Acknowledging the problems within current AML practice
It is disingenuous to introduce holistic AML as a new concept. However, prevalent AML compliance systems often impede progress towards integrated, practical solutions. Presently, most AML systems cleave to traditional know your customer (KYC) and transaction monitoring.
Meanwhile, financial criminals display seemingly limitless ingenuity as they exploit the ongoing technological revolution of this century. The uptake of innovative know-how by legal and financial entities charged with preventing or catching and punishing these criminals is not keeping pace.
Responding to the problem with current AML practice
The current tendency within financial entities is for AML teams to stratify into specialized units which attend to different requirements of and by their organisations.
An unintended consequence is that client information databases become restricted to silos within a fragmented AML team. What is required is a customer centric approach to AML that brings together all the datapoints on a customer. This dynamic, transversal approach incorporates customer behaviour into its KYC and AML processes.
The United States Treasury recognised the problem in its strategy document for 2020. The document identifies the threats and vulnerabilities the country faces, sets out priorities and notes action to be taken: “The U.S. government must holistically approach strengthening the U.S. AML/CFT regime to make it more effective, efficient, and responsive to an evolving threat environment.”
What is holistic AML?
The three tiers of holistic AML:
- Holistic AML at the global level is the international co-operation between law enforcement, policymakers and supervisors, which enables the sharing of intelligence to investigate and catch criminals who are unconstrained by national borders.
- Holistic AML at the industry level is the cooperation among financial firms on the sharing of data about bad actors and suspicious activities, which could possibly include (non-private) data for the purposes of KYC compliance.
- Holistic AML at the individual firm level is the implementation of holistic approaches to AML which will overcome operational, business, system and data silos, allowing a co-ordinated view of customers and their activities.
The urgent need for holistic AML now
The implementation of holistic AML is critical because of the nature of the modern criminal economy, which adapts to shifts in the finance environment with alarming agility. This illicit ecosystem can write, re-write or throw out its own rule book as opportunities appear, rather than read from the staider version availed upon by the world’s policy makers, law enforcement bodies and supervisory frameworks.
The old and new of financial crime
Increased globalisation, massive shifts to digital channels for banking and gambling, the emergence and rapid growth of cryptocurrency trading and increasingly sophisticated peer-to-peer platforms are arranged into a smorgasbord of opportunities for criminals to pick from. The traditional money-laundering techniques- such as cash smuggling and trade-based illicit activity- also continue, with some tech-savvy criminals exploiting new technology to hone old skills.
The money laundering problem in numbers
The scale of the money laundering is staggering. A 2009 United Nations Office on Drugs and Crime (UNODC) study estimated that criminal proceeds amounted to 3.6% of global GDP, 2.7% (or $1.6 trillion) of which was laundered.
Based on 2019 global output figures, that indicates somewhere between $1.7 and $4.3 trillion is illicitly obtained in any given year.
To illustrate the enormity of the problem, by contrast,only the US, China, Japan and Germany produce economic output greater than or competitive with the annual nominal GDP of the global criminal economy.
Huge amounts of money are being laundered each year by technologically adept criminals. They use increasingly sophisticated and complex methods which capitalize on new and innovative technologies with ruthless efficiency. Meanwhile, AML practice is failing to keep up.
Current AML practice - malaise or muddle?
A ground-breaking 2016 report by Europol estimated that the first four years of the decade saw just 2.2% of illicit funds seized, only 1.1% of which was eventually confiscated. Whilst it is tempting to blame complex and ever-changing regulation for some of these difficulties, many of the barriers to achieving holistic AML are those internal to financial institutions.
Financial institution tunnel vision versus criminal visionaries
Matthew Redhead, associate Fellow at Royal United Services Institute (RUSI), attributes this diminishing effectiveness to both a developmental stasis within AML frameworks over several decades while the evolution of financial criminality has been fluid and pragmatic, and increased specialization of AML departments within financial institutions.
The latter, he believes, has resulted in blinkering among different components of AML teams. He explains that “they exist in their own stovepipes, not in the complex web of interaction that we see in the criminal world.”
Christopher Woolard, former Executive Director of Strategy and Competition at the Financial Conduct Authority, (FCA), concurred with Mr Redhead’s analysis, saying “in the fight against financial crime, fragmentation is our greatest enemy”.
Financial firms can counter this fragmentation by incorporating cutting edge technology into an integrated, comprehensive response to financial crime risks. This will facilitate closing the gaps in current AML practice which financial criminals are currently finding and exploiting.
Holistic AML and the way forward
The holistic AML approach represents the future of both fighting money laundering and the countering of financing of terrorism (CFT). Over the next few weeks, Napier will identify the obstacles which holistic AML must confront and discuss the solutions which need to be implemented, with a focus how the process can be concluded efficiently, effectively and with the least disruption to the current systems utilized by our clients.
This article is based on our larger paper on the importance of a holistic approach to AML.
If you would like to read more about the benefits of a holistic approach to AML, download Understand your customer: the importance of a holistic view of client activity in AML.