BIS Updates its Guidelines for the Management of AML/CFT

This month the BIS released an update to its January 2014 publication “Guidelines: Sound management of risks related to money laundering and financing of terrorism.“

The updates focus on the need for increased communication/interaction and co-operation between a nation’s financial institution supervisory agency (prudential supervision) and other domestic national agencies charged with anti-money laundering and countering the financing of terrorism.

As well the BIS advocates similar cross-border interaction and cooperation.

It’s important to note once again that the BIS does not have the authority to force countries to accept its guidelines. It does not legislate, it recommends.

Individual countries may accept or reject BIS guidance in full or in part. And are free to set the details of how a principle they accept will be applied. 

That being said, it is rare that countries reject BIS suggestions in toto.

What are the changes?

The addition of paragraph 96 to the main body of the guidelines and a new Annex 5 outlining best practices.

Paragraph 96 sums up the BIS’s intent.

“Prudential and AML/CFT supervisors should establish an effective cooperation mechanism regardless of the institutional setting, as set out in Annex 5, to ensure that ML/FT risks are adequately supervised in the domestic and cross-jurisdictional context for the benefit of the two functions.“

Annex 5 contains what I’d consider some rather self-evident points. But many regulations do state what is obvious. And that’s done for good reasons.

License Authorization

1. Prudential Supervisors should consult with AML/CFT supervisors to identify any AML/CFT risks posed by the bank’s proposed business model for a new bank or such risks for an existing foreign bank seeking a license in its jurisdiction.
2. They should also consider the bank’s AML/CFT policies and procedures, risk management structure and risk mitigation systems.

Assessment of Major Shareholders, Acquisitions, and Major Holdings

1. Similar to the above with a focus on how these affect the proposed licensee’s AML/CFT risk as well as cases when new shareholders are proposed.
2. Part of this assessment is a review of the history of the proposed major shareholders, acquisitions, and major holdings for evidence of AML/CFT risks, vulnerabilities or transgressions.
3. This assessment requires cross border interchange and co-operation to obtain information from other national regulatory agencies.

International Co-Operation

1. This can be established via bi-lateral agreements (MoUs) for exchange or “prudential colleges” where a group of supervisory or regulatory agencies agree to exchange information. Link to information on EU “prudential college”.
2. The FATF has published guidelines on the exchange of AML/CFT information both domestically and internationally. Last update in 2017.PP

BIS Releases Discussion Paper on Designing Prudential Treatment for Crypto-Assets

Yesterday the BIS Basel Committee on Banking Supervision (BCBS) released a discussion paper on “Designing a Prudential Treatment for Crypto-Assets”.

The purpose of the paper is to solicit comments about several principles that the BIS BCBS proposes to employ in designing such a framework.

It’s important to note that the BCBS does not have the legal authority to compel national jurisdictions to accept its rules and regulations.

Rather it relies on its influence as a multi-national organization to secure voluntary co-operation.

In that regard, it is like the FATF/GAFI—which develops standards for anti-money laundering and countering the financing of terrorism. Both are the primary global standard setters for their respective areas of expertise.

The BCBS’s clout derives from its membership – 45 regulators and banking supervisors from 28 jurisdictions across the globe.

Failure of a national jurisdiction to accept BIS or FATF/GAFI standards generally places it “outside” of what are generally accepted norms and places it at a disadvantage to those jurisdictions that accept the standards.

It’s also important to note that the BCBS sets standards for financial institutions and their regulators.

So this exercise doesn’t seek to directly regulate Crypto-Assets but rather banks involvement with this asset class and how national regulators would assess and control the risks that these assets pose to individual banks and national and global banking systems.

Key elements from this paper are:

1. The BCBS assessment that Crypto-Assets do not meet the definition of currency – medium of exchange, store of value, unit of account. Hence the BCBS’s use of the term Crypto-Assets instead of Crypto-Currencies. That may seem like arguing over semantics.  But if the BCBS pronounces that Bitcoin et al are not currencies, it is likely that national regulators will adopt a similar view with consequences for their treatment of these assets.
2. The BCBS view of risks of these assets.
3. The proposed prudential (regulatory) treatment of banking exposures to these assets in view of the perceived risks.

This paper isn’t the final word.  Rather it’s the first step in the process.

The BCBS will publish comments it receives.  Those interested in crypto-assets will find these replies useful in furthering their understanding of this asset class.

BIS: GSIBs Risk IT Systems Weak

Unnamed GSIB Data Scientist /Risk Manager Demonstrates New Techology

In January 2013, the Basel Committee published the Principles for effective risk data aggregation and risk reporting (the “Principles”) to remedy deficiencies in risk management disclosed by the 2008 “Great Financial Crisis” (first euphemism of the post).  G-SIBS (Globally Systematically Important Banks) identified in 2011 and 2012 were required to fully implement the Principles by January 2016.

The BIS explained its action as follows:

“One of the most significant lessons learned from the global financial crisis that began in 2007 was that banks’ information technology (IT) and data architectures were inadequate to support the broad management of financial risks. Many banks lacked the ability to aggregate risk exposures and identify concentrations quickly and accurately at the bank group level, across business lines and between legal entities. Some banks were unable to manage their risks properly because of weak risk data aggregation capabilities and risk reporting practices. This had severe consequences to the banks themselves and to the stability of the financial system as a whole.”

In March this year, the BIS issued a progress report on implementation of the Principles.  Italics courtesy of AA.

“The latest assessments by supervisors show that banks’ level of compliance is unsatisfactory and the overall implementation progress remains a source of concern to supervisors. Based on supervisors’ assessments, only one bank fully complied with the Principles, even though the implementation deadline for global systemically important banks (G-SIBs) identified in 2011 and 2012 had lapsed in January 2016. In view of the unsatisfactory assessment results, banks are urged to step up efforts to comply with the Principles. Supervisors are expected to monitor progress and call on banks to address observed weaknesses.” 

There were some 28 G-SIBS as of November 2012. 

One out of 28 is roughly 3.6% compliance.

Not a very impressive performance from these megabanks who tout their capacity to provide state-of-the-art banking services based not only on their self-proclaimed profound intelligence but also their ability to perform complex mathematical analyses and calculations. These are also the same banks that have convinced their regulators that their internal risk models are sufficiently robust so that they should be used to determine their “true” exposure to various risks and, thus, their required capital under the Basel Framework.

The BIS progress report indicates that these self-assessments may be “overly optimistic” (second euphemism of the post). 

What’s even more disturbing is the BIS assessment of the reasons for the failure to reach compliance. You can read that in detail in Appendix 2.  Here’s the BIS’s take on “technical shortcomings”.

“Difficulties in execution and management of complex and large-scale IT and data infrastructure projects, such as resources and funding issues, deficiencies in project management, and coordination with other ongoing strategic programmes.

Overreliance on manual processes and interventions to produce risk reports, although some manual processes are unavoidable.

Incomplete integration and implementation of bank -wide data architecture and frameworks (eg data taxonomies, data dictionaries, risk data policies).

Weaknesses in data quality controls (eg reconciliation, validation checks, data quality standards).”

On a positive note, the BIS may have just supported US corporation and banks’ contention that they are incapable of determining the ratio of their CEO’s pay to the average for all other employees.

If we accept that as a working hypothesis, would you buy a product or place a deposit with a bank unable to measure its risk exposure or perform simple math (Dodd Frank)?

BIS Releases Triennial Central Bank Survey on FX and OTC Derivatives Markets

The BIS released its Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Market Activity.  Use the links at the upper right of the press release page to access the full report.  The links at the bottom of the page are to individual country reports released by individual country central banks.

Here are some headlines from the BIS press release.

1. Turnover on the Global foreign exchange market

• Global foreign exchange market turnover was 20% higher in April 2010 than in April  2007, with average daily turnover of $4.0 trillion compared to $3.3 trillion. 
• The increase was driven by the 48% growth in turnover of spot transactions, which represent 37% of foreign exchange market turnover. Spot turnover rose to $1.5 trillion in April 2010 from $1.0 trillion in April 2007.
• The increase in turnover of other foreign exchange instruments was more modest at 7%, with average daily turnover of $2.5 trillion in April 2010. Turnover in outright forwards and currency swaps grew strongly. Turnover in foreign exchange swaps was flat relative to the previous survey, while trading in currency options decreased.
• As regards counterparties, the higher global foreign exchange market turnover is associated with the increased trading activity of "other financial institutions" - a category that includes non-reporting banks, hedge funds, pension funds, mutual funds, insurance companies and central banks, among others. Turnover by this category grew by 42%, increasing to $1.9 trillion in April 2010 from $1.3 trillion in April 2007. For the first time, activity of reporting dealers with other financial institutions surpassed inter-dealer transactions (ie transactions between reporting dealers).
• Foreign exchange market activity became more global, with cross-border transactions representing 65% of trading activity in April 2010, while local transactions account for 35%.
• The percentage share of the US dollar has continued its slow decline witnessed since the April 2001 survey, while the euro and the Japanese yen gained relative to April 2007. Among the 10 most actively traded currencies, the Australian and Canadian dollars both increased market share, while the pound sterling and the Swiss franc lost ground. The market share of emerging market currencies increased, with the biggest gains for the Turkish lira and the Korean won.
• The relative ranking of foreign exchange trading centres has changed slightly from the previous survey. Banks located in the United Kingdom accounted for 36.7%, against 34.6% in 2007, of all foreign exchange market turnover, followed by the United States (18%), Japan (6%), Singapore (5%), Switzerland (5%), Hong Kong SAR (5%) and Australia (4%).

2. Turnover in OTC interest rate derivatives

• Activity in OTC interest rate derivatives grew by 24%, with average daily turnover of $2.1 trillion in April 2010. Almost all of the increase relative to the last survey was due to the growth of forward rate agreements (FRAs), which increased by 132% to reach $601 billion.

More detailed results on developments in the foreign exchange and OTC derivatives markets and comprehensive explanatory notes describing the coverage of and terms used to present the statistics are included in the separate statistical release of the data. Explanatory notes follow statistical tables.  The BIS plans to publish, in November 2010, the detailed results of the activity in April 2010 and of the positions at end June 2010 on FX instruments. A specific press release will also be published in November on the global OTC positions at end June 2010. In addition, special features will be devoted to the Survey in the December 2010 BIS Quarterly Review.

New BIS Data Report on Property Prices

The BIS has launched a new data series on worldwide property prices.  Available here.

The property price statistics bring together data from a variety of national sources. The BIS, with the assistance of its member central banks,  has obtained approval of these sources to disseminate the  statistics as long as the national sources are clearly indicated. The sources and any relevant disclaimers are listed separately (sources of data). Copyright in these data must be honoured. 

The property price statistics include data from 37 countries, and are available at different frequencies. The dataset is updated at the end of each month. The data differ significantly from country to country, for instance in terms of type of property, area covered, property vintage, priced unit and seasonal adjustment. This reflects the fact that there are currently no specific international standards for property price statistics

BIS Issues Consultative Document on Corporate Governance

Apparently, it's the season for corporate governance.  The BIS has just released a consultative document on the topic.  Text here.

The Central Bank of Bahrain is pretty well known for its practice of incorporating international standards into its regulations.  It will be interesting to see how they deal with this development given the release yesterday of Bahrain's much labored over Corporate Governance Code (which applies to all joint stock companies in Bahrain not just those regulated by the CBB.