"Contactless Finance" Increases the Risk of Financial Crime

With the emergence of new technologies and new forms of financial assets, the financial business continues to innovate and develop. The new crown epidemic has accelerated the development of "contactless" financial services. In this context, anti-money laundering supervision is facing 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 Specialists) was held online from April 23 to 24, with the theme of "Proving the Effectiveness of Regulatory Compliance" to discuss how to make accurate judgments under the epidemic Changes in risk, take appropriate countermeasures, and enhance the effectiveness of anti-money laundering work.

Zhu Liqiao, Assistant President of the Hong Kong Monetary Authority, said in an exclusive interview with a reporter from the 21st Century Business Herald: "The focus of anti-money laundering work is prevention, detection and deterrence. 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."

The outbreak of the new crown epidemic at the end of 2019 disrupted the pace of development of all walks of life in society. The requirements for epidemic prevention and control and the popularity of online services have brought new difficulties 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 business and online shopping are becoming more popular, and the number of online fraud cases has also increased significantly.

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 also easily used by criminals to become puppet accounts, increasing the risk of financial crimes."

The "contactless financial" service is characterized by "non-face-to-face", and its supervision focuses on identity verification.Li Na, Director of Anti-Money Laundering Compliance Strategy 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 identification system will help to efficiently solve the problem of customer identification under the new business form.

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

According to Zhu Liqiao, more than 90% of retail banks in Hong Kong have fully or actively prepared to provide customers with remote account opening services, and have adopted appropriate risk management measures according to their own conditions, and most of them use fintech regulatory sandboxes and chat rooms Communicate with the Hong Kong Monetary Authority on the application of technology solutions as soon as possible, and officially launch the market after sufficient trials.

The epidemic is a 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 improved the speed and breadth of financial transactions, but at the same time it will also increase the difficulty of preventing and detecting suspicious transactions. Under such circumstances, the fraudsters’ financial crime activities are facilitated, and the risk of impersonation involved in online customer due diligence is also relatively high. The network and data security links 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.

In the "40 Recommendations" issued by FATF, the fifteenth recommendation mentioned that countries and financial institutions should identify and evaluate the development of new products, new business practices, and the use of new or developed products for new and existing products. money laundering or terrorism financing risks that may arise from the technologies in it, and said such risk assessments should be carried out before launching new products, conducting business or using new technologies or those under development.

In addition, Zhu Liqiao pointed out that the key to coping with these new challenges is also to make good use of new technologies, which requires regulatory agencies to provide guidance to financial institutions at the two levels of policy and business operations. One 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; On the one hand, financial institutions are encouraged to have more exchanges with technology experts to jointly discuss the positive role that innovative technology can play in anti-money laundering work.

According to Zhu Liqiao, the Hong Kong banking industry has made considerable progress in adopting anti-money laundering compliance technologies. At present, more than 60% of banks have begun to adopt technological solutions such as robotic process automation, natural language processing, and no-code workflow; 53 banks Banks are using or actively considering using non-traditional data for analysis, and 70% of them have discovered suspicious relationships and transactions that could not be identified before; 19 banks are conducting or actively considering network analysis.

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

In this regard, Li Na pointed out that ACAMS and RUSI (British think tank) have released a survey report on "Cryptocurrency Risk and Compliance". The results show 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 posed by virtual currencies, the first thing to do is to improve the relevant information, especially the collection of relevant information on small varieties of virtual currencies and the tracking of currency flows, as well as to fill in the need for the booming DeFi (decentralized Finance) and NFT (Non-Fungible Tokens), the second is to reach a consensus on virtual currency in various countries, and on this basis to reach a consensus on regulation and obtain a consensus in the industry.

At present, the international community does not have a unified definition of virtual assets, but with the reaching of relevant consensus, the understanding of this field will continue to improve.

In March 2018, the G20 meeting of finance ministers and central bank governors issued a joint communiqué, stating that virtual assets do not have the key attribute of "currency". Many international organizations and the central banks and regulators of 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 title, 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. In accordance with the requirements of the G20, international regulatory organizations such as the Financial Stability Council and the Basel Committee have focused on global stablecoins represented by Libra, and conducted 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 relatively high-risk activities, and stricter control measures must be adopted. Regulatory agencies around 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 to prevent, detect and deter money laundering and financial crimes that have caused global damage. 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 guidelines according to actual conditions.

(Author: Zhu Lina, intern Qi Yingze, editor: He Jia)