Enhanced Anti-Money Laundering Controls Pay Off For Taiwan

Anti-money Laundering

Taiwan’s ranking by a money-laundering watchdog has risen over the past year, but future efforts will need to address challenges emerging from digitization of the financial sector.

Taiwan has significantly strengthened its anti-money laundering regime in recent years, which has been reflected in its improved ranking by a key regional watchdog. In late 2019, the Australia-based Asia Pacific Group on Money Laundering (APG) agreed to place Taiwan (referred to as “Chinese Taipei”) in the “regular follow-up” category, alongside Hong Kong, Macau, Indonesia, and the Cook Islands.

Taiwan had previously been in the “enhanced follow-up” category, which requires more frequent reporting to the APG. The island nation has never been a haven for financial crime but was slow to adopt fast-evolving global anti- money laundering (AML) and countering financing of terrorism (CFT) standards.

The languid pace of compliance reforms eventually caught up with Taiwan. Citing lax controls at the New York City branch of Mega International Bank Co., Taiwan’s third largest lender by assets, New York’s Department of Financial Services (NYDFS) fined the bank US$180 million in October 2016.

According to the New York financial regulator, suspicious transactions occurred between Mega’s New York City branch and two branches in Panama, a high-risk destination for money laundering. The Taiwanese bank failed to adequately manage risks associated with the transactions, the NYDFS said. Further, Mossack Fonseca, the Panama law firm at the center of the Panama Papers scandal, was said to have likely been involved in the formation of “a substantial number of customer entities” at several Mega branches.

Taiwan moved swiftly after the fining of Mega Holdings to implement more robust AML/CFT controls, passing new legislation in June 2017. The legislation brought Taiwan’s money-laundering controls in line with global standards by strengthening and expanding the requirements that financial institutions perform customer (including beneficial owner) due diligence, keep records, and report suspicious transactions. Customs declarations for cash and gold over a certain value were made mandatory. Using the name of a person other than the owner in property or shell-company transactions became a crime.

The Mega incident “was a catalyst that triggered a transition from compliance in form to compliance in sub- stance,” says Thomas McGowan, an expert in financial-services law and a foreign legal consultant in the law firm Russin & Vecchi Taipei. “The risks posed by regulatory shortcomings to both the banking system and Taiwan’s global reputation resulted in substantive upgrading of money-laundering controls.”

APG lauded Taiwan’s compliance reforms in an October 2019 report. “Chinese Taipei has pursued wide ranging reforms since early 2017, with very significant progress achieved in a short period of time,” APG said, adding that the progress “reflects strong political commitment” to AML and CFT reform.

“Taiwan finally improved its index status” with more robust laws and regulations, better staff training at financial institutions and in the private sector broadly, as well as public education efforts, says Ross Darrell Feingold, a Taipei-based lawyer and political risk analyst. “As these efforts more than satisfied APG’s assessment requirements, the upgrade to Taiwan’s index status was justified.”

Premier Su Tseng-chang speaks at an event on Taiwan’s progress in implementing anti-money laundering standards after the island’s APG status was raised to the highest category. Photo: CNA

If anything, Taiwan’s money-laundering controls may have become almost too strict in some cases. For instance, opening a retail bank account as a foreigner in Taiwan has become a complex process.

One of the reasons for this enhanced oversight is that Taiwan since January 2019 has participated in the OECD common reporting standard (CRS), which requires banks and other financial institutions to provide tax authorities with information about their customers. The information is then shared with other participating countries in which the customer holds citizenship or residence. CRS is intended to foster tax compliance but also effectively enhances the overall know-your-customer (KYC) process.

While the U.S., China, Hong Kong, and Macau are not currently within CRS’s scope in Taiwan, “this does not mean that individual or entity account holders or controlling persons of passive non-financial entities that are tax resident in these jurisdictions or other non-report- able jurisdictions will not have their accounts examined by Taiwan financial institutions,” according to an October 2018 Deloitte Taiwan report.

Although a stricter compliance regime may increase the complexity of banking here for foreigners, it boosts Taiwan’s global reputation, showing that it com- plies with developed country standards, McGowan says.

Staying ahead of the curve

Now that Taiwan has revamped its AML and CFT regime, the challenge will be to stay ahead of potential financial crime – adopting a proactive approach to maintain the momentum from recent successes.

At least on the regulatory side, there are signs that Taiwan has adopted such a proactive approach to controlling financial crime. In late March, the Financial Supervisory Commission (FSC) sent a letter to local financial institutions that highlighted a number of areas in which AML and CFT compliance should be enhanced.

The FSC found deficiencies in risk assessment, transaction monitoring, and name checking – an anti-fraud service that verifies names when people make payments – as well as with customer due diligence and the customer risk-rating system. The latter two areas appear to have the most room for improvement. The FSC said it found that Taiwanese financial institutions did not have “an actual understanding of the background of customers and the reasonableness of establishing customer relationships,” had failed to obtain the requisite documentation for identifying beneficial owners, and had not retained records or data related to rejected customers.

Additionally, the FSC told financial institutions to enhance their monitoring of accounts, transactions and name checking. Name checking should be faster and more thorough, including for relevant beneficial owners and senior management, the regulator said.

Foreign legal consultant McGowan says that the compliance deficiencies mentioned in the FSC’s March letter to financial institutions fall within the realm of process and procedural shortcomings that could lead to future failures of the system to identify and prevent AML/ CFT, as opposed to major money laundering incidents. While Taiwan’s AML and CFT regime has improved considerably in the past few years, “some aspects of the internal control and AML/ CFT implementation systems at financial institutions are not quite there yet,” McGowan observes.

One area where McGowan sees room for improvement is making more trans- parent the process by which money launderers are identified, caught, and punished. At present, that process is largely confidential and not readily visible to the public.

Looking ahead, Taiwan’s virtual banks – which are expected to launch in the second half of the year – will need to be vigilant about ensuring AML/CFT compliance. Three digital banks are being licensed: LINE Bank, Next Bank, and Rakuten Bank. While the three consortia all include financial services incumbents, their majority shareholders are non-financial firms: the fintech arm of Japanese messaging app LINE, telecoms giant Chunghwa Telecom, and Japanese e-commerce platform Rakuten, respectively.

The lack of legacy IT systems is an advantage for digital banks when it comes to fulfilling compliance requirements as they don’t have to retrofit clunky infrastructure designed for in-branch transactions.

“Virtual banks have the benefit of building their systems from the very beginning to cross-reference structured data in an ecosystem that connects the financial supply chain with the compliance value chain,” says Carl Wegner, the Singapore-based CEO of trade-finance platform Contour.

Virtual banks could potentially develop more robust AML processes than traditional banks. “Imagine if a transaction was constantly monitored for linkage to sanctioned issues rather than just at the initiation, providing an additional layer of verification in real time,” Wegner says.

Yet virtual banks must also be prudent as they work to develop their deposit bases and loan books, says Zennon Kapron, a fintech expert and director of the Singapore-based consultancy Kapronasia. “Virtual banks tend to try to build scale rapidly, with aggressive customer acquisition strategies. The key is achieving a balance between ambitious growth targets and time-consuming regulatory requirements.”

“If all the emphasis is on growth,” he adds, “AML and CFT controls may be overlooked.”