In the EU, banks are spending $20 billion on compliance per year. Unfortunately, for all that money and all the regulations around Anti-Money Laundering (AML), the ability to prevent money laundering has been negligible. Rob Wainwright, former director of Europol, stated that “professional money launderers are running billions of illegal drug and other criminal profits through the banking system with a 99 percent success rate.”
The multi-headed AML hydra
One of the issues is that each member state has its own regulations and regulatory body. While there are EU-wide directives, these directives need to be transposed into law by the national governments, and enforced by the national regulators.
Consider 4AMLD, the 4th Anti-Money Laundering Directive. The EU had set a deadline of June 26, 2017 but 17 countries missed the deadline. Missing directive deadlines is not unusual, as the vagaries of passing legislation mean many obstacles along the way, but it does point out the issue of multiple governments trying to deliver on a coordinated approach to AML. The best intentions fall prey to government divisions, political agendas and legal quagmires until EU leadership embarrasses or sanctions member states to conform.
Communication and coordination among the different regulators and enforcement agencies also causes fundamental problems. While the money launderers are able to move their funds fairly easily across EU borders, the information and investigative insight needed to slow down illegal flows doesn’t travel as easily. With so many competing interests, it’s difficult to attain consensus across numerous countries, agencies and divisions.
Another factor is the vast amount of money flows and associated information that occurs on a daily basis. Consider all the accounts and payments, transfers, trades and other financial transactions that an obliged entity needs to track. Since failing to report suspicious activities is a compliance failure, the tendency is to report anything that has a hint of trouble, making for a flood of false positives to further complicate analysis.
While the scope of the problem is immense, the will to fight the scourge of money laundering is strong. After all, it’s estimated that $800 billion to $2 trillion is laundered each year; those illicit funds encourage and promote illegal activities as well as divert funds from legitimate purposes and tax coffers. There are numerous initiatives to strengthen AML rules and procedures being considered or in process.
Cooperation among banks
After the uncovering of the Troika Laundromat exposed issues with several Nordic banks, six major banks in the region announced the formation of a KYC utility. Danske Bank, Swedbank, Handelsbanken, Nordea, SEB and DNB will pool KYC checks, starting with large and medium-sized Nordic-based companies next year.
KYC utilities — central repositories that store KYC data and documents — would seem to offer advantages in terms of better coverage, data consistency and dissipated costs. However, careful consideration on issues of sharing personal identifiable information (PII) and competitive information is necessary.
Also, each institution has different compliance procedures and appetite for risk, thus requiring a level of trust that all members of the utility are performing proper due diligence. In the end, compliance is the responsibility of the institution, and that is nontransferable.
There are other forms of AML information sharing that can provide benefits without going the KYC utility route. For example, training programs, sharing of best practices and joint-review programs are simpler to enable, as client information and due diligence is not shared.
Building a better public framework
Beyond financial institutions working better together, public institutions can also improve communication and coordination. Governments, regulators and enforcement agencies can better synchronize policies and procedures to advance the common cause of better AML.
The proposal of one financial watchdog for the EU, if it comes to fruition, would be one step. Any time there are multiple agencies involved, there are bound to be interagency squabbles. If one agency can get all member states to cooperate, the ability to investigate and prosecute cross-border money launderers should improve.
The introduction of the EU’s next generation of AML requirements 5AMLD will help close loopholes, consider new technologies and improve transparency.
The goals of 5AMLD are as follows:
- Enhance the power of EU financial intelligence units and facilitate increasing transparency on who really owns companies and trusts by establishing beneficial ownership registers
- Prevent risk associated with the use of virtual currencies for terrorist financing and limit the use of prepaid cards
- Improve the safeguards for financial transactions to and from high-risk third countries
- Enhance the access of financial intelligence units to information, including centralized bank account registers
- Ensure centralized national bank and payment account registers or central data retrieval systems in all member states
Of course, money laundering is not limited to the EU. It’s an international problem, and separate, siloed solutions can only go so far. Money launderers are sophisticated criminals and operate on a global scale; it will take global solutions to help solve the issue. Extending the public institutional cooperation beyond the EU is another critical element to battle the scourge of money laundering.
Ultimately, relying on laws, regulations and enforcement to prevent money laundering can only go so far; an effective compliance program has a strong ethical foundation that goes beyond simply following the minimum requirements. Effective compliance has buy-in from the entire organization, from the board through to the entire staff. Due diligence is performed not from necessity, but from a desire to protect the organization and thwart criminal activity. Technology is integrated into processes to be scalable and adaptable, to serve best practices now and into the future.
If we are to successfully battle the corrosive effects of money laundering, it’ll come down to personal choice; will we look the other way for the sake of easy money, or will we fight the good fight and help ensure that corruption becomes something for the history books?
Anti-Money Laundering programs that only capture one percent of all the tainted money are nowhere close to being acceptable. The criminals are getting richer, good citizens are bearing an unfair tax burden and economic and politics are being distorted by corruption. We can, and need to, do better.
“The only thing necessary for the triumph of evil is for good men to do nothing.” ― Edmund Burke