The statistics are awful: less than 1 percent of criminal proceeds from financial crimes are seized or frozen.
That, despite the finance industry in North America and Europe spending $214 billion in 2021 on compliance controls, including anti-money laundering (AML) and know-your-customer (KYC) measures, according to LexisNexus Risk Solutions.
The figure is as staggering as the inability of banks to blunt financial crimes.
Although some of these misdeeds seem mild, like tax evasion, they also include money laundering for human trafficking and the sexual exploitation of children. There are more than 25 million people in slavery, whose exploiters use the banking system to move money. Crimes also include scams that defraud people of their savings, and hiding drug money and other money gained through violent means.
And as the Pandora Papers showcase, even tax evasion is a gigantic criminal enterprise. The recent leak of data documents at least $600 billion of assets owned by politicians and well-connected companies that should be going to paying for education, healthcare, pensions, and other government services – but are instead lining the pockets of rich people.
Banks can’t stop crime, but they can stop money from being drained from people’s accounts. They can deny banking services to organized crime. They can help law enforcement bust evildoers.
And they try, as their compliance spend attests. Why is it failing so badly, and can it be improved?
Some good news
A discussion of this topic at the annual Sibos event organized by SWIFT shows there is good news, believe it or not.
First, law enforcement and regulators, especially in the U.S., have dealt massive, multi-billion dollar fines for bank fails. The message has sunk in. Banks understand they need to prove where funds originate from, and the importance of beneficial ownership (that is, identifying the people who really benefit from an asset, which may not be the same as the name on a title to property).
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“The industry is learning to exchange information and improve our understanding of risk,” said Carolina Garces-Monterrubio, global head of financial crime compliance at Banco Santander, in London.
C-suites pay more attention now to FCC (financial compliance control), and are eager to work with fintechs to experiment with technology solutions. And banks are partnering with the public sector – regulators and law enforcement – to disrupt crimes, usually be leverage data-driven solutions.
“This has led to real arrests, prosecutions, and confiscations of criminal proceeds,” said Milan Gigovic, head of financial-crime threat management at ANZ, in Melbourne. This is often down to financial institutions combining data sets to find patterns of criminal behavior.
This sort of thing is occasionally possible domestically in markets where legislation allows.
It doesn’t happen cross-border, or even domestically in most places. But most financial crime is international, so banks need to find ways to get a holistic view of payments and ownership of assets.
This is difficult for several reasons.
The biggest barrier, bank executives say, is that law and regulation for AML has been designed to be rules-based prescriptions, which tends to devolve into a box-ticking exercise to please authorities, rather than actually root out crime.
“The traffic-cop approach to supervision [has banks] looking for technicalities,” said Daniel Tannebaum, New York-based partner at consultancy Oliver Wyman. “They’re not truly focused on looking for risk.”
Another problem is the soaring cost of compliance – which is not just a complaint of the banks, but of regulators, which are overwhelmed by the paperwork requirements they have unleashed.
This explains why some regulators, such as the Hong Kong Monetary Authority, are so keen to get banks to adopt regtech solutions.
But it’s not just a tech or data issue. “We still operate under outdated, conservative thinking about law and regulation, which is lagging technological advancements,” said Paul Jevtovic, head of FCC at National Australia Bank in Sydney.
He notes the industry could benefit if regulators extended fintech sandboxes to AML. “The inability for banks to dare to challenge the traditional approaches in a safe environment, in collaboration with regulators, has stopped progress,” he said.
On the contrary, financial innovation and fintech may be making the situation worse.
“The industry has been slow to understand the role that different non-banking financial institutions play, in what should be a fully regulated activity,” such as payments, said Garces-Monterrubio. “We risk undoing the gains of the past 20 years in terms of transparency.”
(She didn’t mention crypto, but it is an obvious problem in this context.)
So how do we get out of this mess? Do we turn those billions on compliance spend into effective safeguards?
Paths to success
Data sharing is the most important element. Banks already have the data, but in isolation it can’t detect criminal patterns. Shared and accessible, it can. This will require a big investment in digital identity infrastructure for the sharing of data, either among banks, or with regulators.
It will also require a rewiring of regulation and legislation. In Asia, it means a rethink of data sovereignty laws, to enable a holistic look at money flows. Criminals know how to game systems to hide the true source of money, because data queries tend to be purely national.
“Break all the barriers down,” Garces-Monterrubio said.
Privacy needs to be renegotiated, says Jevtovic. “For many jurisdictions, privacy law is decades old. But people now give away more personal information on their mobile than they’d ever give to a bank.”
Artificial intelligence and big data can shift banks from legacy processes to pattern recognition, but it comes at a cost, so banks need the comfort or regulatory approval to make the transition.
Banks and regulators therefore need to improve their relationships, which too often are toxic. Regulators are playing “Gotcha!” while banks often just go through the motions of AML checks. Both would benefit from a more collaborative approach.
Finally, it’s important to recognize both the success stories – they do happen – and to acknowledge what’s at stake. Financial crimes lead from the exploitation and the suffering of millions of people. Fighting money laundering is not just a nice-to-have, but a moral necessity.