…to the 52nd edition of House! and it’s December already…what a year it’s been! 

Headlines this month have seen Westpac enter the regulatory spotlight with 23 million breaches of Australia’s AML and CTF Laws, while governance practices face imminent changes amidst scandals ranging from WeWork to regulators in the Vatican. What's more, as crypto continues its rapid expansion, compliance officers across the globe continue to tackle the regulatory puzzle that is digital currency. This month we address some of the key moves and significant developments relevant to this sector.

It’s also been a turbulent year for China who continues to dominate headlines and world news. Although the focus has been primarily on its external relations, China has continued to develop its financial systems and is pioneering a regulatory approach using its controversial Social Credit System. We explore these developments and China’s evolving compliance culture.

Given the endless allegations of its misuse and undeniable volatility, regulators worldwide appear to remain increasingly skeptical of cryptocurrency; an understandable stance given its immediate lack of regulatory capacity.

Despite the SFC introducing it’s pioneering ‘crypto-licenses’ scheme last year, Hong Kong’s regulator has allocated them to but a handful of firms under their jurisdiction, most prominently amongst them Diginex, whom have recently added Thibault Verbiest to their compliance team as Head of Regulatory Affairs, EMEA. A client of Arion House based out of Hong Kong, believes the key hindrances surrounding the crypto industry, particularly within APAC, are more of an operational and infrastructural issue, as opposed to any substantial regulatory or legal obstructions therein. This in turn proves that, the issue surrounding the crypto-sphere within Asia and Hong Kong in particular isn’t strictly that of compliance, but more so that of industry immaturity. Until digital currency matures as a sector within finance, not just in Asia but globally, we will continue to see a slow, but steady development of crypto compliance officers in the region.

The Mainland’s Central Bank has initiated a crypto-crackdown, to counter the unexpected, unprecedented and frankly ironic rise in investor enthusiasm for digital currency, following President Xi’s appraisal of blockchain technology, in October of this year. The [Chinese] government has since then begun cooperating closely with regulators, in particular the State Administration of Foreign Exchange (SAFE), whom have expanded their blockchain platforms authority to oversee 19 provinces up from 9, therein demonstrating the growing demand for risk management, AI, and blockchain experts, as the crypto-sphere continues to expand within the region. Since initiating the crackdown on digital assets, the Chinese government have allegedly shut down 6 on-shore virtual trading platforms, 203 overseas servers, and up to 10,000 accounts.

The trend of healthy skepticism continues across APAC, with Singapore’s Monetary Authority classifying all crypto derivatives, other than Bitcoin and Ether, as categorically unsuitable for retail investors while South Korea have introduced 5-year prison sentences and fines exceeding upwards of US$40,000 for executives whom fail to register their firms with regulators, and/or comply with FATF’s AML regulations.

Outside of Asia, the SEC has expanded their legislation over crypto markets, by introducing the requirement for digital asset exchanges to verify the identities of both customers and beneficiaries of transfers exceeding US$3,000. With estimate figures demonstrating up to US$4.3bn of crypto funds to be implicated in financial crime this year alone, U.S. regulators and compliance officers most certainly have their work cut out for them. 

On the other hand, the FCA’s regulatory attitudes towards crypto, is a mix of healthy skepticism and keen investor curiosity in equal measure. While the U.K., as of 2019, has not passed any concrete legislation specific to crypto-compliance, digital assets are still regarded as illegal tender in the region, prompting British exchanges to follow strict regulatory requirements and tax structures.

To summarise, although global crypto regulatory demands are only increasing, the infrastructure, operational and maturity issues that the industry faces will continue to limit it’s mainstream potential and its need for Crypto-Compliance Officers.

As China continues to aggressively expand into foreign markets in an environment where compliance is emphasised, they find themselves in a rush to ensure the implementation of a thorough regulatory structure to avoid sanctions, and most importantly to safeguard their reputation. 

To achieve this, Mainland regulators have begun to urge financial institutions under their control, to make a greater effort to not only embrace international compliance procedures, but to cooperate with relevant authorities and their implied legal obligations. To elaborate, as of 2018, penalties issued by China’s Central Bank, the Peoples Bank of China (PBOC), against AML and CTF violations had risen 41% from the previous year, amassing a total of 189.3 Million Yuan in sanctions. Furthermore, the government have, in close cooperation with the Ministry of Human Resources and Social Security, undertaken substantial efforts to formally list ‘Compliance Officer’, as a new and legitimate profession within China, with speculative figures displaying their need for up to 500,000 said professionals in the foreseeable future. Their actions clearly demonstrate China’s increased efforts to paint their regulatory procedures in a more positive light, a keen strategy aimed at alleviating any possible risks opposed to the Belt and Road Initiative; a tactic all the more prevalent given rising tensions brought about by the trade war with the United States.

The Chinese Government appear to have clearly learned their lesson after the regulatory debacles surrounding Huawei and ZTE late last year. Since then, the demand for professionals in fraud, sanctions, and AML procedures have risen a staggering 80%, as too have the average pay packages to relevant candidate with said expertise. Furthermore, since 2018, an overwhelming majority of China’s State and privately owned enterprises have adopted a renewed and far more thorough compliance structure, although the impacts of their regulatory reform upon the nation’s lucrative economic productivity are yet to be seen…

Perhaps the most prominent regulatory development ushered in by Chinese authorities in recent months is their intention to extend China’s Social Credit System to Corporate Organisations by as early as 2020. This is a move to create a more standardised, fair, transparent and predictable legal business environment and corporations within China are already being characterised by the effectiveness of their compliance programs, along with the transparency of their audit and financial records. While these developments have seen compliance costs rise exponentially within the region, corporates such as TenCent have revealed that an increase in regulatory action has seen net profits drop considerably since enhanced regulations and security protocols were put in place. Surely though, this is a small price to pay for  Chinese Organisations, who aim to proactively expand into global markets.

China’s regulation of market participants based on a definition of ‘trustworthiness’ is a fundamentally different approach to its western counterparts and reaches far beyond the parameters traditionally applied to business ratings. This coupled with a strengthening regulatory environment suggests a high demand for regulatory experts in 2020.

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