Almost 20 years ago, I was fortunate enough to chair the FATF (Financial Action Task Force on Money Laundering). It was a hard job, since we were in the middle of the process of blacklisting Non-Cooperative Jurisdictions. But it bore fruit: the combination of peer reviews (the so-called mutual evaluations), the blacklisting process (combined with swift delisting once sufficient progress by dubious jurisdictions had been achieved), and the framework for suspicious transaction reporting (STR) enabled a profound change in the effectiveness of the fight against criminal money stemming from illegal activities.
More than 18 years later, I read the newspapers and wonder what went wrong: it is rare for a day to pass without a new scandal damaging the reputation of a major financial institution. Certainly, issues of banking culture are a crucial and painful part of the failure, as a G30 report reminds us these days. But at the same time, the hefty financial losses banks incur due to sanctions—and the hardest to measure but even more relevant loss of reputation—are far greater than any profits derived from these activities. Banks comply with an expensive compliance system that is ineffective in protecting their reputation. At the same time, anti-money laundering (AML) authorities are overburdened by STRs with little informative content. And, finally, developing countries are witnessing the disappearance of correspondent banking provided by international banks due to the legal AML risks it entails.
So, what can be done to reduce false positives and avoid the massive failures we are witnessing?
First, we need to replace automatic and unilateral AML reporting systems with a richer exchange of relevant information among banks, and between banks and AML authorities. This poses challenges for public authorities: in the event of failure, responsibility will be shared by both banks and authorities. But in return for this responsibility, AML authorities will increase the success rate in preventing these activities. For banks, this may require allocating more skilled resources, but at least a more effective system will protect them more effectively than the current one.
Second, we need to consider the use of ML/AI (machine learning and artificial intelligence) techniques to clear that forest of false positives generated by STRs. Instead of a myriad of reports with very limited informative content, an intelligent STR system using these techniques helps to reduce false positives and target the relevant fraudulent transaction more effectively. Once again, in exchange for investment in these costly systems, AML authorities should be sufficiently confident not to overreact when the intelligent STR system fails to deliver (which will probably happen).
Third, in Europe we should reflect on the shortcomings of our prevention systems. Improving banks’ compliance culture is a given, but let’s face it: we have a single financial market, but a fragmented AML system (multiple member-state AML authorities and no single EU AML body), which is a boon for money launderers. It is obvious why criminals use small jurisdictions with limited resources and international transactions: it is optimal to do so. In other words, if Europe does not respond and build a single AML system for our single market, we will continue with the current situation, with US AML authorities acting as the de facto EU AML authority.
To sum up, serious failures in banking culture are, without doubt, one of the factors behind the failures we are witnessing in the EU. The industry needs to think deeply about how to stop them. But at the same time, we should consider why a system that worked well in the past is no longer delivering results. The ideas above offer some possible ways to break the current impasse. They may be wrong, and other, better proposals may exist. But let’s face it: we need more imagination if we want to remain as effective as we were in the past. Our much-valued AML/KYC system is broken, and we need to fix it.
