Financial regulations: Keeping up with financial technologies?
A recent panel discussion about regulatory tech (RegTech), organised by Thomson Reuters, highlighted how electronic Know-Your-Customer (e-KYC) processes, can be abused.
The panel discussion moderated by Thomson Reuters’ Robin Lee, tried to crystallise what RegTech means and the role that Chief Information Officers (CIOs) play when it comes to enabling RegTech and leveraging RegTech.
According to Thomson Reuters, “Until recently RegTech has only been a requirement for financial institutions. A combination of increasing regulations, strict KYC requirements and threats of heavy fines for financial crime, meant that banks were forced to look for ways to increase the efficiency of compliance departments.”
Thomson Reuters, a solutions and critical news provider for the global financial community, does observe that with the emergence of non-traditional financial players, like fintechs, startups and even non-financial institutions embarking on payment gateways, there has to be closer scrutiny of and need for global financial governors to ensure fraud, money laundering and sanctions become a shared responsibility of all players in the digital economy space.
Thinking the processes through
Back to KYC, or customer onboarding, one of the more important steps that has to be completed before transactions can be allowed to happen.
President of the Fintech Association in Malaysia, Ridzuan Aziz, said “E-KYC can be abused by money launderers.” All the tools that are required to do money remittance – telephones and a bank card – can be stolen and identities of money launderers can be obscured or not easy to track, this way.
PIKOM CIO Chapter (PCC) EXCO member , Sekar Jaganathan, also pointed out, that there is a lot of effort put into authenticating transactions, but less effort on authenticating the persons who are conducting the transactions.
“So, there is need to do enhanced authentication and enhanced due diligence (EDD). Even so, fraudsters can be very convincing,” Sekar said.
Ridzuan was also of the opinion that humans still have their roles to play, “Technology becomes a small issue when you want to deliver financial services with integrity and compliance.”
The better the public understand money laundering activities and how it works, the better they can see how scenarios around them could be potentially abused and detect the money laundering activity.
For example, there is perception that money laundering involves big amounts only.
Resident legal advisor with the US Embassy, Karyn Kenny said, “Money laundering can happen with more frequent transactions,” pointing out also that RM200 remittance transactions made to ten persons each, could be funding terrorism. “Is that not alarming to you?”
After a foiled terrorist attack last year in New York, a very unlikely suspect, a ‘kind and generous’ Filipino doctor was implicated because he was found to have sent USD423 to defendants to fund the making of the bomb.
Another myth that needs dispelling, is that money laundering is a problem reserved only for financial services institutions (FSIs) or banks. This is becoming more and more inaccurate, today.
A fellow PCC member also opined that for example, accountants need to be educated to flag out accounting irregularities in the organisation. Many do not do so now, because they think it is a function of the audit department instead.
There is general consensus that this attitude and ‘wilful blindness’ must not be allowed to carry on.
All onboard, please
The panellists and moderator concur that money laundering may have started with remittance services, but it is expanding to other financial services which includes fintechs, and it is time for more accountability from all quarters. It impacts everyone, from employees in an organisation, to the different industries in an economy.
Ridzuan also held the view that if not literacy about capital and financial markets, at least the basic understanding of financial systems has to be there. “For example, how does money come out from the wall (or ATM)?” he shared an example of basic knowledge we could try to teach the younger generation.
Regulations will expand in scope, so everyone must get onboard, because fraudsters will view these unregulated channels as opportunities for abuse.
Cryptocurrencies for example, is one medium that is ripe for abuse and in Malaysia and several other countries, legislations have been formed to ensure effective measures are taken against money laundering and terrorism financing risks. One of these measures requires Malaysian cryptocurrency exchanges to conduct customer due diligence and KYC.
This is a step in the right direction.
But technology and innovation have a way of moving too fast for legislations to keep up with in Malaysia. And also, the matter of more and more transactions being conducted in digital (including mobile) ways, has yet to be holistically addressed by our local regulators.