CEO Charles Delingpole
ComplyAdvantage CEO Charles Delingpole.

New financial crime report predicts sanction loophole scrutiny

A series of market forces will shape the worlds of fintech and cryptocurrencies in 2022, ComplyAdvantage founder and CEO Charles Delingpole said.

A provider of AI-driven financial crime risk data and detection technology, ComplyAdvantage serves more than 800 enterprises in 69 countries through hubs based in New York, London, Singapore, and Cluj-Napoca.

The company recently released The State of Financial Crime 2021: Mid-Year Review. It details several global geopolitical trends and analyzes their impacts on financial markets.

While much has changed in Washington, one thing that has not is the number of economic sanctions levied by the federal government, Delingpole began.

He estimates the Trump Administration dropped 3,900 such actions while no previous president had authorized more than 700.  While there will likely be a change in how organizations use sanctions as a tool, their increased use looks to continue.

Sanctions are being used in new areas, Delingpole explained. They are being applied to Chinese companies and against Myanmar, Russia, North Korea, and Sudan entities. There may be a tightened focus for them in 2022, Delingpole believes.

“So I think Janet Yellen is concerned that potentially they were used too widely. And what you saw was countries like Russia or China trying to go outside of the West financial system. So they’re building things like central banks, digital currencies are going outside SWIFT. So I think the Federal Reserve realizes they could have gone too far with sanctions, but underlying it all, what you have are the same geopolitical concerns.”

Sanctions remain in favor

He added that the underlying structural forces Trump was reacting to have not disappeared. So while Joe Biden presents a much more lIberal front, sanctions remain his favored tactic to pressure countries such as Russia and China.

Delingpole also sees a massive uptick in lending and fintech companies interacting with cryptocurrencies, with many CEOs looking at some stablecoins.

But they need to look before they leap, as governmental strategies, along with several newish regulations, will shape what they can do.

They include the European Union’s fifth anti-money laundering directive, which, among other things, seeks to enhance transparency by setting up publicly available registers for companies, trusts, and other legal arrangements.

ComplyAdvantage CEO Charles Delingpole.

“There’s much lower thresholds to where the money can go to, the thresholds to where they have to begin due diligence,” Delingpole said.

“There’s new legislation around physical exposure, so they now have to track if it’s linked to people in positions of power.

“That was already a requirement in Canada.”

An early 2021 change at the top of the Office of the Comptroller of the Currency will also affect the American cryptocurrency scene, Delingpole believes.

Many cryptocurrency licenses were issued under former acting comptroller Brian Brooks, but he left in January. The road may not be so well-paved now.

Even with these warnings, many companies are not fully prepared for increased regulatory scrutiny, Delingpole said.

We’ve seen BitPay fined for dealing with Chinese, Crimean, North Korean, Iranian, Sudanese, and Syrian IP addresses. The Office for Foreign Assets Control has also sanctioned more than 20 companies, and Binance is finding it harder to access the United Kingdom’s payment system.

Client protection concerns

Concerns also persist around the protection of the clients of decentralized exchanges, Delingpole said. Citing the example of former Bitmex CEO Arthur Hayes facing federal charges, which included failing to enact proper money-laundering controls.

Another issue, however, is many cryptocurrency firms are offering excess leverage, with numerous clients having lost money. Fintechs and other financial firms wonder when crypto companies will face the same level of scrutiny they do.

“So I think there may be some overlapping issues whether it’s protection of clients, whether it’s evasion of sanctions, whether it is money laundering, whether it’s some companies in digital banking, being annoyed that crypto companies don’t have to, say, issue, currency transaction reports from other towns or thresholds, or they have to understand who the end beneficiary of a payment is in the same way that you have Swiss bank accounts that are anonymous,” Delingpole said.

“So there’s these symmetrical regulation between banking cryptocurrencies, which is perceived to be unfair.”

A common refrain in some circles is the United States needs to take explicit action on cryptocurrencies and set the direction for global markets.

While that can be disputed, what seems clear is what leadership is indeed happening in the United States is not occurring at the federal level, Delingpole said.

It’s at the municipal level, led by the likes of Miami and New York, who are vying for the business and jobs companies with huge profits (or at least available capital) could bring.

“Municipalities and states want the jobs and the wealth, but government regulators are still pretty skeptical,” Delingpole said while adding a similar situation exists at the federal level in the UK. “And the Feds aren’t giving on wholeheartedly endorsing it.”

Rapid growth brings scrutiny

Regardless of what is being done by federal governments, the cryptocurrency industry is chugging along, buying arena and stadium naming rights, and raising tons of venture capital. Eventually, they could become too big to fail.

That rapid growth not only brings regulatory scrutiny but also the attention of hackers who will be increasingly tempted to go after entities holding larger and larger sums of money. They better have their security strategies top-notch. Because those hacked funds will go to illicit purposes, there are also AML implications.

So how do companies prepare in an uncertain environment like we now have? Serious companies want to operate under clear regulations, so they know their limits, Delingpole said.

But in the absence of that federal leadership, many are led to move off-shore. One company he spoke with met with regulators in the UK, telling them they wanted to set their company up there. The government wouldn’t let them.

Most companies want to play it straight, he said. More than 120 have signed up for ComplyLaunch, which offers free access to AML and KYC tools that help them with customer screening, transaction monitoring, and behavioral pattern analysis.

Brexit presents the United Kingdom with a unique opportunity to assume a global leadership role on decentralized finance, Delingpole said.

“There’s no regulatory equivalence between the UK and the EU,” he explained. “So basically, the Treasury, the LSE, the FCA all have complete latitude to implement whichever regulation they want. So the government is extremely open to all suggestions and all changes.”

But there are signs they’re missing the boat. The Competitions and Markets Authority blocked the Seedrs/Crowdcube merger, so the two went their separate ways.

Lack of global coherence

“The CMA could have created a single British champion,” Delingpole said.

Lack of any global coherence means firms have to weigh where they will launch next carefully, Delingpole said. The EU allows harmonized legislation across its membership, but a company also has to register in the UK. And because of the difficulty in getting a federal charter in the United States, they have to go state by state.

China has a strong lead in developing a central bank digital currency (CBDC) because they have strong motivations, Delingpole said. They want to circumvent US sanctions and SWIFT. China is also working on bilateral CBDCs with some allies.

“I think elsewhere you’ve seen the growth of private stable coins,” Delingpole said. “And therefore it is a story of increased centralized Chinese power, but the weakening of other non-Chinese state institutions and monetary systems.”

Neobanks have had an impressive run over the past few years, Delingpole said. In the UK, many were upset because they were left outside to deliver stimulus payments, while others were left to compete against government offerings. Stimulus payments did expose a vulnerability among some fintechs, however.

“I think you saw fraud rates were like nine times higher amongst neobanks versus community banks because community banks obviously had face-to-face identity platforms, whereas a lot of the neobanks were going digitally,” Delingpole said.

“And you had Nigerian gangs and others who are exporting systems, and you saw sub-one-per-cent rejection rates, but fraud rates were in the high billions. 

“So that was the real story of government-backed stimulus.”

  • Tony Zerucha

    Tony is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT's Unchained, a blockchain exposition in Hong Kong. Email Tony here.