Foreign exchange (forex) is essential in today’s global economy as a facilitator of cross-border commerce. As with any industry that involves the movement of money, there is potential for money laundering, hence the need for regulation to protect and support national and international efforts against financial crime. Huge fines by financial regulators in recent years give evidence to this. In 2014, the UK Financial Conduct Authority (FCA) levied $1.7 billion in penalties against five banks for ineffective foreign exchange controls, and in 2015, U.S. and UK regulators collectively fined six major banks over $5.6 billion for forex market manipulation.
What are the regulatory environments for foreign exchange businesses in some of the world’s major markets?
All forex businesses operating in Canada must be registered as a money services business (MSB) with the Financial Transacations and Reports Analysis Centre of Canada (FINTRAC), the national financial regulator. Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, the regulatory obligations for forex companies includes implementing anti-money laundering (AML) and know your customer (KYC) compliance processes, reporting large or suspicious transactions to FINTRAC, and keeping records of transactions.
In the U.S., foreign exchange businesses are also considered MSBs and must register with the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN). The Bank Secrecy Act requires forex companies to establish a written AML/KYC program, keep detailed transaction records, reporting, and report suspicious activities to FinCEN.
Under Australia’s AML/CTF (Counter-Terrorism Financing) Act, foreign exchange is referred to as currency exchange services and falls under the category of financial services and must register with the Australian Transaction Reports and Analysis Centre (AUSTRAC). Once registered, these businesses must remain compliant by having an AML/CTF program, report large or suspicious transactions to AUSTRAC, and recording customer transactions.
Foreign exchange companies in New Zealand are considered financial service providers and must register on the Financial Service Providers Register (FSPR). The New Zealand Department of Internal Affairs is responsible for supervising AML and countering financing of terrorism (CFT) compliance for the industry in the country. Like in other jurisdictions, forex businesses are expected to put in place an AML/CFT program, carry out customer due diligence checks, report suspicious transactions, and keep records of transactions.
Just as in Canada and the U.S., forex companies in the UK are considered MSBs under the country’s AML regulations. As an MSB, UK foreign exchange businesses must register with Her Majesty’s Revenue & Customs (HMRC). According to the current money laundering regulations, MSBs must carry out AML/KYC checks on all customers, report any suspicious activities to the National Crime Agency, and have an active compliance program.
Although the regulatory regimes in the countries studied have very similar requirements for forex companies, there are noticeable differences in how monitoring and enforcement is carried out. Wherever a foreign exchange business operates, it is important to be fully aware of local regulations governing the industry. By staying compliant and maintaining a rigorous AML/KYC program, these companies establish a reputation of integrity and gain the trust and confidence of their clients.
What compliance challenges do you see for forex businesses that operate in multiple countries?