Organised Crime vs. Disorganised Compliance

An estimate by the International Monetary Fund places the aggregate size of money laundering in the world at between two and five percent of global GDP. While the illicit nature of money laundering means no precise statistics are available, it is fair to say that bad actors have traditionally had the upper hand. But why is this? In this blog, I’ll explore some of the competing priorities and developments that have caused banks to play catch up, and whether the tide is now turning with the advent of collaboration and technology.

We need banks, but banks also need us, and other banks, to borrow from and equally to lend money to. Banks are consistently looking at new, sometimes innovative, ways of doing more business with their existing customers but also establishing worthwhile relationships with new customers.

This is a core focus for banks, and is a prerequisite for their shareholders, but it can also cause problems. Not opening your doors wide enough won’t let enough new customers in. Conversely, opening your doors too wide can invite legal entities in who need access to the global banking system but their motives are far from legitimate.

No single bank has consistently managed to strike a balance although progress is being made in terms of appropriately managing risk versus reward. Banks apply a risk-based approach to their existing and new clientele and set their risk appetite accordingly. Or is it the other way around? Risk appetite should drive business strategy as much as business strategy drives risk appetite.

The word ‘remediation’ is not new and has regularly been heard and actioned in banking circles almost since know your customer, or KYC, guidelines were implemented almost two decades ago. Banks needed to move with the times. Traditional banks’ rate of growth had outstripped their KYC functions’ capabilities and, quite simply, risk indicators got missed. Prospects, and existing customers, were not being screened to a defendable standard and things needed to change.

Opportunity knocks

Criminals are always looking at ways they can launder their money. An interesting angle that criminals have adopted is the use of money laundering through gaming. No, not gambling, but via online video games! Virtual ‘in game’ assets can have a tangible value in the ‘real world’ and, to some extent, these movable assets have been exploited as methods of transferring illicit money.

Another relatively new entrant into the financial industry is cryptocurrency. When Satoshi Nakamoto (or whoever it really was) came up with the idea of Bitcoin, I’ll wager that their intention was not to provide a new and improved currency that could be used by the criminal underworld to hide their ill-gotten gains.

We should all be familiar with the accepted stages of money laundering i.e. placement, layering and integration although, potentially, a further level exists, that of ‘structuring’, which involves moving money around financial centres whose focus on KYC is not at the level of, say the UK or the US.

Structuring is carried out to further obscure the origin of funds as well as making it appear more legitimate. Structuring makes the money trail harder to follow and we are, generally speaking, dealing with professional facilitators here i.e. legally qualified people who know what they’re doing, working with the intention of making the source of funds appear as opaque as possible.

This is where financial institutions could, and in my opinion should, do more to collaborate and make information about mutual clients available so that patterns can be established to determine if transactions are suspicious. Conversely, criminals have mastered the art of collaboration giving them a further advantage over the banks they aim to exploit.

Fractured functions

Compliance functions can appear disorganised. A silo mentality prevails in some shape or form in most banks and to say that it is often difficult to find the right person to speak with in an organisation would be an understatement. Now just imagine that complexity multiplied tenfold when you start to coordinate your enquiries with one of your peers.

The European Union, in many of their Anti-Money Laundering Directives, call for greater cooperation between member states in their collective efforts to thwart financial crime. However, if they and other competent authorities are setting the ‘tone from the top’, it is perhaps somewhat understandable to see the lack of cooperation that currently exists between most of the bigger banks.

Another factor causing a disconnect for compliance teams is the attitude towards investment in this space given it offers very little by way of immediate and tangible return on investment. It is also noteworthy that many of the KYC, client lifecycle management and remediation teams within large banks are unsustainable in their current formats due to costs, quality and availability of experienced staff.

Narrowing the gap

One of the most spoken about areas that could provide a more level playing field for financial institutions is that of collaboration. Although progress in this area has been a little slow, more initiatives are now taking hold and creating momentum.

Let’s take the example of the Joint Money Laundering Intelligence Taskforce, or JMLIT for short. This was initially a 12-month pilot project developed by the Home Office, National Crime Agency (NCA), City of London Police, the British Bankers’ Association (BBA) and other financial institutions. The plan was to create a ‘hostile environment for criminals’ and in practice this involves many of the major banks being been given a ‘seat at the table’ with the NCA selecting a target. They then request information from all the banks on their target and compile or augment their files to assist with their enquiries.

Another great example of positive collaboration is the FinTech FinCrime Exchange (FFE). This is a platform that was established by FINTRAIL and the Royal United Services Institute (RUSI) to share information on criminal typologies and controls. Their members help to strengthen the sector’s ability to detect and counter the global threat of financial crime. What an excellent initiative.

New technology such as artificial intelligence is also starting to deliver on its promise to revolutionise financial crime prevention. Significant developments have been made in this space and improvements in coverage, accuracy, speed and automation will undoubtedly help reduce some of the limitations and shortcomings identified in this blog.

Download our white paper Organised Crime vs. Disorganised Compliance for more in depth coverage and further examples on the themes identified in this blog.