be challenging to convince management that that the initial investment is worth the spend. Yet, that thinking creates situations where a company is a penny richer and a pound poorer in the end. Advances in AI/ML will allow compliance professionals to make greater strides and reduce overall spending for management teams.

Over the years, we have seen the regulatory landscape of list screening expand from the usual sanctions lists to:

• Foreign (Politically Exposed Persons)
• Domestic PEPs
• Heads of International Organizations (HIOs)
• Relatives & Close Associates (RCAs)
• most recently adverse media

These lists and sources will only continue to expand. Consider the recent inclusion of digital currencies, such as Bitcoin or Ethereum into address into the OFAC as a searchable field. Pretty soon we will see other G38 members of the FATF do the same. There is no doubt this trend will continue to be a focal point for regulators to ensure regulated entities include more and more sources.

Regulators continue to push forward to the notion that more tools are needed to tackle these issues. A recent joint publication from the Fed Reserve, FDIC, FinCEN and the National Credit Union Association states that the joint agencies are committed to supporting “innovative efforts in combating money laundering, terrorist financing and other illicit financial activity.” This is a strong statement encouraging all those governed by the BSA that the use of AI and ML learning is an acceptable approach to “enhancing the effectiveness and efficiencies” of the financial sector the point where Fincen is willing to consider “exceptive relief under 31 CFR 1010.970 to facilitate the testing and potential use of new technologies and other innovations”.

Here in Canada, the Financial Stability Board (FSB) has also recognized in a 2017 report that AI and ML is playing a critical role in driving “to increase productivity and simultaneously reduce costs and risks, while complying with regulations”.

The Take Away

AI and ML capabilities have been steadily increasing over the last few years and to ignore them much longer would be at an organizations peril. It will not only affect its bottom line, but will most likely cost more due to the shear amount of data, alerts, and false positives that are increasing every day. It’s time to take a leap forward in AML compliance and start investigating the use of AI and ML to drive efficiencies and meaningful results.