As technology advances, financial crime has become a major threat to global financial systems, surpassing many other forms of crime. Asia’s emerging digital markets, which are still developing regulations to combat tech-based crime, have become prime targets for financial fraudsters. Experts emphasise that international cooperation and robust enforcement of anti-money laundering regulations are essential to address this challenge effectively.
Quantum AI, an Elon Musk-backed online trading platform, promises to change the way you can make money through crypto investments. “Smart investing that makes you $9288 in 5 hours and cured poverty”, the website says. A starter video even has Musk himself explaining how he has developed a piece of quantum computing software that wins stock trades at a success rate of 91 percent. There are also videos sprawled across Youtube explaining how the algorithm works and how one can safely invest on the platform. To the untrained eye, Quantum AI appears completely legitimate and highly promising.
However, it was recently revealed that Quantum AI is actually the latest cryptocurrency scam identified by Hong Kong’s Securities and Futures Commission (SFC), employing deepfakes to trick unsuspecting internet users into sharing their personal details and subsequently draining their bank accounts. In its public warning on May 8, the SFC said it had made a request to the Hong Kong Police Force to block access to its websites and social media pages. The linked domains were inaccessible as of this week, and the Facebook groups seem to have been removed.
This is the latest in a string of warnings to be issued by the SFC highlighting a growing trend in the use of technology, particularly AI, in committing financial fraud. And Asia’s growing digital markets are particularly susceptible.
The Asia/Pacific Group on Money Laundering (APG), a Financial Action Task Force-style body for Asia, points out in their 2023 report that financial crime, through virtual assets and related service providers, poses the biggest threat to Asia’s markets. In Hong Kong, officials reported a 45 percent increase in white-collar crimes in 2022 compared to the year before. Singapore’s Minister for Home Affairs and Law, K Shanmugam, said in response to a parliamentary question that between January and June 2023, there were 34,605 crimes reported to the police. Of these, about 75 percent were attributed to white-collar crimes, scams, and cybercrimes.
Tracking, regulating and prosecuting financial crime in increasingly globalised markets has become a prime focus for Asian economies, which are building robust infrastructure and laws in an internationally led effort to tackle the complexities with which economic criminal syndicates operate.
LEADING THE WAY
In April, the Monetary Authority of Singa-pore (MAS), Singapore’s financial industry regulator, launched the city-state’s first centralised digital information-sharing platform, COSMIC (Collaborative Sharing of Money Laundering / Terror-ism Financing Information & Cases). The platform seeks to facilitate the sharing of financial intelligence between participant financial institutions, so as to combat money laundering and terrorist financing (ML/TF) and mitigate financial crime risks.
“We expect such a platform to be effective in helping to counter the efforts of money-launderers and thwart the segmentation of information so institutions would have more data and see a bigger picture,” says Wilson Ang, partner and head of Asia regulatory compliance and investigations practice, as well as cybersecurity and data privacy practice at global law firm Norton Rose Fulbright.
Singapore is also pushing heavily against the use of digital payment tokens (DPT) and cryptocurrencies to illicitly park and transfer money through its banking systems. Most recently, the country amended its Payment Services Act in April to include user protection and financial stability requirements. Under the new rule, DPT service providers must update their license applications, ensure their AML/counter-terrorism financing (CFT) controls meet the updated norms, and complete an external audit to continue operations post-January 2025.
Singapore’s regulators have also increased AML/CFT compliance requirements across various sectors.
Ang points to new AML/CFT requirements introduced in June 2023 for property developers in relation to the need to develop and implement internal policies and controls to manage and mitigate ML/TF risks. In March 2024, amendments were proposed to enhance the regulatory regime for corporate service providers (CSPs), requiring all CSPs in Singapore to be registered and comply with AML/CFT obligations. New AML/CFT requirements were also imposed on digital payment token service providers, including cryptocurrency trading firms and exchanges, recently in April 2024. Hong Kong has matched and, arguably, even gone ahead of Singapore when it comes to AML/CFT regulation and enforcement.
In 2023, the SFC initiated and concluded more than 10 consultations, stepped up enforcement action to combat internal control failures, insider dealing, ramp-and-dump and other types of misconduct, and published a flurry of new circulars and guidelines. Significant regulatory developments were also seen in emerging areas, such as ESG and virtual assets, and efforts were made to reform or refine long-standing regulations and practices relating to insider dealing and market soundings.
“The way forward domestically for the crypto industry should be to embrace regulation and licensing and then impose balanced AML requirements.”
— Martin Rogers, Davis Polk & Wardwell
Martin Rogers, chair of U.S. firm Davis Polk’s Asia practice, says Hong Kong is a good model for how governments must tackle cryptocurrency-related financial crime.
“The way forward domestically for the crypto industry should be to embrace regulation and licensing and then impose balanced AML requirements. Hong Kong is a good model for this, with its Virtual Asset Service Provider regulatory framework including KYC/AML requirements as a core element. It’s worth emphasising, though, that the AML requirements need to be tailored to account for the nature of the global cryptocurrency markets,” Rogers says. “Domestic laws should cover not just AML and CTF but also cybersecurity. This is an area where Hong Kong is still in the process of catching up, currently lacking sufficient cybercrime offences (and as yet any legislation to protect critical information infrastructure, although this is in the works),” Rogers adds.
Other South Asian and Southeast Asian economies are still playing catchup when it comes to tackling modern white-collar crimes. While increased awareness and political will are pushing for reform, a lackadaisical attitude towards rampant corruption (particularly low-level corruption), poor digital infrastructure, a dearth of resources, and slow enforcement are holding back significant progress in these regions.
Take the Philippines for instance. From February 2022, the country’s regulators expanded transaction reporting requirements when they required all ‘Covered Persons’ to use VA-specific transaction codes for covered/suspicious transaction report (CTR/STR) filings. But, identifying non-compliant VA-related activity remains the larger challenge. While reports suggest extensive use
of foreign VASPs, coupled with domestic VASPs’ low utilisation of VA-specific transaction codes, “the cited statistics only represent a small subset of VA-related transactions passing through the Philippine financial system,” an APG report found.
“Criminal actors may be moving their funds across VASPs under different regulatory frameworks in a bid to hamper the authorities’ detection of their activities and ability to trace their funds,” the report said.
Vietnam is another country that takes financial crime seriously, recently sentencing real estate tycoon Truong My Lan to death for her involvement in a $12 billion fraud case – one of the most severe punishments for economic crimes worldwide.
ATTITUDE PROBLEMS
Experts agree that the attitude towards corruption is a key element of financial crime in Asian markets. The $4.5 billion 1MDB scandal in Malaysia, which resulted in a 12-year prison sentence for former Malaysian prime minister Najib Razak, points to the fact that even top political and bureaucrats aren’t immune from corrupt practices.
A 2024 report by Transparency International found that 71 per cent of the countries across Asia and the Pacific have a CPI score below the regional aver- age score of 45 and the global average of 43 out of 100.
“Corruption is often at the heart of financial crime. In the majority of cases involving financial crime, corruption plays a crucial, if sometimes small, part. Corruption is still a major issue in Asia, with low-level corruption in particular still not really seen as criminal in nature,” Rogers says.
“Domestic anti-corruption laws should be strongly enforced with appropriate investment in strong anti-corruption agencies, with more whistleblowing,” Rogers adds.
Debevoise & Plimpton partner Gareth Hughes and counsel Philip Rohlik says technology and geopolitical instability are the two main drivers of increased financial crime in Asia and across the world.
“Technology, especially artificial intelligence, is a real—if too often over-hyped—threat insofar as it allows bad actors to evade the internal controls of private companies and vigilance mechanisms of public authorities. The second (and more important) is the increasingly polarised world we live in, in which tit-for-tat sanctions, trade controls, and similar policy tools create incentives for companies and countries to engage in complicated transactions to avoid the full impact of such trade controls, thereby taxing the compliance resources of their business partners and creating new avenues for bad actors to exploit,” Hughes and Rohlik say.
Rogers at Davis Polk also points to the development of what Interpol has called the “revolutionary” nature of cryptocurrency technology, which has provided an additional, new challenge to combatting financial crime.
“The fast-accelerating technological developments (in areas such as cyberhacking, AI and data manipulation present potentially an overwhelming challenge,” Rogers adds.
The APG’s 2023 report finds that Recent reports raise serious concerns about the Democratic People’s Republic of Korea’s (DPRK) theft and laundering of hundreds of millions of dollars worth of VA for financing the proliferation of weapons of mass destruction. “Terrorist groups, including ISIL, Al Qaeda and their affiliates, as well as extreme-right wing terrorist entities, are increasingly using virtual assets to raise and move funds globally,” the report finds. Deepfake incidents in Asia-Pacific surged 1,530 percent last year, with Vietnam and Japan seeing the most attacks, according to a report from identity verification platform Sumsub. Sumsub identified Hong Kong as one of the top five markets in Asia for identity fraud at a rate of 3.3 percent last year. Bangladesh had the highest at 5.4 percent.
New data released by American consumer credit reporting agency TransUnion shows that in Hong Kong, financial services ranked second among the most targeted industries for suspected digital fraud in 2023.
But both these risks can and are being addressed through proper training and compliance programs, say Hughes and Rohlik.
“We should not become too despondent about global instability as there is still global consensus when it comes to combatting financial crimes.”
— Gareth Hughes and Philip Rohlik, Debevoise & Plimpton
“Regulators increasingly expect large financial services and other firms to incorporate data analytics, which can incorporate AI to identify AI, as part of their compliance programs. While there have been much-hyped news stories about deep fake video conferences, the vast majority of financial crimes, like the vast majority of cybercrimes, are not that sophisticated and rely more on the assumption of human careless-ness or inattention than on technology. Training employees to be vigilant (and to raise concerns when a transaction looks suspicious) and making sure standard accounting controls are in place goes a long way towards preventing financial crime,” they say.
“We also should not become too despondent about global instability as, despite other disagreements, there is still global consensus when it comes to combating financial crimes. Groups like FATF and APG coordinate national responses to money laundering, and despite all the tensions in the U.S.-China relationship, in April 2024, the U.S. and China announced a Joint Treasury-PBOC Cooperation and Exchange on Anti-Money Laundering,” Hughes and Rohlik added. Indeed, regulatory bodies like the FATF, MONEYVAL and APG play a significant role in promoting the effective implementation of legal, regulatory, and operational measures for combating ML/TF.
Ang at Norton Rose Fulbright explains that recommendations by the FATF have prompted many countries to introduce legislation to regulate emerg-ing areas of ML/TF risks, such as that presented by corporate service providers or classes of high-value assets like cryptocurrency, as well as precious stones and precious metals.
“Mutual evaluation assessments conducted by bodies such as the FATF or APG are also effective in monitoring countries’ compliance with international standards and prompting more active implementation of AML/CFT measures,” Ang adds.
Another significant challenge, particularly in the retail and corporate banking, capital markets, and private banking and wealth sectors in Asia, is the misuse of corporate vehicles and the opacity of beneficial ownership, making it difficult for regulated entities to fulfil their AML/CFT obligations.
“The Singapore Government is taking steps to address the issue through initiatives like COSMIC and legislative amendments (in particular, to combat the misuse of nominee directorship arrangements by prohibiting persons from acting as nominee directors unless their appointments are arranged by registered CSPs), though we expect that more will certainly have to be done – not only on the part of policymakers but also industry participants – to ensure that effective know-your-customer / customer due diligence measures and procedures are implemented,” Ang says. Economic turbulence also remains a strong driver of financial crime, as was seen in the FTX case.
“Businesses, and their executive and owners, are under immense pressure to demonstrate success -enchanted revenues, profits and share prices (particularly for businesses with publicly listed equity). But if underlying conditions are poor - this means an increased tendency to engage in financial corporate fraud, or stock market manipulation—a trend which we have been seeing through the increasing number of appointments we are seeing as counsel to special committees of boards,” Rogers at Davis Polk explains.
Asia is also poor when it comes to whistleblower protection, and better regulations to protect whistleblowers balanced with defence against false allegations need to be set up.
“In our experience, a large proportion of investigations involving suspected financial crime by employees of corporates and financial institutions are triggered by whistleblowing complaints. False allegations are a problem for any whistleblowing system, but on balance, the experience is that whistleblowing should be further encouraged, with support from senior management of organisations and protection of both whistleblowers and targets of the complaints, until the outcome of investigations,” Rogers says.
LOOKING AHEAD
Experts believe the best way to tackle financial crime is through building more expertise locally and enhancing cross-border coordination, particularly given the international nature of modern tech-based financial crime and the continuing dominant role of the U.S. dollar and banking system.
But, cross-border cooperation across Asia’s economic, cultural and political diversity is extremely challenging. While most countries across Asia are aware of crypto-based laundering and related crimes, few have implemented stringent provisions to identify, prevent, and punish such activities, often relying on the private sector to ensure best practices.
“Asian governments need to hire sufficient experts as a priority and ensure sufficiently large budgets for anti-finan-cial crime R&D. AML can drive technology investment by private financial institutions, but this is not sufficient,” Rogers says.
He explains that governments need their own international-standard experts to (a) formulate and drive effective and balanced policies, (b) staff financial crime police capabilities, (c) provide support for critical infrastructure protection, (e) provide public education against scams and hacking, and (d) participate in regional, inter-governmental meetings. Summarily put, there needs to be as much governmental level and crime-agency collaboration as possible to com-bat cross-border financial crime in the region.
“I would like to see the focus on collaboration against financial crime being given even higher priority and status by ASEAN, and also broader collaboration covering the whole of Asia,” Rogers says.
