UK Firms: Why Not Simply Process EEA Residents' Personal Data In the EEA?

It's time for UK businesses to get creative in dealing with Brexit and all its uncertainties. As I've explained here, the processing of personal data relating to EEA residents is a particular problem. The UK is 13th on the list of countries that will be waiting for the European Commission to declare the UK personal data regime to be 'adequate' to transfer that data as of right (as happens now).

So, rather than bring personal data into the UK from the EEA, you could - as many already have - simply incorporate an entity within the EEA to hold the data and determine the means and purposes of processing there. That EEA entity could do the processing itself within the EEA or outsource that to an EEA-based processor with the right experience and expertise. Ireland, for example, is the top AI hub in the EU and it can be a simple matter to transfer existing English law contracts to a new entity there, particularly as Irish law is so similar.  

Only the aggregated results would need to come in to the UK.

Open Finance: The FCA's Call For Input

The FCA has called for suggestions by 17 March 2020 as to how it can support more open access to customers’ financial data. A few thoughts here, with an article to follow in the coming weeks...

The major stumbling blocks, as ever, are genuine customer problems/demand and supplier appetite, which tend to be focused quite narrowly; and who gets access to the data and for what purpose. 

One suspects that the Nirvana of a single consumer 'dashboard for everything' remains a long way off. We’ve seen broad-based initiatives before, like the UK government’s ‘midata’ programme from 2011. Key challenges remain customer identity and authentication on a broad scale, as opposed to channels more closely aligned with specific customer activities. In July 2019 the Government Digital Service and the Department for Digital, Culture, Media & Sport were still calling for evidence of how the Government can support improvements in identity verification and the development (and secure use) of digital identities generally. 

Yet there have been genuine advances around more defined customer activities. The FCA itself cites the second payment services directive and related standards designed to open up the payments market, for instance. These were partly a response to strong demand for new, unregulated services that were already providing access to current account data and enabling the remote initiation of bank transfers. Those competing to provide these services were encountering a distinct lack of co-operation from the current account providers (mainly banks). Specific regulation was forthcoming and has duly helped account information and payment initiation services proliferate and scale. But regulation did not itself catalyse either the demand or the services themselves. 

At any rate, it will be interesting to see whether the FCA receives evidence of other existing but nascent 'open finance' type services whose growth is genuinely stymied by issues that can be resolved by regulation. Whether such use-cases are sufficiently distributed across the range of day-to-day activities in which customers are engaged to constitute generally 'open finance' will be interesting to discover but of secondary importance. 

Of course, the elephant in the room is who will have access to all the data and for what purpose. In this respect, it would be particularly interesting to know when the FCA and PRA will begin to actually audit the use of artificial intelligence by financial services providers, rather than merely survey the industry on a self-disclosure basis. If they're true to form, we'll see a few major train wrecks first...

Are You Caught In The Wider Net Of The New Money Laundering Regs?

As a late Christmas present, the UK government issued the long-awaited amendments to the money laundering regulations ("MLRs") that must take effect by 10 January 2020. The changes impose customer due diligence and transaction monitoring obligations on letting agents, art market participants; cryptoasset (e.g. virtual currency) exchange providers and custodian wallet providers. The definition of tax adviser is also extended to those who provide material aid or assistance on tax; and certain limits are lowered for e-money transactions and new restrictions are imposed on acquiring anonymous prepaid card transactions. I've summarised some of the key aspects below, but there is no substitute for getting advice on your specific circumstances. Let me know if you need assistance.

Whether your activities fit the various definitions may not be easy to decipher. Crypto-currency exchange and wallet providers have been in discussion with the authorities for many years, and the impact there is reasonably clear. The definition of "letting agent" and the impact on the property market, however, deserves a blog of its own.  The impact on the art market is also difficult to address...

Art Market Participants

Recent allegations reveal that a complex web of people and international locations are often involved in art fraud. Not only does this type of fraud itself produce dirty money, but high prices, inconsistent record-keeping, subjective valuations, questionable authenticity and anonymity also create a fertile environment for laundering cash generated by other crimes. Digital technology and encrypted communications have made it increasingly hard to detect and prove fraud and money laundering after the fact. Prosecution of art fraud across national borders has been difficult.

Prior to MLD5, "high value dealers" fell within the scope of the AML regime, and these were defined as:

"a firm or sole trader who by way of business trades in goods (including an auctioneer dealing in goods), when the trader makes or receives, in respect of any transaction, a payment or payments in cash of at least 10,000 euros in total, whether the transaction is executed in a single operation or in several operations which appear to be linked."

The MLRs have now been amended to also apply to an “art market participant”, meaning a firm or sole practitioner who either: 

(i) by way of business trades in, or acts as an intermediary in the sale or purchase of, works of art and the value of the transaction, or a series of linked transactions, amounts to 10,000 euros or more; or 

(ii) is the operator of a freeport when it, or any other firm or sole practitioner, by way of business stores works of art in the freeport and the value of the works of art so stored for a person, or a series of linked persons, amounts to 10,000 euros or more;

A “work of art” means anything which in a long list in section 21 of the Value Added Tax Act 1994.

A “freeport” means a warehouse or storage facility within an area designated by theTreasury as a special area for customs purposes pursuant to section 100A(1) of the Customs and Excise Management Act 1979 (designation of free zones).

What Does Compliance Involve?

Those caught by the MLRs must at least apply certain "customer due diligence measures", including verifying the identity of the customer (subject to certain thresholds or triggers) and the ultimate beneficial owners of the money and assets involved:

• before establishing a business relationship; 
• if they suspect money laundering or terrorist financing; 
• if they carry out a funds transfer of more than a 1,000 euros; or
• if they doubt the veracity or adequacy of documents or information previously obtained for the purposes of identification or verification. 

Additional requirements apply in some cases. For instance, art market participants must also apply customer due diligence measures consistent with how that role is defined:

• in relation to any trade in a work of art when the firm or sole practitioner carries out, or acts in respect of, any such transaction, or series of linked transactions, whose value amounts to 10,000 euros or more; 
• in relation to the storage of a work of art when it is the operator of a freeport and the value of the works of art so stored for a person, or series of linked persons, amounts to 10,000 euros or more.

You must also understand the nature of your customer’s business and its ownership and control structure. If you can’t complete that due diligence, or enhanced due diligence where it is appropriate to make further checks, then you must cease dealing with the customer and file a suspicious activity report (SAR) with the National Crime Agency (NCA).

You will also need to monitor transactions with your customers for suspicious activity, which must also be reported to the NCA.

The Proceeds of Crime Act makes all forms of money laundering a criminal offence, and creates other offences such as failing to report a suspicion of money laundering and “tipping off” a suspected money launderer, which applies to staff and your nominated money laundering reporting officer (MLRO).

The Fraud Act 2006 also sets out offences committed by false representation, failing to disclose information and abuse of position.

The Data Protection Act 2018 and the EU General Data Protection Regulation require you to take appropriate security measures against the loss, destruction or damage of personal data. You also remain responsible when you pass data to a third-party for processing or to countries that do not have adequate data protection regimes.

The MLRs require a risk-based approach to compliance. It’s not enough that you comply, because you must be able to demonstrate that you comply, if challenged. That means written policies and procedures; good records of obligations performed, training, compliance monitoring; and taking steps to remedy gaps or failings identified. Your written AML policy should show that you and your staff are aware of the requirements and how you go about meeting them. You should also have a set of detailed, written AML procedures that show exactly how you and your staff will satisfy the commitments in your AML policy.

Again, while I've summarised some of the key aspects of AML compliance here, there is no substitute for getting advice on your specific circumstances. Let me know if you need assistance.

Anonymity In Central Bank Digital Currency Systems

The European Central Bank has been wrestling with the issue of how to allow a certain degree of privacy in electronic payments using digital cash issued by central banks ("central bank digital currency" or "CBDC"), while complying with anti-money laundering and counter-terrorist financing (AML) requirements. 

Eurozone central banks believe they have now established a proof of concept for anonymity in CBDCs based on a simplified payment system using distributed ledger technology (DLT). This proof of concept allows users some degree of privacy for lower-value transactions, while still ensuring that higher-value transactions are subject to mandatory AML checks. Each user's identity and transaction history cannot be seen by the central bank or intermediaries other than that chosen by the user. Automated enforcement of limits trigger additional checks by an AML authority. 

While the ECB believes that the proof of concept will be instrumental in assessing how CBDCs could work in practice, it says the prospect of central bank initiatives should not discourage or crowd out market-led solutions...

Recent Adventures In Artificial Intelligence

My most recent Dublin trip was timed to take in the SCL event on bias in artificial intelligence, the second in a series following the SCL's Overview of AI in September.

This time Dr Suzanne Little of the School of Computing at Dublin City University explained the types of challenges that introduce bias.

Three further events are planned for Dublin in 2020, drilling into how we should assess the performance of AI, whether transparency is possible without explainability and the thorny issues relating to liability when AIs are wrong.

Assessing Performance 

While giving us some insights into bias, Suzanne Little also explained that 'confidence' in AI is quite different to 'accuracy'. The measurement of accuracy/error and confidence intervals is explained here, for example.

Transparency

The UK's Alan Turing Institute and the Information Commissioner are consulting on best practice for how to explain decisions made with AI, with a view to ensuring a legal person remains responsible and accountable for what an AI decides.  This is aimed at senior management, as well as compliance teams.

This issue is particularly important given that we often don't know that we are exposed to decisions made by artificial intelligence.

Liability

How to determine who should be liable when artificial intelligence goes wrong is also the subject of a recent report published by the European Commission.