Rachel Dettmer
Welcome back to the fifth and final instalment of our 2023 financial crime market outlook series.
In this blog, we focus on Asia-Pacific countries.
The region’s financial risk landscape is truly diverse with an array of high-risk jurisdictions, rising authoritarianism, declining democracy, serious and ongoing environmental crimes, forced labor, emerging risks, plus new and constantly evolving AML legislation – all of which create a tangled and complicated financial crime market.
Let's delve into this further...
High Corruption Levels & Jurisdictions with Strategic Deficiencies
Afghanistan (24), Cambodia (24), Myanmar (23) and North Korea (17) score lowest on Transparency International's 2022 Corruption Perception Index (CPI).
The Philippines is on the Financial Action Task Force’s (FATF) watchlist for “strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing,” and are subject to increased monitoring.
Additionally, the Democratic People's Republic of Korea and Myanmar are on the FATF’s blacklist which imposes economic penalties and other restrictive measures for failure to comply with anti-money laundering and anti-terrorist financing regulations.
High levels of corruption and insufficient anti-money laundering legislation increase the prevalence of financial crime and enable dirty money to enter the international financial system.
It also poses a significant challenge for any organization's risk framework and requires enhanced due diligence.
However, towards the end of last year, Pakistan was removed from the FATFs grey list and this was followed by the removal of Cambodia this February – both are positive indications of some progress for the region.
Rising Authoritarianism & Declining Democracy
In various Asia-Pacific countries, authoritarian governments and their leaders are prioritizing economic recovery over anti-corruption efforts.
Additionally, in countries such as the Philippines, Bangladesh, and India, democracy has been steadily declining with draconian laws being implemented restricting free speech and prohibiting criticism of the governments in power.
This rise in authoritarianism and decline in democracy inhibits civil society's function to challenge and dispute wrongdoings.
Without this accountability, human rights violations and financial crime are left unchecked, increasing the prevalence of both.
Governments in the region need to do more to ensure people can make their voices heard and to reverse these worrying trends.
Likewise, organizations with ties to these jurisdictions must ensure that they are taking the necessary precautions to safeguard themselves from reputational or monetary damage by continuously assessing their risk appetite and conducting accurate and reliable KYC processes.
Wildlife Trafficking: When Will it End?
“Only when the last tree has been cut down, the last fish been caught, and the last stream poisoned, will we realize we cannot eat money” – A famous prophecy of the Cree Indians.
The Conservation Strategy Fund ranks illegal wildlife trafficking as the world’s fourth largest internationally organized crime, with annual revenue of between $7 - $23 billion.
Unfortunately, most of the wildlife that is poached and trafficked is destined for China, where it is used for traditional medicines.
At some point you just shake your head and wonder: when will it end? So many species face extinction, yet this dire reality is entirely avoidable.
Wildlife crime is a serious transnational crime and needs to be treated as such. Increased cooperation, coordination, investigative and enforcement measures are needed to ensure adequate, efficient, and effective action is taken to stop illicit wildlife trafficking in both China and the jurisdictions that facilitate the demand.
Forced Labor: A Critical & On-Going Challenge for APAC
In the Asia-Pacific region, the International Labour Organization estimates that 15.1 million people are in forced labor – the highest number of people in the world.
Forced labor is a critical issue for companies aiming to manage risk, safeguard their business, and protect workers throughout their supply chain.
However, confirmed cases of forced labor are notoriously difficult to detect and prove in global supply chains.
One of the best approaches to mitigate this risk is to recognize the country or industry where forced labor is most prevalent and conduct an extensive risk analysis audit and extensive due diligence, so that right from the start exploitive practices are avoided.
It is also vital that organizations have a response policy and strategy in place should corrective action be required, this could include: a policy statement, actions to be taken if violations are identified, compliance procedures and finally, ensuring all documentation and reporting obligations are met and auditable.
Yet often, an audit trail is one of the hardest challenges for a supply chain, but with advanced third-party risk management, a sound strategy can be established to provide a clear view of third-party risk.
Hong Kong: Amended AML/CTF Legislation
Last December, the Anti-Money Laundering and Counter-Terrorist Financing Amendment Bill 2022 was passed in Hong Kong.
There were two new introductions to the bill and four amendments to align with the latest international standards set by the FATF.
The two new introductions are:
- Licensing Regime for Virtual Asset Service Providers – taking effect 1 June 2023
- Two-tier Registration Regime for Dealers in Precious Metals and Stones – taking effect 1 April 2023.
The four amendments are:
- Amending the definition of “politically exposed person” (PEP) to align with the FATF requirement
- Facilitating a risk-based approach in determining the degree of customer due diligence (CDD) that former PEPs are subject to
- Supporting the use of technology by clarifying that a recognized digital identification system can be used for the purposes of CDD and satisfying the additional requirements where a customer is not physically present for identification purposes
- Clarifying that, where a trust is concerned, a beneficial owner includes a trustee of the trust, a beneficiary, and a class of beneficiaries of the trust entitled to a vested interest in the trust.
To give the industries sufficient time to prepare for the new regulatory requirements, these amendments will be phased in from the second quarter of 2023.
This amended legislation ensures that international obligations are fulfilled, while simultaneously cementing Hong Kong’s status as an international financial center with an effective AML/CTF regulatory regime that promotes sustainable development.
Drug trafficking is one of the most lucrative activities for organized criminal groups.
These groups are also experts at identifying and exploiting loopholes in financial systems and employ a variety of money laundering schemes, with the FATF noting there is ‘no single business model for layering and subsequent integration methods.’
Unbound by rules, regulations, or borders, they have the freedom to do whatever is necessary when required, which is a definitive advantage in comparison to law enforcement.
These illicit financial flows continue to pose a severe risk to socioeconomic development and the security of the state by fueling violence, insecurity, instability, and corruption.
In North America alone, the non-medical use of synthetic opioids like fentanyl is causing hundreds of people to die every day from overdoses and opioid-related deaths and continues to be the leading cause of non-injury-related death.
FATF published a report late last year, the first since 2014, providing information on risk indicators and best practices to aid in money laundering investigations involving the proceeds of drug trafficking.
Financial institutions need to optimize multi-factor identity verification processes, due diligence, and AML transaction monitoring, flagging high-risk transactions for suspicious behavior, as well as emerging trends and patterns.
China: A New Watchdog for the Financial Sector
China’s Banking and Insurance Regulatory Commission (China’s banking watchdog) is set to be replaced this year by a new national financial regulatory administration.
This new watchdog, alongside China’s Securities Regulatory Commission, will create a new regulatory framework; one will cover market conduct and consumer protection, while the other will focus on financial system stability and policy.
This has stemmed from many organizations failing to keep pace with a rapidly growing and increasingly digitized economy.
This two-pronged regulatory approach mirrors international financial regulation standards and ensures China levels up, while also unifying and tightening the country's framework to improve efficiency and effectively manage emerging risks.
Malaysia: Severe Misappropriation of Government Funds
Towards the end of last year, Malaysia's Anti-Corruption Commission opened an investigation into the alleged misappropriation of $136.39 billion in government funds by ex-Prime Minister, Muhyiddin Yassin.
He was subsequently arrested last week and now faces corruption charges.
Unfortunately, this isn't the first incident, and it certainly won’t be the last either.
Take for example the former prime minister Najib Razak who was jailed for 12 years last year after being found guilty in a case linked to a multibillion-dollar scandal at state fund 1MDB.
It's clear that urgent anti-money laundering legislation reform is needed to curb corruption in Malaysia and that organizations must carefully consider interacting with such a high-risk jurisdiction and the implications of such moving forward.
Final Thoughts
Financial crime in Asia-Pacific countries is complex, sophisticated, digitally enabled, and international.
It also has a challenging AML landscape, and organizations that do business in this region must be ready to manage a diversity of regulatory obligations.
To fully understand and comprehend the risks involved and avoid regulatory penalties, organizations must be able to quickly collect, analyze and accurately act on large data subsets.
Yet, legacy technology and manual checks continue to haunt and hamper any meaningful transformation.
Spotting any kind of financial crime – fraud, money laundering or corruption – is difficult and most criminals are skilled in leaving behind as few traces as possible.
With advanced AI and Machine Learning compliance technology, financial organizations can Reimagine the Fight Against Financial Crime.
If you want to find out more about our cutting-edge solutions, just fill out our contact form and we’ll start the conversation.