Fourth Anti-Money Laundering Directive Underway in EU – Medium

5 things you need to know about the fourth anti-money laundering directive underway in the European Union.

It isn’t always easy to get multiple stakeholders to agree to change. But after much discussion (and some bickering), the European Union finally passed the Fourth Anti-Money Laundering Directive earlier this year. Financial institutions operating in an EU member state have until 2017 to meet the new reporting and disclosure requirements aimed at disrupting terrorist financing, corruption and money laundering. And in just a few months, financial institutions need new account onboarding procedures put into place no later than January 1, 2016.

In a nutshell, here’s what you need to know:

  • The entire gambling spectrum is now subject to these regulations, not just casinos.
  • Enhanced customer due diligence is required.
  • The cash payment threshold was lowered to €7500.
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Global warming heats up risk management

When we think of risk management within a financial institution, we usually associate it with the operational risks related to fraud, money laundering, damage to reputation, etc. But an interesting article recently reminded me that risk presents itself in many forms…including ones that banks must have the foresight to control, such as mitigating the impact of global warming.

A recent report by Canada’s Shareholder Association for Research & Education (SHARE) suggests that banks need to establish a climate change strategy that allows for them to recalibrate risk management quickly as the earth’s surface temperature rises. Why is this important? Because banks are vulnerable to the economic, social and political impacts that are caused by global warming.

For example, financial institutions are usually heavily invested in energy sector, including fossil fuels. As global warming increases, fossil fuels become a less-viable energy resource – increasing the bank’s exposure to risk in carbon-related assets.

Climatic change can also affect a financial insitution’s real estate investments, sometimes in very surprising ways. Warmer temperatures lead to an increase in the number of damaging storms, and while today’s building codes require developments to use materials made to withstand wind, they are usually less resilient to flooding. As temperatures rise, banks need to take into account the changing value of assets located in exposed areas, particularly those along coastlines and other waterways. This may cause a financial institution to proactively alter the geographic location of its asset portfolio to mitigate risk.

According to the World Economic Forum, climate change is a major long-term threat to investment and economic security. In fact, industry observers note that if the world’s largest asset owners (including pension funds and insurance companies) don’t change their risk strategies to correct the imbalance between high and low carbon investments, it could precipate another global financial crisis similar to the one in 2008.

With so many potential risks, including those that come from unexpected natural causes such as global warming, banking institutions today are forced to rely even more heavily on technological advancements to help them navigate the financial waters. It’s a brave – and warmer – new world in the development of financial risk management strategies.

JPMorgan’s London Whale Problem

As a banking behemoth, JPMorgan is frequently the target of lawsuits and allegations of suspicious activities.  None of them have proved as problematic as the London Whale scandal, which entered a new chapter this week.

Since the banking crisis in 2008, JPMorgan has encountered criticism for its poor risk management practices.  The biggest outcry began in 2012, as the flawed risk strategies deployed by trader Bruno Iksil and the bank’s London employees with derivatives trading caused the bank to lose $6.2 billion.  Dubbed the London Whale, this scandal showed that JPMorgan supported Iksil despite understanding the risks involved with his approach to derivative bets.  The bank went so far as to try to cover up the massive losses, initially only acknowledging a loss of $2 billion when restating its 2012 first quarter earnings.

JPMorgan eventually paid more than $1 billion in fines and admitted its mistakes to settle government investigations in the U.S. and U.K.  Former traders have been criminally charged in the U.S., with trials pending.

But it’s not over yet.  Resulting shareholder lawsuits have been dismissed over the years, but this week, the U.S. District Court in Manhatttan ruled that a class action suit could proceed.  Led by shareholders in pension funds in Arkansas, Ohio and Oregon, the suit contends that JPMorgan knowingly hid increased risks.

Just how big is this?  JPMorgan will be facing potentially hundreds of thousands of investors in this suit, some of whom bought shares after the bank’s partial disclosure of the loss.

The lesson to be learned from this story is one of oversight and compliance.  JPMorgan had been using the risk measurement tool known as Value at Risk, or VaR – something the bank itself had helped to develop and popularize.  But despite the fact that its VaR identified the London Whale trades as exceeding the bank’s risk indicators by more than 330 times, no actions were taken.

Risk and compliance guidelines are only as strong as those who implement them.  While it appears JPMorgan has since learned this, that knowledge is coming at what may eventually be an ever-increasing cost.

It’s not that easy to KYC

It sounds pretty straightforward.  Banks should know who they are doing business with in order to halt illegal activities.  But Know Your Customer (KYC) programs as a risk management tool aren’t all that easy to implement.  Quite often, they are at the  polar opposite end of delivering superior customer service – a differentiator that all banks are trying to capitalize on in this competitive market.

Let’s assume you want to open a new account at a private bank.  Before the institution of the U.S. Patriot Act in 2001, you could probably have just walked in the front door, showed the teller or bank officer a passport, driver’s license or even a utility bill, and voila! Your new account is up and running.

It’s a much different picture today.  Anti-money laundering protocols now mean that the bank needs to know the origin of your money.  For example, how did you acquire your savings, and can you prove that it came from your hard work? Off the top of your head, could you list all of your assets and attach a dollar amount to them?  Remember that small parcel of land you inherited from Aunt Edith – exactly how much is it worth?

After this interrogation, which will include a discussion of your family and your politics, you MAY be approved for a bank account.  By this time, you are probably frustrated and out-of-sorts; after all, aren’t you supposed to be the client, and shouldn’t the bank be falling all over itself to get your business?

The key to adhering to KYC regulations and mitigating the impact on customer service is rapid customer onboarding.  This is an agile business practice that uses technology to eliminate manual compliance checks. By leveraging integrated data collection and search, banks can keep approval decisions on the fast track and ensure that the data is simultaneously submitted to its risk management and fraud detection programs.

As an example, here’s a story of how improved KYC processes helped one bank simultaneously save $1.4 million while increasing its focus on customer-facing activities.  Enhanced KYC policies do not necessarily have to mean more client aggravation.

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