AML activity often reflects political and financial turmoil across the world. That was especially true in 2022.
2022 started calmly, as much of the world emerged from a long and slow COVID hibernation. But that calm was soon shattered. Two months into the post-pandemic landscape, Putin invaded Ukraine. It was the first of many historically significant moments that took place throughout the year.
We’re going to take a close look at the most AML relevant events which started with an explosive war and appears to be ending with the world economy entering a declining market. Companies were pushed into unprecedented situations and forced to navigate the impacts of geopolitical and economic anxieties.
War and economic sanctions
Russia’s invasion of Ukraine ignited unprecedented levels of economic warfare through sanctions, with the West weaponizing finance to cripple Russia’s economy. NATO, the United States along with the European Union and multiple other countries introduced sweeping economic sanctions and export controls to weaken Russia’s ability to finance the war.
The targets of these sanctions included Vladimir Putin and members of his family, Russian Foreign Minister Sergey Lavrov and other pro-Kremlin insiders. As the world's second-largest oil exporter, Russia’s gas and oil sectors were another prime objective of the West’s main sanction package.
Trade restrictions were additional punitive actions adopted by the West, whereby the G7 nations enforced a price cap on Russian seaborne oil on top of an existing EU embargo and similar pledges by the United States, Canada, Japan and Britain. Other measures included travel bans, asset freezes and cutting off selected Russian banks from the SWIFT network in an attempt to force Russia into “economic oblivion”.
Additionally, there has been an exodus of over 1,000 foreign firms from Russia since the invasion, affecting production capacity as well as capital, with energy giants such as Shell and BP exiting their Russian ventures.
Unexpected consequences of oligarchy and corporate reactions
Another ripple effect of the war was the string of mysterious deaths of Russian oligarchs. A total of 19 Russian influential businessmen died in apparent accidents or by suicide, including several Putin allies.
The causes of death range from unremarkable to obscene, such as death by toad poison in a shaman’s basement, defenestration, and inexplicable self-inflicted gunshot wounds. It has been suggested that Putin is personally ordering executions of executives in critical sectors, chiefly those who held top-level positions at energy giants such as Gazprom Invest and Novatek, whom he feels will not be sycophants.
Subsequently, the conflict in Ukraine has generated a different level of corporate behavior. The mass exodus of investors illustrates how exposure to the Russian economy is becoming a massive reputational risk. Ergo, faced with a new reputational, moral and compliance panorama, organizations around the globe unilaterally engaged in “self-sanctioning”, pre-emptively imposing restrictions on themselves to suspend or completely terminate business dealings with Russia, Russian clients or those doing business in Russia. Navigating the fog of sanctions during this unprecedented regulatory panorama is vital for companies’ survivability in today’s market.
One of the many repercussions on anti-money laundering programs from Russia-related sanctions is the additional challenge of knowing who their companies are doing business with. The ongoing use of offshore or opaque jurisdictions to hide illicit wealth is an important obstacle for private companies expected to enforce sanctions. Consequently, a dramatic event like the manifold sanctions on Russia compel companies with exposure to refresh their AML risk assessments and re-examine their risk-based due diligence protocols.
A blow to UBO measures
However, the European Court of Justice (CJEU) made a shocking ruling in November 2022, invalidating provisions of the EU Anti-Money Laundering Directives (AMLD) that extended the right to access beneficial ownership information to any member of the general public, with no requirement to demonstrate a legitimate interest.
This saw public access to the Ultimate Beneficial Ownership (UBO) register suspended in several Member States. The ruling is a hindrance to NGOs fighting for corporate transparency and journalists, who use the registers to trace illicit financial flows by unmasking the true owners of otherwise opaque companies. It also goes against 6AMLD, which imposes stricter requirements on companies to identify hidden beneficial ownership.
Even before the CJEU’s ruling, UBO registers across different jurisdictions were often deficient or non-existent. According to World Bank data, only 64 economies out of 194 have a legal framework in place for collecting UBO information, exposing a resounding lack of UBO data availability. Not only does this demonstrate an ongoing failure of EU countries to comply with the 6AMLD, but an overall insufficient harmonization which ultimately hampers firms’ financial safety.
This is mainly due to the volume and complexity of AML rules, which are time-consuming and costly. In addition, Member States differ significantly in the way they implement AMLDs, and the nuances in national rules can make it difficult for companies to ensure they are fully compliant when operating across multiple jurisdictions.
Furthermore, the introduction of regulatory changes in the EU has been a barrier for non-Member States looking to do business with the trade bloc. The 5AMLD resulted in a departure of cryptocurrency companies from the EU with some migrating to more favorable jurisdictions, such as Asia-Pacific.
Is MiCA putting a leash on crypto?
Enhancing crypto regulations is another AML trend, as 2022 marks the year of the first crypto regulatory framework in Europe. The European Council agreed in July 2022 on a set of crypto regulations to oversee the activities of virtual assets, the most comprehensive of any jurisdiction to date. These consist of two components, Transfer of Funds Regulation (TFR), and the EU’s Markets in Crypto-Assets (MiCA) framework.
The latter will introduce vital protections for investors and important rules for market participants regarding crypto asset-related risks through a common EU regime. The former will set EU-wide enforcement rules regarding the Travel Rule.
First introduced in 2019, the Travel Rule requires financial institutions participating in a crypto transaction to exchange relevant beneficiary and originator KYC information in the context of investigations for money laundering or terrorist financing. However, the 2022 crypto landscape is very bleak, a major example being the rapid collapse and bankruptcy of FTX affecting almost all crypto tokens, including Ethereum and Bitcoin, and bleeding into nearly every other trading platform.
Consequently, how ready is the industry to comply with new regulations, such as the new Travel Rule? If the infrastructure required to maintain compliance raises operational expenses, a shadow network of exchanges where assets are traded beyond the purview of authorities may develop.
Crypto struggling with regulation
Companies already seem to struggle complying with the Travel Rule, citing legal uncertainty and lack of technical resources. This is unsurprising since there are hundreds of independent blockchain networks, each with their own unique technical and operating procedures. On the other hand, the deeper levels of liquidity required for the market to grow might be brought in by fully compliant exchanges, giving them a competitive edge in attracting institutional investors to crypto.
It is worth noting that, as crypto asset prices rose over 2020 and 2021, exchanges and companies began competing to establish a foothold in the lucrative global sports advertising market. This trend continued into 2022 with the largest crypto companies having committed more than USD 2.4 billion to sports sponsorship over the last 18 months.
However, aside from FTX, several other controversial instances have arisen after the crypto market’s downward spiral in 2022; Inter Milan’s sponsor, blockchain firm DigitalBits, defaulted twice in its sponsorship payments prompting S&P to announce a review of its credit rating, while Crypto.com backed out of a five-year USD 495 million sponsorship deal with UEFA Champions League.
The scale of crypto-asset activities is vast and volatile, and if 2022 has taught us anything, it’s that the crypto dominos are falling, sending enduring and pervasive shockwaves through the global financial system. In addition, sanctions and a general lack of infrastructure have seen extreme regimes, such as North Korea and Russia, establish new channels for funneling funds outside of the traditional payments systems via crypto. The EU has delayed its vote on the MiCA legislation until February 2023, although the implications of these scandals affirm that the vote should be passed, and fast.
Opioids understood as a serious threat
In 2022, the opioid epidemic brought drug trafficking back to the forefront of AML compliance programs. This has not only been overlooked since the Covid pandemic, but has intensified due to a lack of effective regulation and the unbridled profit motives of actors in the pharmaceutical and healthcare industries.
In the U.S, the crisis has contributed to over 109,000 deaths by overdose in the 12-month period ending March 2022, with annual overdose deaths reaching record levels during the pandemic.
Synthetic opioid trafficking involves major transnational organized crime groups who move illicit proceeds through, inter-alia, bulk cash smuggling, trade-based money laundering and wire transfers.
Virtual assets can also be used as a means of payment, and possibly laundering for narcotics such as synthetic opioids, which are commonly marketed on dark web vendor sites. In November 2022, the Financial Action Task Force (FATF) issued its inaugural reporton money laundering from fentanyl and synthetic opioids which recognized that many authorities do not understand the global money flows from opioids.
The report included a comprehensive list of recommendations to strengthen measures and risk indicators for operational authorities. New trends in the operations of organized criminal groups were uncovered in the report, such as the obfuscation of financial flows linked to illicit activity and the use of precursor chemicals to manufacture drugs such as fentanyl.
In 2022, AML functions are being used to combat the epidemic from continuing to infiltrate the financial system. Given that the placement stage of the money laundering process makes the underlying predicate offenses difficult to determine, compliance staff need to be vigilant of broader risk indicators that may help them identify money laundering schemes associated with drug-related trafficking.
Robust risk-based due diligence and KYC procedures along with fine-tuned AML transaction monitoring systems, are tools designed to provide guidance to financial institutions in identifying when transactions appear out of pattern for a customer or business.
Compliance shows its green credentials with focus on IWT
An important AML trend in 2022 was the uptick in enforcement activity regarding Illegal Wildlife Trade (IWT). IWT is the fourth most lucrative financial crime globally and is inherently linked to other forms of financial crime, including money laundering.
Environmental crime was a new predicate offense enumerated in 6AMLD, a relatively novel offense for the majority of Member States. Although there is seemingly no uniform approach to addressing IWT internationally, 2022 has seen real action take place.
For instance, INTERPOL and World Customs Organization’s “Thunder” operation not only resulted in significant seizures of IWT items, including nine pangolins and 389kg pangolin scales and derivatives, it has identified 141 companies suspected of engaging in illegal sales.
The risks of developing a business relationship with an IWT offender are intensified by the fact that IWT-related crimes hold low conviction rates which often lead to repeat offenses. What’s more, IWT is not just a conservation issue, livelihoods are destroyed, diseases are spread, governments are weakened, and entire economies shattered. Many should be taking note of this trend, considering the source of the coronavirus pandemic is suspected to have originated from illegally trafficked wildlife.
What is the state of AML at the end of 2022?
The war in Ukraine has fueled a smoldering fire of inflation and energy shortages, likely triggering the lasting 2022 bear market (market decline of over 20%). In most major economies, inflation continues to rise, and has been exacerbated over the past two years by the aftershocks of Covid lockdowns, supply constraints caused by Covid delays in Asia as well as the war in Ukraine.
A number of stock markets, including the S&P 500, entered bear market territory at the end of 2022. The main problem this year is the rising cost of energy, up by 70%, which encompasses everything from production to consumption. In times like these, the riskier the investments, the harder they fall; as mentioned above, the crypto market has fallen further than most this year.
This soaring price of energy, commodities and manufactured goods is placing an intolerable burden on household budgets. As the odds of a bear market extending into the next six months lie somewhere between probable and certain, corresponding financial crime and money laundering activities are expected to follow suit. According to PwC’s 2022 Global Economic Crime and Fraud Survey, 46% of surveyed organizations experienced some form of fraud or other economic crime within the last 24 months.
One of the consequences of a struggling economy is that people are more inclined to fall for scams promising to earn them money, engage in criminality by becoming “money mules”, or commit acts of fraud themselves.
Between mid-September and the end of November 2022, law enforcement from 25 countries, supported by bodies such as Eurojust and INTERPOL, joined forces in an international crackdown against money mules. The eighth edition of the European Money Mule Action (EMMA8) initiated 1,648 criminal investigations, arrested 2,469 money mules, and intercepted EUR 17.5 million.
This cross-border cooperation and intelligence sharing is an example of how many supervisors are staying ahead of the financial crime race. Other solutions supervisors are employing include innovative forms of data analysis to improve AML and countering the financing of terrorism efforts.
What does this mean for the regulatory landscape?
The regulatory landscape is changing and the attention paid to firms’ compliance with AML regulations in the last year has increased. We expect that 2022 will be remembered as a watershed year for the compliance function in a number of areas, including how global sanctions are employed as well as a renewed commitment from governments and societies in the fight against corruption.
Companies overcoming the challenges of complying with sanctions presents an opportunity to improve corporate data and encourage greater transparency, which will drive greater accountability in the corporate environment.
AML in 2022 can be viewed as a significant leap forward in regulatory complexity, with AML regimes growing sharper enforcement teeth. In the words of business magnate Rakesh Jhunjhunwala, “growth comes from chaos, not order.” Reactivity, insight and perseverance were the watchwords for business in 2022.
There is always plenty to learn from the past about how to better handle compliance in the future. We recently examined seven case studies to provide you with insights into how AML processes can be made stronger today – read them all in our latest ebook.