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Preparing for Financial Crime Risk

An interview with

In this interview with BRINK Asia, Mark Pulvirenti, who leads Control Risks’ Compliance, Forensics and Intelligence practice in the Australia-Pacific region, talks about the challenges of money laundering, bribery, and corruption for companies and economies in the region. While these issues have been around for a long while now, efforts to combat them are becoming increasingly important and common. This is resulting in evolving regulatory frameworks across the region, which, while important and necessary, are opening companies up to regulatory risk, he says, particularly in industries that have not seen substantial regulations so far.

BRINK Asia: How can companies assess and mitigate bribery and corruption risks through compliance programs?

Mark Pulvirenti: The cornerstone of all compliance efforts is risk assessment. Whether it is bribery and corruption or money laundering risks, companies need to take a risk-based approach, with often limited resources, in mitigating each risk. A business that is noncompliant always leaves itself open to potential criminal and legal consequences. Separately, implementing risk-assessment procedures also creates a competitive business advantage.

Whenever there is a change in a business’s structure or operations, risk assessments should be performed and the compliance program adjusted accordingly. In the absence of distinct business changes, risk assessments should be performed on a regular basis. Risk assessments should consider both external risks (such as geography, industry, third-party relationships, and route to market among others) and internal risks or vulnerabilities (such as what policies, procedures and control environments look like). Ideally, this information is obtained through a combination of data, documents and people. 

There is no “one size fits all” when it comes to a compliance program—each will be unique to a particular business. Each will, however, have common elements around policies, communications and training, oversight, controls and monitoring, reporting, investigation and disciplinary measures and dealing with third parties.

Again, the key is not to “set and forget.” The compliance program must be something that employees live and breathe day to day. By way of analogy, many companies have embraced issues of safety throughout their business. Twenty years ago, safety was not necessarily a big thing, but today it has permeated throughout the ways in which many companies operate. Ethics and compliance needs to follow suit.

BRINK Asia: How big a challenge is money laundering in the Asia-Pacific region?

Mr. Pulvirenti: Money laundering is a constant challenge for businesses across Asia-Pacific, particularly those regulated businesses that span the region, dealing with various financial intelligence units.

Let’s talk some statistics. Three Asian countries (Afghanistan, Laos, and Cambodia) were recognized in the top high-risk countries by the Basel AML Index 2017. The remainder were from sub-Saharan Africa and the Middle East. The Basel AML Index measures the risk of money laundering and terrorist financing of countries based on 14 public indicators dealing with anti-money laundering/combating the financing of terrorism (AML/CFT) regulations, corruption, financial standards, political disclosure and the rule of law.

Corruption and other predicate crimes in many parts of Asia related to drug trafficking and smuggling are still prevalent, which means that risk of money laundering will still remain.

And across much of Asia, corporate governance remains a fundamental challenge, owing to the power wielded by many of the large business houses, often owing to the political patronage they enjoy, and at other times, simply because of their size. One example that comes to mind is the still strong influence from family-run corporations and “chaebols” in Korea, which often are not transparent in their shareholding or business activity. There are similar stories playing out in economies such as Indonesia and India as well.

With activities in the Middle East, particularly in Syria and Iraq, ISIS forces are disbursing throughout the world. In Asia-Pacific, we see concentrations of terrorist cells forming or strengthening in areas such as the Philippines and Indonesia, which we expect will result in corresponding risks of money flowing to these jurisdictions as terrorist funding is required.

BRINK Asia: Are Asian economies doing enough to combat these issues?

Mr. Pulvirenti: Outside of first-tier mainstream banks, we see many organizations struggling with compliance measures aimed at dealing with AML/CTF. An often overlooked but critical area is to train frontline staff and customer account representatives to ask the right questions while onboarding new customers, for example. In fact, many organizations across Asia are not even fully aware of the adequate processes required to be put in place to rein in illegal fund flows. Compounding the problem is that methods of money laundering are always changing, so compliance and law enforcement is always playing catch-up. Many Asian economies, to be fair, are already grappling with far too many other pressing issues such as poverty reduction and the provision of basic infrastructure services, and so combating financial crime is understandably not very high on their radars.

That said, things are changing, and many economies and businesses across the region are increasingly taking steps in the right direction. For them, the key is to automate as much of the compliance process as possible in order to make it more accurate, comprehensive and efficient. A relatively new area that needs encouragement is fintech and regtech technologies. It will be prudent on the part of regulators to bring in new policies that encourage the growth of these emerging technologies to counter money laundering and financial crime more broadly. 

If a company does not have “adequate procedures” and an incident of bribery occurs, it may be held automatically liable for that conduct.

BRINK Asia: Is the regulatory framework across the region changing for the better? Is there more regulatory scrutiny?

Mr. Pulvirenti: Generally speaking, yes. However, some are moving at a quicker pace than others.

Law enforcement agencies are working more closely together than they historically have. Some jurisdictions have a particularly strong focus in this area. For instance, Hong Kong is very strong in its prosecution of money laundering offenses under the Organised and Serious Crimes Ordinance. These are, however, more targeted at account holders rather than, for instance, financial institutions for lack of compliance and/or reporting measures.

Similarly, Singapore requires all professional accountants and public accountants to abide by the mandatory requirements of implementing measures and controls to counter money laundering and terrorism financing risks.

Both Hong Kong and Singapore are leading compliance efforts in Asia-Pacific, and other countries in the region can learn from their experience.

BRINK Asia: Are the new regulatory requirements burdening companies?

Mr. Pulvirenti: Again, only regulated industries are facing these challenges. There are increasing challenges around the region for sectors like real estate, law firms, accounting firms and gem dealers. While compliance is moving at different speeds in different sectors, it will eventually place greater burdens on companies that previously didn’t face compliance requirements. However, the end outcome of this exercise will be for the larger good of businesses, societies and countries. 

The rise in compliance guidelines is putting pressures across the board. For instance, it has resulted in an increased demand for employees experienced in regulation, financial crime, monitoring and related tasks. There is a shortage of skills in this area for countries like Singapore and Hong Kong, which have arguably been most active in this space.

In tandem, countries in the region are also increasing their local reporting requirements, adding further to the pressures of existing standard compliance regulations. For example, Hong Kong and Singapore have implemented new standards to align with international standards. And the great positive for the region is that other countries such as Australia, Indonesia, Malaysia, India, Taiwan and China are rejigging their existing regulations as well when it comes to issues of AML/CTF and bribery and corruption.

BRINK Asia: What are some of the regulatory risks that companies operating in Asia need to look out for?

Mr. Pulvirenti: I think the top three would be: AML/CTF—particularly as the number of industries that face reporting requirements increases. It is now imperative for companies to employ the right people and have the required infrastructure to abide by the new regulations put in place.

Next would be bribery and corruption. Corporate liability for failing to prevent bribery is an increasing focus by the likes of the UK and, likely in the near future, Australia. Each of these jurisdictions has and will have relevant extraterritorial reach. If a company does not put in place “adequate procedures” and an incident of bribery occurs, the company may be held automatically liable for that conduct. Companies will need to implement adequate procedures as the only defense to these types of strict liability offenses.

Finally, sanctions. Companies in Asia have to be aware of restrictions imposed by sanctions and be constantly prepared for new sanctions being either unilaterally imposed by local governments or more broadly by the likes of the UN and EU. The most recent example includes U.S. sanctions being imposed in relation to the likes of North Korea and Iran. Myanmar has also long been the subject of international sanctions.

Mark Pulvirenti

Partner at Control Risks
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