Almost 20 years ago, I had the good fortune to chair the FATF (Financial Action Task Force on Money Laundering). It was a difficult job, as we were in the middle of the process of blacklisting non-cooperative jurisdictions. But that effort bore fruit: the combination of peer reviews (peer reviews, the so-called mutual evaluations), the blacklisting process (coupled with a rapid removal from the list when sufficient progress was made by doubtful jurisdictions), and the establishment of a framework for channeling suspicious transaction reports (STR) allowed for a profound improvement in the fight against criminal money from illegal activities.
More than 18 years after all that, I read the newspapers and wonder what went wrong: it is a rare day when we do not see a new scandal affecting the reputation of a major financial institution. Of course, banking culture issues are a crucial and painful part of this distressing situation, as a G30 report published recently reminds us. But, at the same time, the heavy financial losses suffered by some banks that have been punished with severe sanctions and the loss of reputation they have suffered, which is harder to measure but also much more relevant, are far greater than any gain that could come from those activities. Banks are subject to a costly compliance system that, however, is not effective in protecting their reputation. At the same time, anti-money laundering (AML) authorities are overburdened with STRs of little informative content. And developing countries are seeing international banks withdraw correspondent banking services to avoid the legal and reputational risks of failures in money laundering prevention.
What can be done, then, to eliminate the “false positives” in STRs, which block the investigations of the authorities, and to avoid the massive failures we are witnessing?
Firstly, we must change the automatic and unilateral systems for reporting suspicious money laundering transactions for a richer exchange of relevant information between the banks themselves and between them and the AML authorities. This poses challenges for public authorities, since in the event of failure the blame will be shared by both the banks and the authorities. But, in exchange for this shared responsibility, anti-money laundering authorities will increase their success rate in preventing these activities. Banks, for their part, will have to invest more resources in this field, but at least they will be protected more effectively than they are now.
Secondly, we should consider the possibility of using ML/AI (Machine Learning/Artificial Intelligence) techniques to clear that forest of false positives derived from information on suspicious operations that are recorded every day. Instead of the large number of reports with very limited informative content currently produced, an intelligent STR system using these techniques would help clear the multitude of false positives and could target truly relevant and fraudulent transactions more effectively and directly. In exchange for the investment in these costly systems that entities would have to make, AML authorities should feel comfortable enough not to overreact when the intelligent STR system fails (which, inevitably, will happen occasionally).
Thirdly, in Europe we should reflect on the failures of our anti-money laundering systems. There is no doubt that we must improve the compliance culture of our banks, but let’s be realistic: we have a single financial market, but our AML prevention system is highly fragmented which, without a doubt, is an incentive for money launderers. This explains why criminals channel their international transactions using small jurisdictions, which consequently have scarce resources. Without a doubt, it is a perfect move! In short, if Europe does not react and build a single AML system for a market that already is one, we will continue with the current situation and the US AML authorities will become the de facto AML authority of the EU. Something we must not allow to happen.
In short, an inadequate banking culture is one of the explanatory elements for the failures in the fight against money laundering that we observe in the European Union, and the banking industry must reflect deeply on the causes of this failure. But, at the same time, we must not give up reflecting on the additional causes that explain why a money laundering prevention system that worked well for decades is failing now. The ideas expressed here offer some ways to improve the situation. Perhaps they are not the right ones, and there are other superior routes for improvement. But let’s face reality: if we want to maintain the effectiveness of our money laundering prevention systems, we must think of imaginative reform solutions. The current system, which has worked so well in the past, is broken, and it must be fixed.
José María Roldán, Chairman of the Spanish Banking Association
