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Central bank digital currencies: the solution to money laundering?

Napier
November 3, 2021

In this new series of blogs, we talk to experts working in combatting financial crime to better understand the impact money laundering has on society, and the challenges and complexities in tackling it.

In this blog we talk to Mark Nuttall, an AML, geopolitics, and counter-crime specialist based in Singapore. Mark has spent much of his career in law enforcement, working to combat traditional organised crime. As a detective at New Scotland Yard, he specialised in investigating money laundering, drugs importation, and serious and organised criminality. Alongside working as a consultant for financial institutions and foreign governments, he held an executive position in INTERPOL, leading projects focusing on international liaison, cooperation, cross-border operational support and advisory duties, specifically within the ASEAN/APAC MENA region.  He also held an executive position in INTERPOL, leading projects focusing on international liaison, cooperation, cross-border operational support and advisory duties, specifically within the ASEAN/APAC MENA region.  

We asked Mark for his views about the current legislative and enforcement structures for fighting financial crime to understand how banks and enforcement can come together to more effectively fight financial crime.

What is it about the current framework for AML and financial crime that creates challenges for law enforcement and financial institutions?  

The challenges to cross-border collaboration in combatting financial crime

National AML frameworks often make collaboration between financial institutions and law enforcement really complex, and international liaison even more so. Money laundering is a global problem, and criminals shift large amounts of money across borders every day.  Enforcement is the responsibility of the national authorities within the jurisdictions where the criminality has taken place, leaving both law enforcement and financial institutions constrained by disparate legislative frameworks.  

Varying interpretations of legislative recommendations for anti-money laundering

Standards are only recommended at a generic level by the Financial Action Taskforce (FATF), and it is up to each jurisdiction to interpret and implement them into national legislation; if they so wish, and at their own discretion. INTERPOL exposed me to the vastly differing challenges, legislative frameworks, and administration, which the law enforcement entities from a range of the 194 member states have to practically deal with: each state has its own set of legislation, its own criminal justice system, civil procedures, and its own financial regulators. and it is up to each jurisdiction to interpret and implement them into national legislation; if they so wish, and at their own discretion.

Neighbour states can have ‘chalk and cheese’ systems - what is punishable by a ten-year sentence in one country may not even be illegal in another. AML in a global context is difficult to implement because it actually requires an understanding of each country's criminal and civil legislation. This is the context within which law enforcement and financial institutions must proactively work in each nation, with lawful liaison to other jurisdictions. As a result, understanding a country’s specific legislatory framework is crucial for tackling financial crime.

Misunderstanding of resources available to combat financial crime

There is a fundamental misunderstanding around what both sets of actors think they can do compared to their actual capabilities. Financial institutions tend to think that law enforcement organisations have an unlimited ability to sort through and prosecute suspicious activity once reported. Likewise, law enforcement often underestimates how difficult it is for banks to stay on top of suspicious transactions and report them in a timely and coherent manner. In fact, the reality is that there is a shortage of resources and inefficient legacy technology on both sides, twinned with a misunderstanding of what is and isn’t legislatively possible.  

Are there any good examples of public and private sector collaboration on tackling AML?  

Joint Money Laundering International Taskforce (JMLIT)  

The UK’s Joint Money Laundering International Taskforce (JMLIT) is a good example of high-level collaboration between law enforcement and financial institutions on a national scale. Both parties come together to share lawfully relevant information, alongside intelligence about financial crime typologies, establishing a direct channel of dialogue between the two parties.  

Problems arise when attempting this type of collaboration between countries though, as obstacles such as rules governing data sharing across borders, inconsistent approaches to policing and legislation, as well as cultural differences, can all get in the way. INTERPOL can facilitate certain sharing of information, however that is on a ‘national authority to national authority’ basis.  

In your view, what are the biggest challenges getting in the way of successful AML?

Varying international legislation  

Approaches to combatting financial crime vary from country to country, which is in complete opposition to the nature of money laundering as a cross-borders crime. As I’ve already said, something that gets you jail time in one country might not even be considered an offence in another, so law enforcement and financial institutions must maintain a good understanding of a country’s legislations in order to work internationally to combat financial crime and money laundering.

Organisational culture

The tone at the top of a private organisation can also be a key barrier to effectively fighting financial crime. Compliance, AML and counter-fraud do not contribute to the bottom line because measures to combat financial crime are expensive to implement and operate. Accordingly, AML can be slimly funded, run on the minimum number of resources, and ultimately reduced to a tick box exercise. These issues become even more acute if the tone at the top is profit driven. To keep profit margins high, costly compliance measures tend to be sacrificed.

Grand corruption

Finally, we need to consider corruption. I don’t mean small bribes and other minor misdemeanours, I mean grand corruption at the level of politicians, financial, and commercial enablers, and other officials holding significant amounts of power. These people are well placed to influence the legislative systems and frameworks that are put in place to combat AML, and also have the resources to evade these controls. Corruption at this scale is a very complex issue - you only have to look at scandals such as 1MDB to understand just how complex it is from a geopolitical and economic standpoint. It affects everyone from the AML teams in financial institutions to those in law enforcement, politics, judiciary, and even a population, on a national, regional, and global basis.  

What can financial institutions do better to help law enforcement to be more effective and vice versa?  

Adopt technological innovations

Financial institutions need to embrace technological innovations such as analytical reporting systems with a backbone of machine learning, with a view to technological advancement of payments on the blockchain in due course. If banks, for example, moved to a holistic system which includes data analytics and transaction monitoring powered by machine learning, they would be much more effective at detecting suspicious activity, and reducing false positives. These systems already exist and need to be adopted to bolster the position of financial institutions, as a critical line of defence against money laundering (within the respective legislative boundaries of the country where they are hosted).

Streamline collaboration and working towards holistic AML

Streamlining the process of collaboration internally within financial institutions would also help. Currently, within financial institutions, different departments deal with fraud, Know Your Customer checks, trades desk (and surveillance), and transaction monitoring and investigations - it's completely fragmented. This can lead to an ill-informed organisation, which doesn’t understand it’s holistic exposure. Harmonising communication between internal security departments will be crucial to closing the gap inside an organisation, so that it can better deal with AML, regulatory requirements, and dealing with law enforcement entities. This can lead to an ill-informed organisation, which doesn’t understand it’s holistic exposure. Harmonising communication between internal security departments will be crucial to closing the gap inside an organisation, so that it can better deal with AML, regulatory requirements, and dealing with law enforcement entities.

What does the future of AML look like to you?  

Blockchain and digital currencies for Central Bank

In my opinion, we need more futurism. Blockchain and the adoption of Central Bank Digital Currencies is likely to transform transaction monitoring (and general lifestyle purchases / transactions) for the better by ensuring a more comprehensive audit trail.

Right now, blockchain is being treated with kid-gloves, and at a distance by the majority of financial institutions, governments and central banks. Given the geopolitical climate, and the countries who are embracing the technology, it would be wise to revisit these policies, and embrace the future.  

There is an understandable reluctance, given the type of media coverage that blockchain (more in relation to cryptocurrency, and the ‘deep/dark web’) receives, but we need to look ahead, and start discussing how it can be advantageous to governance, geopolitics, a more coherent AML vision, and importantly, financial institutions, insurers, and the general public.  

If AML is dealt with in the traditional way, we will all keep seeing the same unsatisfactory results. As Narcotics Anonymous (not Einstein) once proffered in 1981, ‘insanity is repeating the same mistakes and expecting different results.’ From a compliance and risk perspective, blockchain is here, available, and I would like to see it as the future of better AML.

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