AML/CFT risk ratings confirmed for sectors under FMA supervision

A report by the Financial Markets Authority (FMA) identifies derivatives issuers (DIs) and cryptocurrency service providers as high risk for meeting anti-money laundering and counter-terrorism financing obligations.

In December, the FMA published its Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Sector Risk Assessment 2021, which updates the regulator’s 2017 version. The report outlines those factors that can increase a sector’s risk to ML/TF.

According to the FMA, it is an important document for reporting entities that report to the FMA under the AML/CFT regime because they must carry out an individual risk assessment of their business. The report aims to improve firms’ understanding of ML/TF risks in their sectors, as well as identify trends and emerging issues. The risk ratings of the 10 sectors the FMA supervises have not changed since 2017 as there has been little change in circumstances for reporting entities. However, virtual asset service

providers (VASPs) - which facilitate cryptocurrency, token, or cryptoasset transactions – have been added and rated as high risk. The primary supervisor of VASPs is the Department of Internal Affairs (DIA); the FMA supervises a very small number of these.

“The sectors we supervise are generally expected to be the target of more sophisticated money launderers, as these criminals are familiar with capital markets and financial products,” said James Greig, FMA Director of Supervision. “This means it’s essential that entities understand their key risks and take the necessary steps to detect and prevent money laundering and terrorist financing.”

“Derivatives issuers are naturally high risk because their products have high liquidity, accounts can be opened easily, and they can have many non-resident customers in higher risk jurisdictions. And since our last assessment the risks of virtual assets, particularly cryptocurrencies, have become more prominent. Virtual assets allow for greater levels of anonymity and have global reach, making cross border payments easy.”

The SRA found providers of client money or property service (previously known as brokers and custodians) were medium-high risk and noted there had been a rapid increase in the use of online investment platforms in this sector.

“The rapid growth of a large customer base using online investment platforms means they may be targeted by money launderers because their compliance resources may not have kept pace,” said Mr Greig.

“These platforms are highly liquid, allowing for high volumes of trading to take place without suspicion, and customers can create online accounts quickly without face-to-face verification, which favours anonymity. Although these platforms often have sophisticated systems to monitor accounts, they must collect sufficient information regarding the nature and purpose of the investment.”

Mr Greig said the FMA expected all FMA-reporting entities to review the new SRA and update their own risk assessments accordingly, incorporating any new risks and findings.