Financial Institutions operating in Belgium are subject to stringent rules in order to protect the financial system against money laundering and terrorist financing (“AML/CTF rules”), and play a central role in the enforcement of Sanctions and Embargoes.
International standards for AML/CTF are set by the Financial Action Task Force (FATF), an independent inter-governmental body, and the legal framework adopting these standards is defined both at the national and European level.
As such, the 4th European AML Directive was issued in the course of 2015, and provides for adoption in local law by mid 2017. However, in the aftermath of the recent terrorist attacks in Brussels, Belgian authorities are envisioning to implement the 4th Directive at an accelerated pace, i.e. by the end of 2016 already.
If confirmed, and even when considering that the 4th AML Directive represents in most aspects an evolution rather than a revolution, such accelerated timing would put a stretch on the already loaded Regulatory Compliance pipeline of most banks. As such, banks might need to reconsider their planning accordingly.
Main attention points relate to a required more granular risk-based approach, increased due diligence expectations for, among others, PEP’s and UBO’s, and the new features of the sanction regime. Particular attention may also need to be paid to the Directive requirement to establish a central register regarding UBO’s. Considering its prevailing non-existence, this central register will not be operational by the new envisioned deadline, and as a result transitory measures should be foreseen, at least on this point.
For a full overview of the specific features of the 4th AML Directive, reference can be made to the article in our Regulatory Newsletter of November 2015.
Increased NBB audit activity regarding AML/CTF topics
In parallel, increased supervisory control is witnessed in the AML sphere.
Although the AML/CTF framework of the Belgian Financial Institutions’ was generally rated positively in last year’s evaluation report by the FATF (FATF (2015), Anti-money laundering and counter-terrorist financing measures -Belgium, Fourth Round Mutual Evaluation Report), some room for improvement was highlighted for the NBB’s audit activities. As per the NBB’s latest annual report, the latter is currently reorganizing its audit teams (on-site and off-site) in order to respond to these comments, and the first increased activity has been witnessed in the field.
This increased regulatory activity will require Financial Institutions to further invest material time and budgetary effort in customer due diligence and related record-keeping, AML/CTF Risk Assessments and technology (e.g. for Name List Checks and suspicious transactions monitoring).
FinTech might contribute to a significant improvement of the effectiveness of 2nd line automated transaction monitoring tools
At present, most Financial Institutions use traditional, rule-based platforms for their 2nd line automated transaction monitoring. Even assuming that proper attention was paid to the maintenance of rules and scenario’s embedded therein, Banks are too often confronted with excessive numbers of automated alerts leading to an inefficient usage of scarce resources in their AML/CTF-teams.
Tools developed by FinTech players and using “scenario-agnostic” algorithms start to gain traction, and are likely to offer huge potential for increasing operational efficiencies and identifying suspicious transactions that went previously unnoticed due to the restrictions inherent to the mere use of pre-defined scenario’s.
These FinTech solutions are not expected to replace legacy systems in the near future, yet Financial Institutions will use legacy systems and FinTech solutions in parallel, and will go through the learning curve – while using the outputs from FinTech tools to improve performance of the legacy systems – until comfort levels are high enough to decommission legacy systems all together.