AML/CFT Regimes: A Regulator's Experience

aml/cft compliance financial services regulation risk assessments risking it Oct 14, 2021
AML/CFT Regimes

Recently, I was fortunate to have the opportunity to present to an engaged group of compliance professionals through the Co-op Credit Union League of Trinidad and Tobago (CCCULT). The topic – A Regulator’s Experience of the Caribbean Region’s Challenges and Successes.  

Credit Unions play a vital role in reducing the impact of de-risking and the underbanked within the region. Though in vogue, the value of Credit Unions to society, including the role they play in aiding financial inclusion, has not been widely recognised. In this critical space, compliance issues may be nuanced but are very relevant. I desired to provide this regulator’s insights, which hopefully inspired dozens of compliance professionals to do due diligence (and all that comes with it) differently.


Caribbean Compliance Context

In discussing such broad topics, it is critical to start with context. The evolution of financial services in the Caribbean has been varied. Many will note the full embrace from the Overseas Territories in the development of their financial services industries. Arguably, that positioning was a natural pivot given the lack of natural resources that other countries leveraged for agriculture and manufacturing.  

Whether through the provision of financial services and products to the global community... the financial services infrastructure (banking, insurance, remittances, etc.) built up around agriculture, manufacturing and mass tourism... there is no arguing that the framework for financial services has evolved and continues to evolve before our eyes. 

One of the appreciable changes is the increased focus on AML/CFT issues and their impact on our shores. Globalisation and the increased use of technologies also mean that threats that once seemed a world away are now just as easily perpetrated in Trinidad, Barbados or Anguilla as it is in Toronto, Bahrain or Australia. The scope of entities under AML/CFT scrutiny has not changed much in theory, but the practical application has - given the need for increased scrutiny on DNFBPs. The FATF’s shift towards assessing effectiveness means that Caribbean countries may not have been fully engaged with Real Estate Agents, Car Dealerships and other businesses and professions that fall in scope for AML/CFT supervision.  

As countries jump at the opportunities FinTech bring, they are also reminded of the need to have a comprehensive AML/CFT framework - given the speed and scale at which things could go wrong. This is especially relevant given the penchant of some stakeholders to rush towards innovators who come biased against the need for regulation of Virtual Asset Service Providers (VASPs). The discussion surrounding VASPs and understanding the inherent risks is not the only acute issue that Caribbean regulators and law enforcement agencies are facing at this time.  


Increasing visibility!

With the massive fall off of air and sea traffic during the pandemic, drug traffickers have less ground to run to and fewer distractions to hide behind. Paraphrasing one well-used quote of Warren Buffett vividly illustrates, ‘it’s only when the tide goes out you can see who's been swimming naked’. In the past 18 months, the number and scale of drug seizures highlighted the need for heightened efforts concerning eradicating drug trafficking throughout the region.  

Issues around Trade-based Money Laundering and Human Trafficking have also reared their heads during this time. These issues have shown us the need for greater vigilance to protect our economies and our children. Money Launderers and Terrorist Financiers will not discriminate in targeting our young people as a means of generating revenues to supplement losses from increased drug seizures. AML/CFT measures rarely present their value than through the self-evident risks realised in the region!

Looking at the AML/CFT successes within the region, informal groups and industry associations leverage economies of scale. This ensures that these associations and groups can provide enhanced coverage for training, consultation, sensitising the public and other useful activities. They, too, have improved their visibility and the importance of compliance.  


On the move!

Among Competent Authorities, Regulators, Financial Intelligence Units (FIUs) and others have been hard at work. There is more scope for Caribbean Competent Authorities to participate in international working groups with FATF, The EGMONT Group of Financial Intelligence Units and other sectoral international standard-setting bodies. The pandemic has allowed busy Regulators to become even busier. Regulators, FIUs and Law Enforcement Agencies have been challenged to address the threats that have escalated from opportunistic bad actors. With the inability for "normal" travel, I can attest that regulators have been able to participate in peer meetings with greater frequency while tackling strategic objectives that may have fallen down the rung of priorities. Proactive regulators have also been building capacity within their ranks by exposing more junior regulators to international initiatives that are no longer prohibitive because of travel.


Successes – Triangles, Anchors and Compasses

Within the region, we have had laudable successes. First to mind is Bermuda! In their 2020 FATF Mutual Evaluation Report, Bermuda led the world with one of the best outcomes to date. Achieving ‘Compliant’ ratings in the “usual suspect” Recommendations (10, 11, 15 and 17 through 23) that have been challenging to get a Largely Compliant or Compliance Rating. 28 of the FATF Recommendations receiving impressive results (of a total 40 Recommendations). Their assessment against the Immediate Outcomes was also impressive – ‘High’ and ‘Substantial’ levels of effectiveness.  

This was not an accidental achievement. The Bermudan financial services community – industry, Government, Competent Authorities – worked in lockstep to achieve one of the best ratings in the 4th Round of FATF Mutual Evaluations. An achievement thought to be impossible for a small international finance centre, one of the places constantly mislabeled as a ‘tax haven’. It took focus, dedication, effort and collaboration and, I celebrated their success!

The Cayman Islands has also achieved noteworthy results, but not without controversy. The downgrading of FATF Recommendations resultant from the shift in position by the international standard setter driven by the need to respond to FinTech’s influence on financial services has received outcry as the lack of there being a level playing field for countries within the region. Being familiar with some of the Cayman Islands’ regulatory frameworks, I also commend them for the unrelenting defence of their regime coupled with innovative legislative change and industry support.


The Leadership Challenge

Coordinating the effort of a financial services industry, Government and Competent Authorities is one of the largest challenges that we face within the region. Nonetheless, Bermuda and the Cayman Islands have proven that it can be done! For all stakeholders, this collaboration was largely possible because of good governance structures. However, governance is one facet that presents material challenges to all aspects of economic development and growth. 

Early (and very vocal) antagonists vilified many elements of the then evolving financial services ecosystem and the role of international standard setters. I acknowledge that some arguments made were not unfounded. However, while planting discord on international financial services and not recognising the potential opportunities, other bodies uprooted the comfortable economic benefits and subsidies of banana crops, sugar exports and other products of the region. Not all countries had these luxuries. It is on this basis that the British Overseas Territories embraced and mined these opportunities.

Stepping back from sliding further down a Caribbean-centric socioeconomic rabbit hole, the lack of consistent good governance is one of the challenges that unravels meaningful progress within the region (in my opinion), particularly where regulatory compliance is concerned. The tone from the top imparts a very real effect on the strategic direction and the execution of strategy within industry, as well as Governments and Regulatory Authorities. Anecdotal evidence would infer that there remains some level of forbearance in the region. One possibility may be our closely-knit communities with dynamic interpersonal relationships.  As a plainspoken person would say... we went to school with, go to church with or know who someone is because of parentage. In the long run, this forbearance has not and will not serve us well.  


Culture, Context and Change  

In an HBR article entitled “Changing Company Culture Requires a Movement, Not a Mandate” several statements stuck out for me. The first one was, 

Culture is like the wind. It is invisible, yet its effect can be seen and felt. When it is blowing in your direction, it makes for smooth sailing. When it is blowing against you, everything is more difficult.[1] 

Arguably, the headwinds in the Caribbean region can be fierce! Reasons to not embrace change are varied and ironically, often rests on the ‘culture’ in the Caribbean – be it work, economic or social. By extension, obscuring the fact that there is a need for a culture change often results in businesses in the region not being able to take the necessary steps to move forward. Positive change cannot occur if we do not let go of doing things the way we have always done them when they no longer serve us. This is especially true for applied compliance in financial services.

A quote that I have often used when facilitating diploma compliance-centric courses, and in my recent presentation, is one coined by Peter Drucker, “Culture eats strategy for breakfast. Drilling down to a ‘compliance’ culture... It must be said that if there is not a strong compliance culture present, then all the things needed for meaningful change – Better Compliance, Innovation, Performance, Growth, Execution – will not, and cannot, happen in the way needed.  

It has also been my observation that even the best of intentions in a compliance officer cannot bring about a good compliance culture without the same push from the Board of Directors. Much like everyone rowing in different directions, it is almost certain the firm will not set on an ideal course. And this applies to any organisation in any country in the world. Regionally, our actions must be purposeful and only then can our impact be tangible.


Are We Risking It?

As the FATF and FATF-styled Regional Bodies (FSRBs) continue to produce mutual evaluation reports, it is becoming clear that there is not a deep understanding of risks globally. Within the region, and from our actions, we either do or do not have a solid understanding of risks. National Risk Assessments have been conducted and drained already strained resources from the few professionals with a sufficiently clear understanding of what is required.  


A Few Broad Observations

From determining what individual firms’ risk tolerances are... to what and who to risk assess... not using simplified due diligence in low-risk circumstances, are a few broad observations. In my view, more needs to be done to improve the issue and understanding of risks and risk assessments.

Retrospective compliance checks and ‘sleeper’ risks are also an issue within the region. The opportunity cost for us not embracing compliance in a real way has become far more expensive when compared to the costs of addressing fallout – no pun, or “Papers” intended! When we are passive and allow things to continue as they are, because that is how it has been, we miss out on real opportunities to leverage our talents to progress, evolve and advance. And progress, if any, will be hard-fought if we can’t manage to use good form and lift a few sets with the weight of the risks we face.  





  [1] Harvard Business Review. 20 June 2017. Changing Company Culture Requires a Movement, Not a Mandate. Bryan Walker and Sarah A. Soule.