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    Culture of Compliance | Anti-Money Laundering Under Biden Administration

    What’s on the Biden Administration’s priority list regarding Anti-Money Laundering? In our latest episode, Sabrina Serafin and Jeff Horvath of DigiPli Inc., discuss how the treasury department is seeking to deal with topics like cryptocurrency.

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    Culture of Compliance | Anti-Money Laundering Under Biden Administration

    This transcript was assembled by hand and may contain some errors.

    It has been edited for readability.

    Sabrina Serafin Welcome to Frazier & Deeter’s Culture of Compliance podcast series, where we discuss compliance as a competitive advantage in today’s marketplace. I’m Sabrina Serafin, Partner and National Leader of Frazier & Deeter’s Process, Risk & Governance Practice.

    Today, we’re talking to Jeff Horvath, Chief Compliance Officer at Fitch Ratings and former head of Deutsche Bank’s 300-person central compliance team. Currently, Jeff is the CEO and co-founder of DigiPli, which provides anti money laundering solutions that help financial institutions open new customer accounts remotely. Jeff, welcome to the podcast.

    Jeff Horvath Sabrina, thank you for having me today. Looking forward to our discussion.

    Sabrina Jeff, for our listeners who may not be familiar with anti-money laundering or what we’re going to refer to going forward as AML, can you talk a bit about the Anti Money Laundering Act of 2020 and what it’s designed to accomplish?

    Jeff Sure, happy to do so. To set the stage, the last major update to the AML laws was the Patriot Act, which was passed just after 9/11. A lot has changed in the last 20 years, there’s been major advances in technology, consumers and businesses are transacting in different ways, including sending money through mobile devices, their new products like cryptocurrencies and digital wallets, none of which were contemplated by the original regime.

    Criminals are using more and more sophisticated ways to launder money and to commit fraud and the laws need to reflect that. Plus, over the past 20 years, we identified a number of areas that could benefit from some enhancements and some streamlining, and that led to the passage of the Anti-Money Laundering Act in early 2020.

    Sabrina Thank you for that. I understand that the Biden Administration has discussed some priorities regarding AML, can you share with our audience what the Treasury Department is specifically focusing on?

    Jeff There are two main areas on which the Treasury Department is focusing. One is who ultimately controls or owns a private company; we’ll call them the beneficial owner of that private company, and the other is cryptocurrency regulation. In terms of beneficial ownership, the US has been criticized for a long time in the international stage for making it possible to set up and use what are called shell companies, these are companies that make it easier for criminals to use corporate entities to launder money. It’s of course, much easier to launder money through a company if you don’t know who owns that company.

    AMLA required FINCEN, which is the government organization charged with overseeing AML enforcement, to establish a registry of beneficial owners of each company operating in the US. So, a company is required to file a list of its beneficial owners and then update that list over time and with tens of millions of private companies in the US, this could be a huge logistical burden, but it’s something that is very much needed in the industry. When it comes to crypto, AMLA put to bed the question as to whether cryptocurrency is are subject to the AML laws, some argue that the AML laws didn’t apply to cryptocurrency because it wasn’t money; it wasn’t a great argument, the regulators largely discounted those claims but it’s good to have some clarity in that space.

    But what I find most interesting about this element is that when the head of FINCEN left for private industry a month or so ago, his replacement was a guy named Michael Mosher, and he was the head of FINCEN’s innovation office. Before that, though, he was the Chief Technology Officer for a company called Chain Analysis, and they’re a well-known firm used by both governments and private industry to detect the use of cryptocurrencies to launder money. So, those are the two areas of focus that the Biden administration has highlighted in terms of its anti-money laundering enforcement.

    Sabrina How do you feel this is going to impact the public’s perception of cryptocurrency?

    Jeff Cryptocurrency is becoming more mainstream. The attention that regulators are paying in terms of regulation, I think is legitimizing it more so as an alternative to fiat currency. You also see different governments exploring the use of crypto currencies as a replacement of fiat currency.

    So, there is adoption by industry, there’s adoption by some governments and there is a growing recognition that this is not just a trend or a fad, but something that is likely here to stay and can only benefit from having a strong regulatory infrastructure. I think a lot of the major players in the crypto space believe that a strong regulatory infrastructure is essential for them to survive because it gives them that level of credibility and respectability and trust.

    Sabrina That’s excellent information, it’ll be interesting to follow the progress on this. Let’s shift gears for just a moment and talk about one of the biggest topics in business today, and that’s remote working.

    As we are recording today, it’s been more than a year since most employees nationwide began working from home. So, how is this trend of working from home, working remotely and increasing online activity, how has it impacted financial organizations as a whole?

    Jeff In terms of financial institutions, I would focus on banks in particular and the impact it’s having on smaller to midsize community and commercial banks. There’s over five thousand banks in the US, most of which fit within this smaller to midsize category. If you take a look at how they operate, their processes have historically been very manual, very much reliant upon an individual going into a branch to transact, whether it’s opening an account or making a deposit, not a lot of these institutions were set up for accepting account openings or deposits online.

    When March 2020 came into play, the willingness of consumers to go to the bank branch to the extent that they were still open, very much dried up. When you couple that with the rise of digital banks or new banks or whatever you want to call them, those that don’t have physical presence, it’s really a challenging time for these organizations. We’ve been seeing a lot of branch closures and there’s an open question as to how and whether this model is going to survive in the new reality if it doesn’t start adapting the way it’s been operating.

    The other big impact that you touched on is how does this play out in terms of remote workforce and COVID very much forced a paradigm shift on companies, and companies were required to find a way to enable and even empower remote workforces. There’s been a lot of growing pains, but by and large, it’s been pretty successful, and I can’t see the country or the world really rolling the clock back on this shift, it’s here to stay in some form or another.

    But what it also did is it forced companies, not just financial institutions, to really consider what their core business is and focus on investing in and supporting that core business. There’s a lot of ancillary infrastructure that’s needed for any institution to run, maybe it’s payroll, maybe it’s managed IT services, fintechs embraced early on a model of finding a strong vendor with an expertise in a certain area and relying on that vendor as part of their infrastructure.

    They’ve partnered with those vendors instead of building that infrastructure or expertise in-house. We see this starting to become the case with AML as well. There are a lot of discussions, we’re having the third-parties, whether they’re banks or non-bank financial institutions, who are looking for vendors to partner with them to take up a piece of this infrastructure. This is really fueled by some of what we started with is the shift to a remote workforce.

    So, if your employees are able to successfully work from a location other than your office, what about taking it a step further? What about thinking, “Do they need to be my employees or do they need to just be a reliable firm or reliable partner who can augment and enhance what I’m currently doing without me as an institution need to spend time, money and effort building, hiring, maintaining and training that infrastructure that really isn’t core to my business?” So, yes, the AML space is a bit different from outsourcing your payroll company or your payroll processors, I should say, because it’s a little bit more regulated and what you can and can’t do. But the concept is there, and I see this picking up momentum over time.

    Sabrina Just another interesting side effect from the global pandemic.

    Jeff Absolutely.

    Sabrina As we wrap up, Jeff, do you have any closing thoughts?

    Jeff AML is a complex topic, the laws and rules are constantly changing and firms need the right expertise to avoid the pitfalls. Getting it wrong is a costly experience, whether it’s fines or whether it’s reputational damages. There are a lot of tools that can automate some very manual processes that exist today, it can save time, it can save money and streamline a customer experience, and it’s more reliable than the manual Excel based processes that a lot of these firms are currently running.

    So, what I would leave your audience with, is that if you’re working with a financial institution and if you haven’t already started exploring how to take advantage of some of these advances in technology, now is the time to really give that some thought.

    Sabrina Thank you, Jeff, for being with us today to discuss AML and the trends that you’re seeing and to our audience, thank you for listening to Frazier & Deeter’s Culture Compliance podcast. Please join us for our next episode as we continue to discuss transforming compliance requirements into investments.

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