Economy & Business
Fighting global financial crime in Taiwan
While Taiwan was initially slow to tackle global financial crime, it has now adopted internationally aligned legislation and enforcement mechanisms to deal with the scourge.
By Paul Shelton
In an earlier article I noted the administrative burden of opening of bank accounts in Taiwan, which is, to some extent, caused by some of Taiwan’s international obligations. These obligations represent enormous commitments by banks, regulators, law enforcement agencies and countries in terms of policies, procedures, IT systems, reports, and enforcement. In particular, the Foreign Account Tax Compliance Act (FATCA) is very much part of the Know Your Client (KYC) procedures of most international banks, including Taiwan. However, FATCA is more of a tax related obligation as opposed to being part of the international fight against financial crime, which is the subject of this article.
Anti-Money Laundering (AML), Counter Terrorism Financing (CTF, often referred to as Combating the Financing of Terrorism or CFT) and sanctions are integral to Taiwan’s banking system when it comes to international banking and related risk management, but most of the focus is on AML. The principal financial regulator in Taiwan, the Financial Services Commission (FSC) has responsibility for regulating the AML/CTF and sanctions regime within Taiwan.
In the world of AML/CFT, Taiwan is actively engaged with major international regulatory bodies. The principal organisation is the Financial Action Task Force (FATF). FATF is an intergovernmental organisation founded in 1989 on the initiative of the G7 to develop policies to combat money laundering. In 2001, its mandate was expanded to include terrorism financing.
Taiwan takes FATF’s guidance’s very seriously (as should any country). Taiwan underwent a standard mutual evaluation review by FATF of its AML/CTF laws and regulations in 2018 and Taiwan was deemed Compliant for 10 and Largely Compliant for 26 of the FATF 40 recommendations. This was a sound result as Taiwan was, as we will discuss, a bit slow to adapt to the global AML/CTF battle against financial crime.
The other group, that we must mention, is the Asia/Pacific Group on Money Laundering (APG) (an inter-governmental organisation consisting of 41 members in the Asia-Pacific region, as well as organisations, and observers from outside the region). The APG also published a 2019 mutual evaluation of Taiwan and recommendations for improvement were made. The APG report noted that Taiwan has significantly strengthened its anti-money laundering regime in recent years, which has been reflected in its improved ranking by this key regional watchdog. In late 2019, the APG agreed to place Taiwan 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.
It may seem confusing to have both FATF and APG having oversight over Taiwan and performing mutual evaluations but the purpose of the APG is to ensure the adoption, implementation, and enforcement of internationally accepted anti-money laundering and counter-terrorist financing standards as set out in the FATF Forty Recommendations and FATF Eight Special Recommendations.
APG’s efforts include assisting countries and territories of the region in enacting laws to deal with the proceeds of crime, mutual legal assistance, confiscation, forfeiture, and extradition, providing guidance in setting up systems for reporting and investigating suspicious transactions and helping in the establishment of financial intelligence units. APG also enables regional factors to be taken into account in the implementation of anti-money laundering measures. So, I think it is just easiest to think of the APG as regional watchdog and the FATF as a global watchdog.
Taiwan’s legal framework relating to anti-money laundering and counter-terrorism financing (AML/CTF) is based on two main laws: the Anti-Money Laundering Act (the AML Act) and the Counter-Terrorism Financing Act (the CTF Act).
We could go into the legalese but at the street level, what are some real examples of money laundering? The conventional image of money laundering (ML) often continues to be suitcases of cash being smuggled in or out of the country. But in 2022, ML is conducted in multiple ways. A brief review of FATF’s own webpage highlights the risks of ML in the following areas: Environmental crime, migrant smuggling & human trafficking, trade-based money laundering, Covid-19 related ML, illegal wildlife trade, gold/precious metals/gems, art dealers, illicit tobacco trade, maritime piracy, trusts and company service providers, money remittance & currency exchange providers, real estate, casinos & the gaming sector.
This list is not comprehensive, nor does it indicate how ML may be occurring in Taiwan. It simple illustrates the advanced state of ML on a global scale. Whilst Taiwan has never been a major haven for financial crime (compared with some other Asian countries) it was slow, some six or seven years ago, to adapt to the fast-evolving global AML and CTF standards. But Taiwan has since caught up. A fine imposed on Mega Bank in 2016 by US regulators is often cited as the catalyst for the reforms. That case saw Mega Bank fined some US$180 million by the New York Regulator for flouting AML rules. A probe by New York’s Department of Financial Services (DFS) found Mega Bank’s head office to be indifferent toward risks related to transactions involving Panama, and identified several suspicious transactions between the bank’s New York and Panama branches. The investigation further revealed that several customer entities, which had accounts at several other Mega Bank branches, were formed with the assistance of Mossack Fonseca, the Panama-based law firm that was at the centre of the Panama Papers scandal.
The DFS also cited a lack of familiarity with US regulatory rules. The New York branch procedures did not offer adequate guidance on the reporting of suspicious activities inconsistent compliance policies failure to periodically review surveillance monitoring filter criteria that aim to identify suspicious transactions. The DFS noted at the time that, “The compliance failures that DFS found at the New York Branch of Mega Bank are serious, persistent and affected the entire Mega banking enterprise and they indicate a fundamental lack of understanding of the need for a vigorous compliance infrastructure.” The DFS described Mega Bank's compliance programme as a hollow shell, and that a consent order was necessary to ensure future compliance.
Apart from the fine, Mega Bank was directed to install an independent consultant to implement changes to its policies, immediately address compliance deficiencies at the New York branch, and engage an independent monitor selected by the DFS to review the effectiveness of the branch's compliance program.
These are certainly damning comments and a truly sizeable financial sanction. The incident was a major blow not only to Mega Bank but to the Taiwanese government, financial regulator, and the Taiwanese financial industry.
Taiwan moved swiftly and by June 2017 had implemented more robust AML/CTF controls and new legislation (as mentioned above). This 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 also became a crime.
Taiwan has pursued other wide-ranging reforms since early 2017, with very significant progress achieved in a short period of time, indicating a strong political commitment to AML and CTF reform and which we continue to see today (and yes, with the accompanying administrative burden).
The stricter compliance regime was seen locally by some as increasing the complexity of banking but, overall, it boosted Taiwan’s global reputation, showing that it complies with developed country standards.
But by revamping its AML and CTF regime, Taiwan then faced the challenge of staying ahead of potential financial crime – adopting a proactive approach to maintain the momentum from recent successes and keeping ahead with the transformation of banking. For example, 2019 saw the FSC approve 3 virtual banks (LINE Bank, Next Bank, and Rakuten Bank). As new banks they will need to be particularly vigilant about ensuring AML/CTF compliance especially as whilst the three all include financial services incumbents, their majority shareholders are non-financial firms.
At least on the regulatory side, there are signs that Taiwan has adopted a proactive approach to controlling financial crime. In late March 2020, the FSC sent a letter to local financial institutions that highlighted a number of areas in which AML and CTF compliance should be enhanced.
The FSC had, at the time, 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 appeared 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. Not good findings when banks are very much the at the frontlines in the fight against financial crime.
In addition, the FSC told financial institutions to enhance their monitoring of accounts, transactions and name checking. Name checking needed to be faster and more thorough, including for relevant beneficial owners and senior management.
Some observers of Taiwan’s AML world also see room for improvement in making more transparent 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. There is one very good reason to keep the process confidential and that is so as not to risk “tipping off” related criminals. Tipping off is a ML crime in most countries (including Taiwan).
But lest anyone doubt how seriously AML/CTF breaches are treated in Taiwan (and at least these fines/actions are in the public domain) let’s review the FSC’s actions in 2021.
In 2021, the FSC fined three banks operating in Taiwan a total of NT$18 million for failures directly relating to KYC and AML/CTFT deficiencies (not massive by international standards but a clear message from the FSC for banks to tidy their houses):
- Taipei Fubon Bank was fined NT$2 million
- DBS Bank (Taiwan) was fined NT$6 million
- Citibank Taiwan was fined NT$10 million.
At present there don’t appear to be any published AML/CTF related fines by the FSC for 2022.
CTF is not much of an issue in Taiwan. In its 2019 report the APG acknowledged that there is no specific intelligence suggesting that Taipei is a likely target of terrorism, or evidence of foreign terrorist action with connections to Taipei. The threat of financing domestic terrorism is viewed as low. Externally, there have not been any suspected cases of funds of designated persons or entities, or funds associated with terrorism cases entering or being sourced from the jurisdiction. Similarly, there is not much to say about Taiwan’s sanctions regime. It is in place and Taiwan closely aligns itself with the UN and US policies and lists. Of minor note, Taiwan is now regarded as a non-friendly nation by Russia – but I can’t imagine that came as any shock or concern to the FSC or the Taiwanese government.
The FSC’s position on AML/CFT
Legal compliance, AML/CFT operations and risk management are the cornerstones of financial supervision and contribute to the sound development and stability of financial markets. The FSC has targeted AML/CFT operations as a key supervisory focus and it is working to promote a culture of AML/CFT awareness, domestic policy co-ordination and compliance with international regulations.
What is the FSC’s strategy for AML and CFT?
- Continued adherence to FATF’s policies and guidelines and amending Taiwan’s legislation and requirements in line with international best practice
- Adopting a diverse range of supervisory tactics and more stringent punitive measures
- Building out a safe and effective payments system, increasing the use of e-payment systems, and reducing the risk of using cash
- Promoting and helping financial service firms to implement state of the art customer due diligence (CDD)
- Continuing risk-based supervision
- Developing red flags and typologies by working with law enforcement and the financial intelligence unit (FIU)
- Encouraging financial compliance forums
- Encouraging risk assessments, CDD and the filing of cash transaction reports and Suspicious Transaction Reports (STRs)
- Utilising and supervising the use of new FinTech opportunities and paying close attention to the latest developments and international regulations to mitigate any associated risks in a timely manner
- Strengthening domestic and cross-border supervisory co-ordination and cooperation through frequent information exchanges with global regulators.
These may sound ambitious, but I believe they clearly demonstrate Taiwan’s commitment to meeting global international standards. The FSC has also provided Taiwan’s financial industry with detailed guidelines and best practices on a wide range of matters relating to AML/CTF. It would therefore be in Taiwan’s financial institutions’ best interests to ensure they conform with these comprehensive guidelines and best practices:
- Guidelines for Bank’s AML and CT Financing Policies and Procedures
- Red Flags for Transactions Suspected to Involve ML or TF
- Guidelines for Banks Regarding Assessment of ML and TF Risks and Adoption of Prevention Programs
- Best Practices for Banks to Combat Trade Based Money Laundering
- Best practices of Comprehensive Assessment of Risks Related to ML and TF in Banks
- Suggested Best Practices for Banks’ Controls over Tax-related ML Risks
- Suggested Best Practices for Banks to Identify Beneficial Owners.
In conclusion I’d also like to address the FSC’s concern to ensure Taiwan adopts best practices with regards to ML/TF and sanctions monitoring and surveillance and related systems. I’ve done my fair share of work in relation to sanctions and transaction monitoring systems, and I share the FSC’s concerns. Many such systems (often created internally or purchased at considerable cost from 3rd party providers) simply perform inadequately and, surprisingly, there can be considerable resistance to necessary change. From my own experience financial institutions must:
- Optimize the performance of their risk-based AML/CFT systems
- Support the integration of information and data from external sources to enhance the targeting and investigation of specific ML/TF risks
- See the potential in data analytics
- Be able to demonstrate how their systems work (onshore and, if relevant, offshore)
- Screen all new customers and payments for existing customers whenever new designations are published and keep those lists up to date
- Provide management information to senior management with adequate information on financial crime risks
- Thoroughly test new systems and modifications
- Conduct ongoing monitoring, tuning, and testing – once a year is not sufficient.
- Employ the appropriate staff with the right skills.
To be honest the list could go on much further, but in this time of FinTech with advanced artificial intelligence and machine learning there is still a need for the “human touch” especially with AML/CTF and sanctions.
I do believe that Taiwan is currently in a good position when it comes to its AML/CTF and sanctions regimes, but vigilance must be maintained as the criminals just get smarter all the time too. And, as it is so often said in the financial world, you are only as good as you were during your last inspection!
Paul Shelton is a consultant with 30 years of experience in the international financial services and related industries with skills in all aspects of legal and financial crime compliance and regulatory relationship advisory and management.