AML News and Updates Newsletter - November 2022

Welcome to the first edition of the Newsletter AML News and Updates. The Newsletter will be issued monthly and will provide recent updates on Anti-Money Laundering (AML) and Anti-Financial Crime industry.

This first issue is brought to you by AML Cube Consulting and Education, a business aiming to assist various types of regulated entities to be compliant and stay compliant with AML regulations.

The following developments will be discussed:

👉 Discussion of the month: The collapse of FTX - what went wrong

Other news:

👉 The European Commission Supranational Risk Assessment 2022

👉 Countries not implementing AML/CFT measures in crypto may face "greylisting" by the FATF

👉 Dubai Financial Services Authority (DFSA) fines Bank of Singapore Limited for inadequate systems and controls and unauthorized activity

Discussion of the month:

The collapse of FTX - what went wrong

The week from 7th to 11th November 2022 ended with the announcement of the bankruptcy of FTX, one of the major crypto exchanges, blowing away the crypto industry globally.

FTX was considered one of the most stable and responsible companies in the regulated crypto industry. Sam Bankman-Fried, the founder and CEO, was one of the most influential and respected leaders in the crypto industry.

However, bad risk management practices, poor governance and other actions led to the downfall of FTX within a few days.

The downfall of the empire of FTX

The downfall of FTX started on 6th November, when the CEO of Binance announced publicly that would liquidate the positions in the token of FTX - the FTT token. This announcement created a crypto "bank run" where investors started withdrawing their crypto holdings from FTX.

Unable to meet the demand, on the 8th of November, Binance CEO Changpeng Zhao announced that has reached a non-binding deal to buy FTX and help cover the "liquidity crunch".

On the 9th of November, Binance backed out of the deal, leaving FTX with no option other than filing for bankruptcy.

According to a CNN article, at least $1 billion of customer funds have disappeared from FTX. According to the same article, Sam Bankman-Fried "secretly transferred $10 billion of customer funds from FTX to Bankman-Fried's trading company Alameda Research". Since then, a large portion of those funds has disappeared.

The liquidity problem was huge. According to investment materials seen by the Financial Times, "FTX exchange held just $900 mn in easily sellable assets against $9 bn of liabilities the day before it collapsed into bankruptcy".

The domino effect of the bankruptcy of FTX is now a reality. Genesis Global Capital has suspended withdrawals and new loans for its customers. Gemini exchange has also paused withdrawals on its interest-earning accounts. BlockFi, an all-in-one cryptocurrency platform offering loans is preparing a potential bankruptcy filing due to its significant exposure to FTX according to The Wall Street Journal.

The collapse of Lehmans Brothers - flashback to 2008

This case reminded me of the 2008 days when Lehman Brothers, a global, well-respected financial services firm collapsed and filed for bankruptcy within only a few days.

Although there were some discussions about selling Lehman Brothers to Bank of America, the sale was never completed because the US regulators refused to provide a federal guarantee or any other form of bailout. Some discussions were also made with Barclays but again, the sale was not completed.

The Lehman Brothers collapse had a domino effect on the financial industry back in 2008 that led to what we call "the global financial crisis". Companies, banks, money market funds and individuals worldwide lost vast amounts of funds due to their investments in Lehman Brothers. Some of these entities were forced to shut down.

Similarities between Lehmans Brothers and FTX

By examining the collapse of the two firms, there are some similarities since both companies:

• assumed that the markets will always work to their benefit
• there was a public belief that both companies were trustworthy and "too big to fail"
• used very bad risk management practices
• went from top to bottom within a few days
• were to be sold but the sale was not completed
• the regulators were not willing to bail out either of them.
• their failure had a domino effect on the industry.

Can regulation indeed help?

There were several discussions in the past regarding the need of regulating the crypto industry and the need for investor protection.

The truth is that regulations will not protect customers from losses when investing in high-risk products and products that they do not understand. However, regulations impose requirements on regulated entities to prevent bad practices that could harm or mislead investors when making investment decisions.

In the case of FTX where we have seen the following bad practices:

❌ Bad governance

❌ Inappropriate safeguarding of clients' funds

❌ No disclosures as to the way funds were used

❌ Fraud

❌ Market manipulation

These bad practices could have been prevented if FTX had appropriate procedures in place regarding governance, safeguarding, disclosure arrangements, fraud prevention and market abuse policies.

On the other side, the crypto industry is very different to the traditional financial industry and any regulations must be designed carefully, taking into consideration the specific nature of crypto, and in a way that will not "kill" the market.

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Read below some other recent AML developments:

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The European Commission has published the "Supranational Risk Assessment" for money laundering (ML) and terrorist financing (TF) affecting the European (EU) internal market

On 27th October, the European Commission published the 3rd Supranational Risk Assessment Report. This is a requirement of the Financial Action Task Force (FATF) recommendations which require countries to "identify, assess and understand ML and TF risks and take commensurate preventive measures".

The 4th AML Directive as amended by the 5th, mandates the European Commission to conduct a risk assessment of the ML/TF risks affecting the EU market.

The report explains how COVID-19 and the Russian war of aggression against Ukraine imposed additional ML risk in the EU.

The report assesses the following groups of activities:

1. Cash-related products and services (cash couriers, cash-intensive business, high-value banknotes, payments in cash and privately owned ATMs).
2. The financial sector (deposit on accounts, retail and institutional investment sector, corporate banking, private banking, crowdfunding, currency exchange, e-money, transfers of funds, illegal transfers of funds, payment services, virtual currencies and other virtual assets, business loans, consumer credit and low-value loans, mortgage credits and high-value asset-backed credits, insurance (life and non-life) and safe custody services).
3. Non-financial products and services (legal arrangements, high-value goods, high-value assets, couriers in precious metals and stones, real estate, services provided by accountants and legal services).
4. Gambling sector.
5. Non-profit organisations.
6. Professional sports (professional football).
7. Free zones.
8. Investor citizenship schemes and investor residence schemes.

Read the full report ⬇️

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Countries that fail to implement AML measures on crypto might be facing "greylisting" by the FATF

According to a source of Al Jazeera, countries will be subject to yearly checks by the Financial Action Task Force (FATF) to ensure that they have AML/CFT measures for the crypto industry.

Instead of the current mutual evaluations that take place every 10 years, the yearly interviews will give countries less time to implement the FATF requirements in the crypto industry.

Failure to comply with the AML rules in crypto will not automatically classify a country as high-risk however it will affect a country's overall rating and, as a result, some countries may be "greylisted".

See the original article ⬇️

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Dubai Financial Services Authority (DFSA) fines Bank of Singapore Limited for inadequate systems and controls and unauthorized activity

The Dubai Financial Services Authority (DFSA) has imposed a fine of USD 1,120,000 (AED 4,113,200) on the DIFC branch of Bank of Singapore Limited (the Bank) for a number of contraventions of DFSA legislation, including for having inadequate systems and controls including those relating to anti-money laundering (AML).

The deficiencies involved:

▶️ the bank's business risk assessments

▶️ Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD)

▶️ Identifying the source of funds and source of wealth of clients

▶️ Reporting of suspicious activity.

DFSA announcement: ⬇️

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What AML topics would you like to discuss in the next months?

Waiting for your comments and responses.

Regards

Anna Stylianou