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2022 | Book

Financial Technology and the Law

Combating Financial Crime


About this book

Blockchains and cryptocurrencies, open banking, virtual assets, and artificial intelligence have become the buzzword of this decade. This book focuses on these ‘disruptive’ financial technologies that provide alternatives to the traditional financial services typically offered by regulated financial institutions. Financial technologies are characterized by the innovative ways in which they initiate, support or extend traditional financial services or offer alternative financial pathways and products. However, these financial technologies also pose money laundering and terrorist and proliferation financing as well as cyber security risks that require mitigation. This edited volume addresses a range of regulatory and enforcement challenges related to financial technology and financial crime.

The book responds to the United Nations’ Sustainable Development Goals, in particular in relation to economic development, employment, national security, law enforcement and social well-being. Fostering responsible financial innovation promotes long-term economic growth, inclusion, and improved living standards. This book explores how to promote financial innovation while mitigating risks in a way that ensures financial prosperity and social inclusion.

Table of Contents

From Paper Money to Digital Assets: Financial Technology and the Risks of Criminal Abuse
The first decades of the twenty-first century saw the development of new technologies that hold great promise for the provision of efficient and affordable financial services to far more users than ever before. Criminals, however, have also seized the opportunities that these innovations provide. Service providers, regulators, supervisors and law enforcement must adapt and respond appropriately to the challenges presented by advances in financial technology.
Doron Goldbarsht, Louis de Koker

Risks and Opportunities

Leveraging the Provisions of Open Banking to Fight Financial Crimes
With its over-reliance on compliance by the reporting entities through various reporting obligations, the present anti-money laundering framework has failed to produce the desired result of curbing financial crime and recovering laundered money. In such a context, the sharing of customer data would be highly valuable to combat financial crimes like anti-money laundering and terrorism financing. Not only the risky transactions would be flagged, and immediate action taken, but it would also save banks millions of dollars in transaction monitoring, which then can be spent on innovative solutions ensuring the financial well-being of the general customers. Australian Consumer Data Right (CDR) and its implementation in the banking sector allow customer data to be shared between the banks and other accredited participants of Open Banking. However, under the present Open Banking framework, data-sharing cannot be initiated without the explicit consent of the customer. While this consent requirement empowers customers to control and use their own data, it limits the use of data. Moreover, there is uncertainty about whether all the entities accredited as data recipients under Open Banking are obligated to report suspicious transactions. As a result, in its current form, Open Banking suffers from the limitation that inhibits its potential to fight financial crimes effectively. This chapter is an initial exploration of the developments needed not only in the in the existing anti-money laundering framework but also in the organizational culture of the financial service providers. This will help the financial institutions and regulators collaborate better and deliver the promise of Open Banking- a differentiated positive customer experience while maintaining and improving customer trust in the system.
Suman Podder
Regulatory Approach to Anti-Money Laundering in Online Gambling in the UK
The chapter analyses the AML regime in the online gambling market in the UK, focusing on the nature of its institutional setup and the evolution of its regulatory approach. The analysis questions which enforcement strategies and styles the sectorial regulator—the Gambling Commission—pursued under the overarching framework of risk-based regulation. The findings indicate two stages in the Gambling Commission’s work one characterised by low deployment of responsive regulation coupled with an advisory (conciliatory) enforcement style, and the subsequent stage characterised by a shift towards greater use of responsive regulation and a more punitive enforcement style, which was also coupled with capacity-building enrolment of gambling operators through non-mandatory channels. After discussing the implications of the two approaches for the regime’s performance, the analysis contextualises them against wider debates about the operation of risk-based regimes and conditions for successful operation of risk-based frameworks.
Slobodan Tomic
Cryptocurrencies Transactions in the UK Real Estate Market: Threat or Opportunity for Anti-Money Laundering?
In recent years, the use of cryptocurrencies in various sectors of national economies has become extremely popular, attracting praise and criticism. These transactions have sparked debate about the potential money laundering risks associated with the use of cryptocurrencies. In particular, these concerns pertain to their high-level anonymity and the danger of criminal infiltration of important economic sectors such as the real estate market. However, the discussion on the topic is quite scattered and unsatisfactory, with many unanswered questions and legislative initiatives that have only partially tackled the issue. This chapter focuses on the use of cryptocurrencies in the UK real estate market, assessing some of the critical points that emerge from their employment in property transactions. The UK real estate market is a particularly relevant case study. Indeed, recently, it has been at the centre of debate for its vulnerability to money laundering practices and the challenges it presents for implementing AML regulation. The author addresses the question of whether the use of cryptocurrencies represents a threat or an opportunity for the AML regime concerning the property sector. This study aims to identify key aspects that future legislative and policy actions should consider to strike a balance between using cryptocurrencies and the need to protect the real estate market from criminal activities.
Ilaria Zavoli
‘Hello, Is It Me You’re Looking for?’ Mobile Network Operators and Anti-Money Laundering: The Australian Case
In response to emerging technological developments, methods of money laundering (ML) continue to evolve in order to deliberately circumvent law enforcement efforts. To mitigate the risks that this entails, technological advances in financial services require constant monitoring and oversight, along with appropriate legislation and enforcement, in a manner that nonetheless promotes financial prosperity and inclusion. The structure, functioning and risks of new payment products and services (NPPS) require more effective regulation and operational measures in order to ensure that financial integrity risks are addressed effectively, so that NPPS are not developed at the expense of controls that mitigate the ML risks they pose. This chapter explores the ML risks posed by the expansion of NPPS in the telecommunications sector, which plays a vital role in our society and is constantly expanding the range of products and services available to consumers through its interconnectedness. One of the most relevant NPPS to the telecommunications sector is mobile payment services, which are the primary focus of this chapter.
Doron Goldbarsht

Policy Approaches

Centralised Control Over Decentralised Structures: AML and CTF Regulation of Blockchains and Distributed Ledgers
Proponents of bitcoin have long asserted transnational decentralised structures cannot be regulated by centralised state-based actors. The recent legislative activities of dominant financial jurisdictions, premised on the standards articulated by the Financial Action Task Force, negates this assertion. Regulators have chosen to impose old rules on new business structures, ensuring the dominance of traditional financial surveillance to meet AML and CTF compliance. With recognition that governments can regulate distributed ledger technology, and that analogous behaviour in the cryptocurrency space will be treated similarly to already regulated activities, the discussion needs to shift to the efficacy of using centralised methods in decentralised spaces. There is no disagreement as to the importance of stopping money laundering, the financing of terrorism, or the proliferation of weapons; the question is rather if these goals can be achieved with a new balance between the competing interests of privacy and surveillance, while facilitating the nascent promises of new technologies.
Dianna L. Kyles
Where’s Wally? FATF, Virtual Asset Service Providers, and the Regulatory Jurisdictional Challenge
Financial Action Task Force (FATF) standards require, at a minimum, that virtual asset service providers (VASPs) should be licensed or registered in the jurisdictions where they are created. In cases where the VASP is a natural person, they should be required to be licensed or registered in the jurisdiction where their place of business is located. FATF’s geographic jurisdictional approach has not received sufficient scholarly attention to date. This chapter addresses the current gap in the literature.
While FATF’s focus has been on bringing VASPs, including foreign VASPs, within the scope of domestic AML/CFT regulators, the chapter finds that insufficient attention has been given to the implications of this approach. How are domestic regulators going to establish sufficient supervisory hold over foreign entities that they register or license? How will they ensure effective supervision and, if required, enforcement of their laws? The FATF approach to date has not been sufficient to consistently deliver sufficient supervisory and enforcement hold over foreign entities with no real presence in the country. The authors submit that FATF can improve current processes by aligning its analysis and approach with those of tax authorities who have been battling similar challenges for much longer.
Louis de Koker, Talha Ocal, Pompeu Casanovas
Decentralized Blockchain Technology: Towards a Trusted and Transparent Beneficial Ownership Regime
This chapter offers an insight into emerging blockchain technology and explores how it might support a trusted and transparent beneficial ownership regime. The international anti-money laundering community has advocated for central registers of beneficial owners as a measure to strengthen corporate transparency. A lack of corporate transparency is problematic because it helps to conceal illicit wealth by frustrating authorities’ efforts to identify the real beneficial owner behind corporate vehicles used to launder money and evade taxes. However, there are moral, legal, and practical challenges in implementing central registers of beneficial owners. The chapter considers the application of blockchain in decentralized and distributed digital ledger systems that are without a trusted third party. This chapter concludes with an examination of blockchain’s role in maintaining an accurate, verifiable, and transparent record of beneficial ownership information in support of global AML efforts.
Paul Michael Gilmour
Evolving Regulatory Frameworks: Blockchain as a Form of Trust—Comparative Evidence
Firms and governments are interested in regulatory experiments in order to minimise compliance costs and improve business and regulatory efficiency. Blockchain presents many hopes for achieving the aforementioned objectives but presents many risks in the area of privacy and cyber risks. Considering its regulatory and business organisational features, it can be considered a regulatory tool that supplements, complements and substitutes law. In the area of AML, Blockchain can be employed to verify, validates and transfer information between two or more stakeholders. The aim of this chapter is to understand the organisational features of the four most prominent Blockchain networks and understand how and when firms and their associated Blockchain-based system operate. In order to do so, this chapter compares Blockchain features with national and international current regulatory frameworks for Blockchain. Results show that Blockchain does not undermine the role of the government, but it reinforces its role when the rule of law is weak or absent. Moreover, considering that technological actors can evolve into a digital sovereign, governments need to carefully assess the risks of this novel technological framework and set the right rules of the games that benefits all consumers and businesses.
Alfio A. Puglisi

Investigation of Financial Crime

Investigation of Cryptocurrency Enabled and Dependent Crimes
Cryptocurrency has exploded in both use in business and speculation on the stock market. Increasingly, cryptocurrency is being used in a range of criminal activities, mostly notably as payment and money-laundering tool but also in investment fraud. The speculative nature of cryptocurrencies reminds us of the dotcom boom in the 1990s where any internet related companies attracted great speculation on the stock market without having a product, business plan or any ability to make profits. Naturally, the boom was followed by the dot-com crash a few years later which ended an era of unwarranted highly speculative internet companies. And going further back further in time the gold rush where people around the world flocked to seek their fortunes in lands far away such as Australia, Canada, and the United States in the 1800s, only to discover that finding and mining a big gold stake to be a dangerous and unlikely proposition. 2021 is the year that cryptocurrency became the centre of finance, the doggy Doge meme moved from joke to reality, and where crypto became the new gold rush (alongside toilet paper). Analysing the current research and literature, the authors bring in their personal experience in industry and government investigating cybercrime, online fraud, and cryptocurrency frauds. This chapter will analyse the use of cryptocurrency in online fraud and the challenges posed in crypto investigations and crypto investment fraud.
Alana Maurushat, Dan Halpin
Trade Diversion, Money-Laundering and Illicit Flows
This paper inquires into “trade diversion”, a frequently complex type of misconduct about which little has been written in policy or academic papers, despite recent attention to illicit flows and trade-based money laundering (TBML). (African Forum and Network on Debt and Development, Illicit financial flows: towards a more integrated approach for curbing illicit flows from Zimbabwe, 2015; OECD, Illicit trade: converging criminal networks, 2016; Illicit Financial Flows: The Economy of Illicit Trade in West Africa, 2018; GFI, Illicit Financial Flows from Developing Countries: 2005–2014, 2017).
Nikos Passas
Artificial Intelligence and Policing of Financial Crime: A Legal Analysis of the State of the Field
This article maps the existing use of Artificial Intelligence (AI) in law enforcement, with a focus on crimes perpetrated on financial markets—including market manipulation and insider trading. Market manipulation can cost investors significant sums and reduce investor confidence, negatively impacting the efficiency of the markets that businesses rely on to raise capital and that pension funds, superannuation funds and sovereign wealth funds rely on to generate returns. With over AUD1 trillion of Australian taxpayer money currently invested in securities markets through superannuation funds, the stakes are high. As criminals have become more sophisticated in their efforts to manipulate financial markets, enforcement efforts have also become more innovative, utilising new technologies to detect and respond to criminal behaviour and protect investors, the public and the global financial system. The purpose of this chapter is to establish the state of the field in application of AI to policing of financial markets and take an interdisciplinary look at opportunities to enhance the use of AI in policing more broadly. The chapter begins with an explanation of the laws designed to combat crime on financial markets—in particular the offences of insider trading and market manipulation. This is followed by an analysis of the current state of the field and discussion of the application of AI to detect and deter financial crime, as well as the use of AI in other areas of policing. The chapter concludes with lessons and opportunities from the application of AI to policing financial crime, noting the risks and limitations of an AI approach and the challenges and opportunities for expanding the application of AI to policing more generally.
Hannah Harris


Financial Technologies and Financial Crime: Key Developments and Areas for Future Research
Financial technologies, the ways in which they can be abused by criminals, and the responses by regulators, industry and law enforcement are changing fast. This is a dynamic area. It is, furthermore, important to bear in mind that we are witnessing the early stages of the development and implementation of key technologies and the pace of change and disruption is therefore set to increase. This chapter considers key developments that are important emerging areas for future research in financial crime. The following overlapping and mutual reinforcing developments are identified as important for researcher engagement: Stablecoins and central bank digital currencies (CBDCs); expanding identification programs; FATF's virtual asset service provider (VASP) framework; structural changes in the financial landscape; technologies supporting supervision (suptech) and compliance (regtech); and open banking broadening to open finance.
Louis de Koker, Doron Goldbarsht
Financial Technology and the Law
Dr. Doron Goldbarsht
Louis de Koker
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