AML News and Updates Newsletter - September 2024: The EU Digital Identity: What it Means for AML Professionals | FinCEN issued two rules and more

Welcome to our AML News and Updates Newsletter September 2024 edition. ??

Stay up to date with main AML news and updates in less than 10 minutes per month!

This newsletter is brought to you by IDnow, a leading provider of identity verification and digital signature solutions across Europe. Innovators at heart, IDnow’s teams have introduced two new?digital signatures solutions?in 2024, alongside a?fully customizable expert-led ID verification service. IDnow is also deeply involved in the development of digital identity initiatives within the EU.

Let's see an outline of the topics to be covered in this edition:

1. Discussion of the month: The EU Digital Identity: What It Means for AML Professionals
2. Regulatory Developments: FATF’s Follow-Up Reports published in August 2024 | FinCEN issued two rules on residential real estate and investment advisors
3. Other News: The DFSA fined a former private banker for misleading and deceptive contact | AIA Group Ltd in Hong Kong was fined with HK$23 million | Seven Arrested for Their Participation in the Chinese Underground Banking System | Singapore charges two bankers for helping $2.2 billion money laundering ring | SEC fined a New York-based broker dealer for failing to file SARs

The EU Digital Identity: What It Means for AML Professionals

One of the most critical aspects of Customer Due Diligence (CDD) is accurately identifying and verifying your customers. This process is essential to ensure that the person you’re dealing with is truly who they claim to be, which is vital in preventing fraudsters and money launderers from exploiting the financial system. Traditionally, verifying identity meant relying on physical documents and face-to-face interactions. But as technology has evolved, so too has the way we conduct ID verification.

Today, businesses operate globally, and remote onboarding has become commonplace. This shift in how people do business has transformed identity verification, making it faster, more convenient, but also more complex. In response to these changes, the European Union has introduced a groundbreaking initiative: the European (EU) Digital Identity. This initiative aims to provide citizens with a secure, convenient, and standardized way to verify their identity online.

What Is Digital Identity?

Digital identity is essentially the online version of an individual’s identity. It consists of data attributes that uniquely identify a person digitally. Just like you might show your passport or driver’s license to prove who you are in real life, digital identity lets you prove who you are online.

The EU Digital Identity aims to enable individuals to have a digital ID that works across all EU member states. This digital ID will make it easier to use online services, whether you’re opening a bank account or applying for a loan, in any EU country.

How Digital Identity Operates

The digital identity operates via digital wallets that are available on mobile apps and other devices. It can be used to:

• Identify an individual online and offline: The digital wallet allows individuals to prove their identity both online and in person. Whether you’re logging into a government service portal, opening a bank account remotely, or verifying your identity at a physical location, the digital wallet provides a secure and convenient way to authenticate who you are – no need to carry your physical card.
• Store and exchange information provided by governments: The digital wallet securely stores personal information verified by government authorities, such as your name, surname, date of birth, and national ID number. This government-backed data is trusted and universally recognized across EU member states. When you need to provide proof of identity or share this information with a third party—such as a financial institution for a loan application—the digital wallet enables you to do so quickly and securely, without the need for physical documents.
• Store and exchange information provided by trusted private sources: In addition to government data, the digital wallet can store and manage information from trusted private entities such as banks, insurance and other entities. The integration of private and public data within a single, secure platform simplifies the process of managing and sharing your information, all while maintaining strict privacy controls.
• Use the information as a confirmation of the right to reside, work or study in a specific Member State: One of the most powerful features of the digital identity system is its ability to confirm an individual’s legal rights across the EU. Whether you need to prove your right to live, work, or study in a specific member state, your digital wallet provides a verifiable, legally recognized way to do so. This not only simplifies the process of moving between countries but also ensures that your rights are respected and easily verifiable by relevant authorities.

Using the EU Digital Identity

Under the current circumstances, if a person wants to apply for a loan, they typically need to go through a multi-step process involving physical documents, multiple identity verifications, and various intermediaries. This process can be slow, can be manipulated and is subject to errors.

With the use of an EU Digital Identity, the process will be significantly simplified and more secure. Individuals can instantly verify their identity online, using their digital wallet to securely share the necessary information with financial institutions. This streamlines the application process, reducing the need for repeated identity checks and speeding up decision-making.

How the EU Digital Identity Impacts AML Efforts

The digital identity system, with its streamlined processes and secure data management, directly impacts how Anti-Money Laundering (AML) efforts are conducted:

Streamlined Compliance Processes?

For businesses and financial institutions, the digital wallet’s ability to quickly and accurately verify customer identity means that Know Your Customer (KYC) and Customer Due Diligence (CDD) processes can be conducted more efficiently. This reduces the time and resources needed for onboarding customers, while also minimizing the risk of onboarding bad actors.

Reduced Risk of Identity Fraud

With digital identity, the chances of identity theft or fraudulent use of personal data are significantly reduced. Because the data is verified by both government and trusted private sources, it becomes much harder for criminals to create fake identities—a common tactic in money laundering schemes.

Cross-Border Interoperability

Since the digital identity is recognized across all EU member states, it simplifies compliance for multinational businesses. Financial institutions operating in multiple countries no longer need to navigate different identity verification standards, making their AML efforts more consistent and effective across borders.

Preparing for the Future of AML

As the digital landscape evolves, so too must our approaches to AML. The European Digital Identity initiative represents a critical step forward, offering regulated entities a powerful tool to enhance their AML efforts. However, success will depend on how well these entities can adapt to the new system, integrate digital identities into their existing frameworks, and leverage the opportunities they present.

For AML professionals, this is a time of both challenge and opportunity. Embracing digital identity means not only improving the efficiency and effectiveness of AML efforts but also contributing to a more secure and trustworthy financial system. The future of AML is digital, and by staying ahead of the curve, regulated entities can ensure they are not only compliant but also leaders in the fight against financial crime.

FATF’s Follow-Up Reports published in August 2024

The FATF, in August 2024 has published the following

Mutual Evaluation Report:

• Rwanda

Follow-Up Reports:

• Malawi
• Madagascar
• Kenya
• Namibia

FinCEN issued two rules on residential real estate and investment advisors

The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) has introduced two new rules to combat illicit finance and protect national security.

1. Residential Real Estate Rule: Requires professionals to report non-financed property transfers to legal entities or trusts to increase transparency and prevent money laundering in the housing market.
2. Investment Adviser Rule: Extends anti-money laundering (AML) and counter-terrorism financing (CFT) requirements to certain investment advisers, closing a regulatory gap and ensuring uniform standards across the industry.

These rules aim to close critical loopholes in the U.S. financial system, making it harder for criminals to exploit these sectors.

You can read more about these two rules here.

The DFSA fined a former private banker for misleading and deceptive contact

The Dubai Financial Services Authority (DFSA) fined a former private banker, Peter Georgiou, USD 980,020 (AED 3,599,613) for misleading and deceptive conduct. Georgiou provided false information about a client to bypass his employer's anti-money laundering controls. He also sent a forged email to a client, and tried to mislead the DFSA during an interview. In addition, the DFSA prohibited him from holding office or being an employee of a DFSA authorised firm.

You can read more here.

AIA Group Ltd in Hong Kong was fined with HK$23 million

The Hong Kong Insurance Authority (IA) imposed a HK$23 million (approximately $3 million) to AIA Group Ltd due to gaps in its Anti-Money Laundering (AML) practices. More specifically, the failures were related to procedures to identify Politically Exposed Persons (PEPs), risk assessment processes, transaction monitoring and others.

You can read more here.

Seven Arrested for Their Participation in the Chinese Underground Banking System

Seven individuals were jailed for operating a ￡55 million money-laundering ring targeting international university students trying to bypass China’s capital transfer limits. These individuals facilitated illegal transfers by using the Chinese "underground banking" methods. Sentences ranged from 11 months to 12 years, with the offenders convicted of various money-laundering offences.

You can read more about this case here.

Learn how the “Chinese Underground Banking” works in a previous post I wrote here.

Singapore charges two bankers for helping $2.2 billion money laundering ring

The bankers are Chinese nationals and were employed by Citibank and Julius Baer (a Swiss private bank). They were charged for forging loan documents to help persons who were convicted for money laundering.

You can read more here.

SEC fined a New York-based broker dealer for failing to file SARs

The Securities and Exchange Commission (SEC) - the US body responsible to enforce laws related to the securities industry - charged OTC Link LLC, a New York-based broker-dealer, for failing to file Suspicious Activity Reports (SARs) over a three-year period. OTC Link, which operates three alternative trading system platforms, agreed to pay $1.19 million to settle the charges. The firm neglected to implement proper anti-money laundering policies, resulting in no SARs being filed from March 2020 to May 2023.

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Have a nice rest of the month!

Regards

Anna Stylianou

Founder AML Cube Consulting and Education