“Preventing Financial Crime in a Rapidly Changing Environment: A Regulator’s View” - Remarks by Seána Cunningham, Director of Enforcement and Anti-Money Laundering, at European Anti-Financial Crime Summit

I am delighted to join with you at this Summit and to hear from such a vast array of experts on such an important topic. Just looking at the list of speakers it is striking the different and important roles we all play in combatting financial crime in a continuously changing landscape.

In my remarks, I will briefly outline three ways in which we can be more effective at preventing financial crime in the financial system.

Before doing so, I just want to frame my remarks in the current geo-political and economic context. Without doubt, we are facing new threats and a very changed environment since the ending of the Covid19 pandemic. Due to the shuttering of our economies during Covid19, we have experienced supply side shocks and a move towards polarisation between the largest economies. Added to this has been an inflationary environment that is causing financial hardship on families, households and businesses.

On the geo-political front, we have seen the once unthinkable come to pass with a major war taking place in Europe. Russia’s invasion of Ukraine and the suffering it has unleashed has rightly met with public condemnation. Unfortunately this condemnation is not universal, leading to further deepened polarisation between states. Indeed, the recent suspension of Russia from the FATF, something previously thought to be impossible given the FATF’s consensus led approach, only underscores the changed landscape we operate in.

Why do these issues matter in the context of combatting financial crime? Firstly, financial crime does not respect borders and so the fight to combat it is best achieved through cooperation internationally and domestically. A further polarisation at a political level makes harmonisation and collective action to combat financial crime far more difficult. Secondly, criminals and terrorist groups are enabled in a polarised world to exploit gaps to launder proceeds of crime and perpetrate terrorist acts. Thirdly,  inflation causes financial stress on individuals, often the most vulnerable in society, and businesses, and this can lead to the risk of exploitation by criminals. Finally, the war in Ukraine has highlighted the challenges of implementing international financial sanctions at pace with the precision and certainty that is required.

As a national central bank and a financial regulator responsible for a global financial centre, these issues really matter and inform the work that we do.

There are three ways to counter the challenges we face:

• Recognising shared goals and valuing collective effort
• Raising awareness and being vigilant
• Understanding the changing risks

Shared goals and collective effort

The responsibility for preventing financial crime, money laundering and terrorist financing involves a wide range of stakeholders including policy-makers, regulators, law enforcement, financial intelligence, and private sector firms.

In the Central Bank, as national AML/CFT supervisor and through our role in the European System of Financial Supervision and FATF, we see the importance of shared goals and how collective effort is essential to combat financial crime.  We play our part by ensuring that AML regulation is well designed, understood and effectively implemented by firms through supervision on a risk-based approach that protects the system, its users and the wider economy. We also work closely with An Garda Síochána, policy-makers and peers domestically, in Europe and as part of the global network.

As an integrated regulator spanning across AML/CFT, prudential and conduct, we see the importance of the integrity of the system and the need for a collective effort to safeguard it. To fail to protect the integrity of a financial system allows not only abuse by bad actors and ensuing reputational harm, but also threatens the safety and soundness of firms, can result in consumer and investor detriment, and in extreme circumstances can create instability in the wider system.

Looking at the wider AML eco-system, we see that firms are at the forefront of preventing access to, or misuse of, the financial system by criminals. I want to highlight that our primary aim in supervising firms is to drive high standards and ensure effective risk mitigation measures are in place; it is not to spot minor deficiencies or catch firms out. By adjusting our mind-sets to thinking “we are working collectively towards a shared goal of preventing money laundering and terrorist financing in our society”, we will all be more effective.

Finally, on the challenges of collective effort – the wide range of authorities in the AML framework, nationally and internationally, has led to well documented findings of supervisory fragmentation that challenges the effectiveness of the system. We have seen this being exploited by criminals, particularly if there is inconsistent application of the rules, ineffective cooperation, or absence of timely reporting and information sharing.

When considering some of the challenges faced around information sharing, regulatory arbitrage and supervisory fragmentation, we welcome the EU AML/CFT Action Plan and the proposed new Anti-Money Laundering Authority which offers an opportunity to drive better coordination, high standards and effective collective effort across Europe. We are supporting these European initiatives through our active participation at EU fora and via the establishment of a dedicated transformation team to prepare for a seamless integration with the new authority. 

Awareness and vigilance

Moving on to the topic of consumers being targeted by fraud and the need for awareness and vigilance.

We are all aware of reports of an increase in online and telephone scams in recent times. Indeed, many of you here today have likely experienced receiving unsolicited messages – perhaps citing an unpaid bill and requiring bank details as a matter of urgency. This preys on people’s vulnerabilities. The correlation of these types of scams with many people’s anxiety around cost of living challenges exacerbates the issue and highlights the need for awareness and vigilance.

While the Central Bank does not have a role in the investigation of fraud, it does have a role in investigating unauthorised providers of financial services. Through our work we have seen the devastating consequences these types of crimes have on victims and their families.

We see communications, raising awareness and education as a key way to preventing people from falling victim to these crimes. Whenever issues of fraud or criminality more generally are uncovered during our work, we coordinate with An Garda Síochána and other relevant agencies. The ultimate aim we all should have in the anti-financial crime community is that people are better equipped to recognise, avoid and report frauds for criminal investigation.

Another important area which requires vigilance is financial markets activity in Ireland and the risk of market abuse. There has been a significant increase in scale and sophistication of financial markets activity coming under the Central Bank’s remit. Market abuse, including insider trading, fundamentally undermines the efficiency, transparency and integrity of the markets and the financial system.  We have strengthened our market monitoring and detection capabilities and continue to take proactive steps to protect the financial markets from abusive practices. Again, we see collaboration, reporting and information sharing are key tools for regulators and law enforcement agencies in the fight against market abuse.

Changing risks

In a rapidly changing environment, the risks from financial crime are quickly changing and evolving. For instance, the way in which financial services was provided 5 years ago has changed, and it will have changed even further in 5 years’ time. This brings opportunities for innovation and growth, but also presents challenges to keep pace with this change.

For firms, a thorough understanding of the ML/TF risks to which your business is exposed is key to the development of an effective AML/CFT risk management framework.  A key regulatory requirement is that money laundering and terrorist financing risks specific to a business should be captured in a firm’s Business-wide Money Laundering and Terrorist Financing Risk Assessment. It is from this business wide risk assessment that all AML/CFT policies and procedures will be developed and it is therefore critical that firms have a strong understanding and articulation of the ML/TF risks to which they are exposed from the outset and that this is kept live and under review, as risks and/or business activities will change. It is also key that firms have the right people in place and the new PCF 52 (Head of AML/CFT) role in the Irish regulatory regime emphasises this.

An example of changing risks arising from our geo political context is clearly seen in the area of financial sanctions. The European Union’s Restrictive Measures introduced in the aftermath of Russia’s invasion of Ukraine has brought the issue of financial sanctions to the fore of peoples’ minds. While unquestionably an appropriate response to Russia’s aggression, the scale and pace of the new sanctions against Russia has brought into sharp focus the challenges of the wider European and national financial sanctions framework. It is critically important that firms and businesses understand the sanctions regime and the risks associated with not complying with the regulations. This is particularly the case for any activity with an exposure to those sanctioned entities or individuals.

No different to firms in the financial sector, the risks faced by AML/CFT supervisors are changing rapidly given the rise of new ways financial services are provided and how financial markets operate. This requires us to continuously review our own understanding of risks in firms, sectors and the system as a whole, and the measures we should take to mitigate those risks. It is for this reason, as part of the Central Bank’s strategy, we are enhancing our regulatory and supervisory approach to be more data-driven, intelligence-led and scalable.

Conclusion

In wrapping up, I have briefly spoken about three ways we can meet the challenges that we face and it leads me to conclude that we have many reasons to be optimistic.

I think, for the most part, we recognise that we do have shared goals in seeking to prevent abuse of the financial system. While collective effort can sometimes be challenging, in practice more than in concept, where it is pursued we can reach the right outcome.

There is a shared sense, for example, of a need to protect the vulnerable from scams and fraud. Not only are efforts being made by An Garda Síochána and public authorities on the issue, but larger firms have been very proactive in raising awareness of the issue to the public.

And we have seen that firms are far more sophisticated in how they assess and mitigate risks compared to 5 years ago. That is not to say, however, that there is not more to do, as we all have more to do to meet the challenges we face in a rapidly changing risk environment.

At its heart, AML/CFT is a collective effort to not allow criminals benefit from their crimes, or fund further criminality, or commit terrorist acts. This is a societal good in everyone’s interest, one that is very hard to dispute but is sometimes hard to mobilise.

I started out talking about an increasing polarised world. Sitting here today participating in this Summit, the Anti-Financial Crime community feels far from polarised and very much up for the mobilisation required to meet the challenges that we face today, and that lie ahead.

Thank you.