Emerging payment systemsRisks and Regulations: the way forward

Can virtual currency replace money?

• Decentralized• Pseudonymous• Not regulated• Susceptible to hacks, fraud and theft

The risk of non compliance

• The financial world has been dealing with increased regulation for a few decades

• 9/11 and the financial crisis have contributed significantly to the compliance burden (and cost) of banks

• Authorities have shown zero tolerance for money laundering and terrorist financing

• If Bitcoin is to succeed, regulation is unavoidable

Is Bitcoin still unregulated?

• Tax authorities have issued guidance on Bitcoin transactions

• The guidance varies per country. Some consider the transactions taxable, some levy sales tax on the sale of Bitcoin and some on the services connected with Bitcoin

• FinCen has issued a statement saying that Bitcoin processors and exchanges may be considered money services businesses under US law

Regulation will kick in soon

• In March 2014, the Monetary Authority of Singapore (MAS) announced its intention to regulate virtual currency intermediaries for money laundering and terrorist financing risks, making it one of the first countries in the world to do so

• On July 17, 2014 the New York Department of Financial Services (DFS) issued a proposal for a regulatory framework

• Other regulators have announced that they are considering regulation

The New York ‘Bit License” key requirements

• Safeguarding consumer assets• Virtual currency receipts• Consumer complaint policies• Consumer disclosures• Anti-Money Laundering compliance• KYC• SAR reporting• Cyber security• Dedicated compliance and security officers• Capital requirements• Disaster recovery

• Highly organised• They are using online systems to remain anonymous• They know how to use multiple service providers and

how they interconnect• They know exactly where the weak points are and

how to exploit them• The rely on speed and stay under the radar• Maximizing profit until discovery

What do modern financial crimes have in common?

• Client experience needs to be top of mind for everyone

• A bad onboarding experience can lead to prospects dropping out

• Onboarding institutional clients can be very complicated

• Compliance requirements are seen as a burden• Regulators start by looking at your onboarding

process

Onboarding

Behavioral detection to prevent fraud and money laundering

Outlier Detection

Time between transactions

Tran

sacti

on a

mou

nt= account

= within set parameters

Transaction filtering to prevent terrorist financing

Filtering stages

All transactions in scope for filtering

Matches

Potential hits

Hits

Potential Violations

Violations

(automated) filtering by system

Filtering process

Sanctions Team process

(manual) assessment by RTSC (internal) analysis by CAAML Officer

(internal) analysis by Sanctions Team

(external) analysis by regulator

Results of activity Filtering stages

All transactions in scope for filtering

Matches

Potential hits

Hits

Potential Violations

Violations

(automated) filtering by system

Filtering process

Sanctions Team process

(manual) assessment by RTSC (internal) analysis by CAAML Officer

(internal) analysis by Sanctions Team

(external) analysis by regulator

Results of activity

The future of anti-money laundering

• Risk based monitoring• Transaction filtering using IP addresses• Use algorithms to detect false documents• Use AI to detect suspicious patterns• Analyse transactions on the Blockchain• Encrypted and anonymous audit chain• Automatic exchange of information

From Secrecy to Confidentiality

Regulation is here to stay

• Open dialogue with the regulator and the financial industry

• Pro-active approach on regulation

• We need more lawyers, bankers and compliance officers!

Erik Wilgenhof PlanteErik@itbit.com