Following the Lunar New Year holidays, the online trading systems of a number of brokerages have been targeted by cyberattacks and blackmail. It is evident that as financial technology continues to thrive, updated criminal methods are hiding behind new financial services.
Apart from the information security problem that has been exposed by these cyberattacks on Taiwanese financial institutions, the New York State Department of Financial Services’ imposition of a huge fine on Mega International Commercial Bank last year highlighted the anti-money laundering and counter-terrorist financing problems.
They are testing whether local financial institutions — with the help of new technology — can enhance their adaptability to rapid and drastic changes in the market environment.
In particular, Taiwanese financial institutions have been expanding overseas in recent years.
However, if in the course of their overseas expansion they become involved in any controversies for failing to strictly follow anti-money laundering and related regulations, their operations in local markets can be badly hurt and it might also have a negative impact on the international reputation of Taiwan’s financial sector as a whole.
In practice, the application of financial technology to anti-money laundering mainly lies in assisting financial companies to “know your client” and implement “client due diligence.”
A traditional approach is to do so through interpersonal interactions with clients in accordance with applicable regulations, but today, thanks to financial technology trends, the authentication of clients, credit records and debt-paying ability can all be completed through digital interactions.
Take for example the verification of politically exposed persons in the global prevention of money laundering; manual verification is no longer possible, given the large number of such people.
The Financial Supervisory Commission has therefore required that financial institutions integrate client data through information systems to strengthen account and transaction monitoring in order to detect suspicious deals.
They can even carry out effective monitoring and filtering mechanisms through information systems to leave clear “audit trails,” which not only can help them avoid execution flaws, but also serves as strong evidence in future auditing.
The concrete combination of measures against money laundering and financial technology includes two parts: The first is reliable information sources.
For instance, in its latest Banking Division Transaction Monitoring and Filtering Program Requirements and Certifications (Part 504), the New York State Department of Financial Services states that “each transaction monitoring and filtering program shall require validation of the integrity, accuracy and quality of data to ensure that accurate and complete data flows through the program.”
The second part is adequate system tools, among which the blacklist database serving as a screening basis is especially crucial.
However, the establishment and maintenance of a database is so expensive that it is difficult for most small and medium-sized financial companies to afford it.
Perhaps the concerned government agencies can assess the feasibility of integrating market resources to build a database for market participants.
For instance, Taiwan Depository and Clearing Corp launched the Anti-money Laundering Query System last year, offering client name verification services to financial institution applicants on the online platform.
It is worth noting that although financial institutions may use the query system, or may work with international databases, such functions are limited to preliminary client name verification.
This means that financial institutions should, following the risk-based approach, continue client risk assessment and rating as well as suspicious transaction monitoring and reporting according to different risks caused by particular clients, products and regions of countries involved.
Besides, no matter how well information sources and system tools are, detecting irregularities from their complex daily work still lies in financial service personnel’s familiarity with their duties and whether they truly understand the competent authorities’ requirements.
Therefore, despite the importance of using financial technology to prevent or report business crimes, education and training of personnel and building a culture of compliance are still fundamental.
Since the law-abiding awareness of Taiwan’s financial institutions has always been relatively low, it might be difficult to prevent financial crime, which is constantly changing and becoming increasingly complicated.
However, it is never too late to amend the problem.
The authorities and local financial institutions should work together and pool their resources toward financial technology application, cultivation of specialized personnel, creating a culture of compliance and implementation of information security systems.
By doing so, the ability to combat financial crime would be enhanced and the order of our financial market would be further stabilized.
Wang Chia-wei is deputy director of the Overseas Business Institute at the Taiwan Academy of Banking and Finance. Lin Yu-fang is a lawyer admitted in New York.
Translated by Eddy Chang
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