Unveiling Insights: A Masterclass in Risk & Compliance Management

The webinar culminated in a dynamic Q&A session, providing attendees with an opportunity to engage directly with our speakers, Metodi Pachev and Diane Shepherd. From probing questions on decentralized finance to inquiries about the future of compliance technology, the session was marked by lively discourse and illuminating insights. Metodi and Diane, drawing from their wealth of knowledge and experience, offered nuanced perspectives and practical advice, further enriching the webinar experience for participants.

Question 1: Decentralized Finance (DeFi) Demystified

Q: Could you kindly elaborate on what is meant by Decentralized Finance (DeFi)? Do you mean BaaS?

A : During our webinar, we referenced the U.S. Department of the Treasury’s 2023 Illicit Finance Risk Assessment of Decentralized Finance report, which highlights the absence of a universally accepted definition or understanding of DeFi. However, the report adopts the definition of DeFi as “virtual asset protocols and services that purport to allow for some form of automated peer-to-peer transactions, often through the use of self-executing code known as smart contracts based on blockchain technology.”

In simpler terms, DeFi encompasses systems facilitating the creation, management, and peer-to-peer exchange of virtual assets through programmable contracts that execute automatically based on predefined conditions, utilizing blockchain technology. One example of such systems is decentralized lending platforms, where users can earn interest on their deposits (e.g., cryptocurrency) and borrow funds without involving traditional financial institutions.

Despite its growth, DeFi is susceptible to money laundering due to the lack of enforced KYC procedures. This vulnerability underscores the importance of discussing DeFi in our webinar, considering its significant impact on the financial landscape in recent years.

Question 2: Justification of Increased Difficulty in Identifying UBOs

Q: Is the increased difficulty in identifying UBOs, due to privacy regulations justified in your opinion? On one side, exposing business owners information publicly presents as a risk for them. With that in mind, they are fully able to take action to mitigate this risk. On the other side, bad actors can take full advantage of these regulations to cover their history. – We cannot mitigate this risk, unless we prove that we have “interest” In knowing the information.

A: We acknowledge the challenges in establishing legitimate interest for accessing UBO information, particularly following the recent ruling by the Court of Justice of the European Union. In the absence of clear guidelines on what constitutes legitimate interest, transparency becomes even more vital for a well-functioning economy, where accountability is paramount. Without transparency regarding UBOs, effective sanction programs and risk management become difficult to implement.

However, it’s essential to recognize that even seemingly transparent systems may conceal the true beneficiaries. Therefore, we advocate for an analytical approach that connects various actors and sheds light on stakeholders who may operate in the shadows. Central to this approach is a critical review of the facts, and asking questions such as: 

• Does this align logically? 

• Does the stated purpose of an undertaking or transaction match its actual outcome?

• Who stands to gain the most from this arrangement? 

This method enables a deeper understanding of complex financial structures and helps identify potential discrepancies or irregularities.

Question 3: Benefits of On-Site Visits in a Digital World

Q:  Do you believe that on site visits are beneficial for overall risk assessments of a subject in an increasingly digital world?

A: Site visits have become even more beneficial in this increasingly digital world than they were before. The acceleration of the internet’s prominence in businesses’ day-to-day operations has made companies overly reliant on online sources when it comes to administrative tasks, including verifying information. This may have created a false sense of security, of which we should beware of. 

Information has indeed become more accessible and exhaustive through digitalization: online registries, online information request forms, videos, etc. The range of possibilities has expanded thanks to technological progress. However, this same progress has also enabled the development of sophisticated ways to trick the systems in place, to fake the information, or to sidetrack its access.

On-site visits and inspections remain unaffected by this downside, thus being a great way to verify information in an indisputable manner. Agents physically going to a location to confirm that a business is indeed operating from there and providing evidence gathered in situ is the key to remaining impervious to deceiving online tactics that might be used by third parties (customers, vendors, etc.) when engaging in a contractual relationship.

Companies are still required to have a physical address, so on-site visits remain a key means of verifying if a business is real and operating (for a comprehensive risk assessment).