Proposed COUNTER Act Clears the Way for Fintech

On 9 May, the US House Financial Services Committee unanimously recommended a bill to reform the US anti-money laundering (AML) regime. RANE expert Amit Sharma, founder of digital financial services platform FinClusive, commented on the bill and what it means for finance risk.

The Coordinating Oversight, Upgrading and Innovating Technology, and Examiner Reform (COUNTER) Act of 2019 is intended to modernize US AML law and encourage collaboration between US regulators and the private sector. It appears to have strong support, but has not yet been scheduled for discussion in the US House of Representatives.

  • COUNTER has provisions to enable and encourage, but not require, information sharing between financial institutions and regulators; improve regulators’ AML expertise; review institutions’ de-risking strategies; appoint agents at federal regulators responsible for ensuring data privacy; enhance whistleblower protections and enforcement mechanisms; and encourage regulators and the financial services industry to innovate, test, and adopt new technology.
  • The bill received unanimous, bipartisan support in the House Financial Services Committee. The American Bankers Association and eight other industry trade groups wrote a letter of support in favor of the bill.

The rising cost of compliance and the threat of large fines has pushed larger banks to exit high-risk markets, leaving large parts of some regions underserved by financial services.

  • De-risking also created a chain reaction in which other firms de-risked from those areas for fear of losing their relationship with larger Western financial institutions. This process significantly increased transaction fees for businesses operating in high-risk regions.
  • The lack of legal banking forced the increasing flow of global remittances from immigrants and migrant laborers into untraceable networks that were not beholden to AML regulations, such as hawala networks or digital currencies. US authorities feared that terrorist groups, criminal networks, and rogue nations were abusing the remittance system to launder money, according to Sharma.
  • De-risking occurred especially often in poorer developing nations and in countries like Saudi Arabia, Mexico, and Indonesia where terrorist networks and international criminal organizations have a significant presence.

COUNTER seeks to modernize US AML regulations to incorporate developing technology by increasing FinCEN’s tolerance for fintech and encouraging innovation. Sharma notes that by doing this, and also improving communication between regulators and private firms, the act will make it easier to offer financial services to high-risk people or regions.

  • Sharma believes that fintech innovations such as mobile and digital banking, alternative payments, advanced analytics (including artificial intelligence), and distributed ledger technologies promise to lower the cost of financial services and therefore improve the appeal of doing business in high-risk areas, which also tend to have low wealth.
  • One provision of COUNTER requires the Treasury Department to issue clear rules on the testing of new technology and also encourages FinCEN to provide financial institutions with exemptions to certain requirements under the AML regulatory regime that allow those institutions to test new technology.

Depending on how far COUNTER lowers the compliance burden in high-risk markets in practice, it could disrupt the balance between larger banks and newer, non-traditional financial services firms.

  • Non-traditional entrants into the financial services market have driven much of the innovation in fintech, which gives them the ability to do business more cheaply and efficiently, but the regulatory barriers to doing so have kept many upstart firms from growing into that space.

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