In a year that witnessed international terrorism and geopolitical tensions top the news agenda, government policy and regulation has continued to evolve, with inevitable consequences for the global financial service system.</p> Keeping pace with rules to combat terrorist financing and money laundering was front of mind for delegates at this year’s Sibos Compliance Forum in Singapore, but other themes – notably the roles that utility solutions and innovative technology can play in meeting client needs in a highly-regulated banking environment – also came to the fore.</p> Terrorist financing </strong></p> Je-Yoon Shin, president of the Financial Action Task Force (FATF) – the inter-governmental body tasked with developing and coordinating policies to combat money laundering and terrorist financing, kicked off proceedings by outlining how its agenda has been shaped by recent global terrorist activities.</p> He said: “The game has changed for terrorist financing. The ISIL phenomenon shows there is a new type of terrorist organisation with unique financing streams. ISIL’s presence on the internet and social media has allowed it to convert information into tangible funds. How ISIL’s financing works differs to terrorist threats that we’ve previously faced.”</p> Shin explained that the G20 had asked the FATF to focus on “global collaboration” to enhance the transparency of payment systems, which in turn should lead to a marked reduction in terrorist financing. </p> The FATF has started work through its regional units to strengthen standards and introduce new requirements. It’s now developing new guidance on how best to supervise firms, given the various financial sanctions, which have been imposed in recent months.</p> Securities transparency</strong></p> The screening of payments against sanctions lists is less advanced in securities circles than it is in the wider payments world, according to panellists and delegates at this year’s Sibos.</p> An audience poll showed that 52% of the audience screened securities transactions; but a further 22% were intending to begin screening over the next year. A quarter had no plans in place.</p> Panellists at the securities transparency session expressed a hope that regulators would respond positively to a set of financial crime compliance principles recently published by the International Securities Services Association by aligning their expectations with industry proposals.</p> De-risking</strong></p> Another major compliance trend affecting banks and other financial institutions’ operations continues to be the trend toward de-risking their balance sheets, in response to the Basel III capital and liquidity framework as well as rising financial crime compliance requirements.</p> In response to these regulatory shifts, a number of institutions have pulled back from high-risk or high-cost operations, limiting business relationships with clients who don’t generate sufficient returns to offset the increase in regulatory costs.</p> Jack Jared, head of business compliance, correspondent banking group, treasury & trade solutions at Citi, acknowledged the business impact of higher compliance costs: “We have looked at the portfolios of our customers and looked at the relationships and realised that a lot of them were just not paying their way.”</p> “At the individual level, a lot of correspondent banks are being let go, not because they have a higher risk, but the fact is they couldn’t provide sufficient revenue to cover the costs we are facing.”</p> There is no doubt that de-risking has become a complex issue. It’s driven not just by profitability, but also by liquidity requirements, compliance costs, and reputational risk – amongst other factors.</p> Lam Chee Kin, group head of compliance at DBS Bank, underscored the difficulties arising from competing strategic priorities, noting that ultimately all banks are “in the business of producing returns from a shareholder perspective,” adding that it was unrealistic to think otherwise. </p> If banks’ returns are adversely affected – whether “by a capital overhead, derivatives from a trading business or operational requirements resulting from compliance rules” – they are likely to be scrutinised, Lam said.</p> Shin said that the FATF would look more closely at factors influencing de-risking by banks. “The scale of this issue is not known. Most of the evidence has been anecdotal and despite numerous surveys, empirical evidence of the phenomenon remains scarce,” he said. “We are doing what we can to clarify how our standards should be implemented effectively.”</p> Utilities</strong></p> Attendees also heard how utility-based solutions are key to addressing some of the issues resulting from financial crime compliance requirements. An audience poll found that 43% of banks are using industry utilities, with 31% in talks to do so. A further vote also revealed that data privacy still remains a challenge to adopting the utility model.</p> Nevertheless, speakers acknowledged the importance of SWIFT’s KYC Registry as a secure way to exchange and store documents required for KYC compliance. Panellists observed that further dialogue between the industry and regulators is necessary to address privacy concerns, thereby potentially paving the way for greater use of utility-based approaches to compliance. </p> Emerging technologies</strong> </p> Financial crime compliance is regarded as a moving target for banks and regulators – and not only because of changes to sanctions regimes and terrorist threats. </p> A lively debate at this year’s Compliance Forum came from the sessions covering payments which highlighted how new technology-based financial services were raising compliance questions. From crypto-currencies to Apple Pay, the new ways in which banking customers are transferring their cash are opening up new fields for investigation by compliance experts.</p> Carolyn Burke, vice-president, international cards and Canadian payments regulatory initiatives at Royal Bank of Canada, said her bank’s recent risk assessment of alternative payment providers had identified both potential financial and market conduct risks for users of such services. </p> Speaking on the financial risks, Burke said: “It’s very unclear [what would happen] if a company went insolvent; consumers could have their credit scores affected. The other very high risk is market conduct as consumers won’t necessarily know who takes control of their money.”</p> Burke said that the rapid growth of some FinTech brands should also be a cause for caution, due to how these entities are regulated globally.</p> “FinTech has grown enormously. What is frightening is that because some of these entities aren’t seen as financial institutions from a regulatory point of view; the principals are not required to be screened. I even have to be screened when I want to coach my daughter’s soccer team, so I think the bar is perhaps too low.”</p> Looking forward</p> As the 2015 Compliance Forum underlined, financial crime compliance is now a permanent part of banks’ operating landscape. Panellists at this year’s conference suggested that changes in banks’ behaviour would lead to less enforcement activity by regulators in the future. But they also noted that new challenges were arising as a result of the move to faster payments and globalised business models.</p> While banks are gaining a better understanding of compliance challenges and regulatory expectations, panellists acknowledged a need for a still better grasp of how to manage compliance-related risks resulting from sanctions. </p>