Experts take on FinCrime
In this blog we talk to Nic Ryder, Professor of Financial Crime at the University of the West of England. With a background in consumer credit law, Nic has spent the last fifteen years researching financial crime. A professor for the last 13 years, he splits his time between the lecture hall, producing research papers and leading training sessions for international organisations including NATO and the UN.
We began by asking Nic to define the concept of a crypto asset, the AML-related challenges crypto assets create, and how things could be improved.
Let’s start with the basics, what is a crypto asset?
Defining a crypto asset
At its most basic level, a crypto asset is e-money. While popularised by the success of bitcoin, the current iteration of crypto assets has a long history, stretching back to older versions like the Linden Dollar. Crypto assets can be used lawfully, but they have accrued a tarnished reputation for anonymously facilitating financial crime, especially due to links with the now infamous Silk Road and Silk Road 2.0 platforms.
Crypto asset or crypto currency?
Crypto assets and crypto currency are interchangeable terms. International stakeholders such as FATF and the UN use the term “crypto currency” while here in the UK, “crypto asset” is the most common term.
In your view, what are the three greatest impacts of crypto assets on financial crime?
Last year, I published a paper revealing a new financial crime typology, which I termed the “social media funding mechanism”. Our research identified several cases in the US where criminals were convicted of terrorism or fraud offences for attempting to send crypto assets to terrorist groups in Asia and North Africa. One example is Zoobia Shahnaz, an American woman convicted in 2018 for attempting to transfer $62,000 of Bitcoin to the terrorist group ISIL. Another is Ali Shukri Amin who, in 2015, was convicted for using Twitter to instruct ISIL on how to mine bitcoin to anonymise the provision of funds to the terrorist group. These two examples are part of a larger trend of exploiting the speed and anonymity of social media and crypto assets to fund terrorist organisations.
The second major impact crypto assets have on financial crime is their use in money laundering. Currently, 2-5% of global GDP is laundered money - crypto assets are a simple yet highly effective way to launder funds.
Crypto asset trading also looks particularly tempting for those wanting to ‘get rich quick,’ promising a quick profit for lucky traders. However, unlike other forms of money, crypto assets are not covered by mechanisms like the UK’s financial services compensation scheme (FSCS). Currently, if your crypto assets are fraudulently stolen, you could lose your life savings. This gap in protection presents a huge threat to unwary investors.
What is it about the current framework for AML that creates challenges for financial institutions tackling crypto asset crime?
The high cost of compliance
The current AML and CTF framework can be arduous for financial institutions to navigate. As compliance costs are astronomical already, adding another layer of crypto regulation will up these even more.
Anonymous transactions are hard to trace
Additionally, the anonymity afforded by crypto assets creates big challenges for financial institutions looking to trace illicit money trails. Both banks and law enforcement agencies lack the time and resources to scrape the dark web for criminal activity.
Miscommunication between governing bodies
The UK has implemented a crypto regulatory regime under the Financial Conduct Authority (FCA) and the National Crime Agency (NCA). However, my research paper revealed worrying discrepancies in the perceived threat level of crypto assets between the two government agencies. The NCA doesn’t regard crypto as a major threat, but the FCA does. These differing opinions suggest the exchange of information between government bodies is currently not fit for purpose, as both should seek to reach a common view.
What can regulated firms do better to address the impact of crypto assets on financial crime?
Be aware of emerging financial crime typologies
It’s imperative that regulated firms keep up to date with recent developments in financial crime typologies. This must also translate into relevant training for staff so they can better understand the methods used by criminals to launder money or commit fraud, which is a crucial part of detecting suspicious transactions. Staff need to know what to look for.
Remain fully compliant with the relevant AML and CTF regimes
Beyond that, it’s really important for firms to ensure they are compliant with customer due diligence regulations. However, this doesn’t mean they should raise an alert for everything that looks remotely suspicious. Regulated firms face harsh penalties for non-compliance, and highly publicised incidences of non-compliance can create an atmosphere of fear among financial institutions, the end result of which is defensive reporting and a mass of false alerts. The UK Financial Intelligence Unit (UKFIU) are inundated with suspicious activity reports, in excess of 550,000 a year. This mass of false alerts is yet another example of why typology training is so crucial.
Technology can help
Technology can help ease many of the problems regulated firms face in detecting suspicious activity. While I don’t believe it will ever suffice on its own, when coupled with human expertise and verification, technology is a very wise investment. One crucial point to note: government funding must support digitalisation in the public sector.
What does the future of AML look like to you?
Governments need to act
I am uncertain if the UK will be seen as the benchmark standard in relation to AML and CTF regulation, As there are aspects of the current regime that desperately need reform. Fraud accounts for 42% of all UK reported crime, and 52% of that is cyber-related. Yet there is no national counter fraud strategy. This is a major oversight that must be addressed in the near future. The disappointing lack of action in tackling financial crime extends to the SARs regime too: the UK Law Commission made nineteen recommendations to fix existing problems, but so far none have been implemented.
Private to public collaboration will increase
The public to private sharing of information is essential to a successful AML regime. While the UK’s Joint Money Laundering Intelligence Taskforce (JMLIT) - where financial institutions and law enforcement agencies voluntarily convene to share information - is a world-leading example of private and public collaboration, crypto providers and social media platforms need to be included.
We may even see more private to private exchanges of information, as per the Dutch system of competitor collaboration. Five major banks in the Netherlands have jointly established Transaction Monitoring Netherlands (TMNL) to facilitate the pooling of encrypted transaction data to help fight financial crime. There are tentative steps towards this in the UK, as set out in the 2017 Criminal Finances Act. While it is currently on a voluntary basis, enforced information sharing on suspicious activity may well be the future of AML.
We clearly have plenty to do. However, while the extent of the reform presents a bleak picture, I am optimistic that the resources are available to make successful AML a reality.