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Why are criminal profit recovery rates so low?

Recently, the poor rate of recovery of the criminal proceeds from the trillions of dollars that are laundered globally each year has been in the headlines once more.

Julian Dixon
May 6, 2021

Recently, the poor rate of recovery of the criminal proceeds from the trillions of dollars that are laundered globally each year has been in the headlines once more.

Highlighted by Sir Rob Wainwright, a former director of EUROPOL, at this year’s International Fraud Prevention Conference, the estimate that only 1% is recovered annually, yet again caused the industry to question what exactly is going so badly wrong in the fight against money laundering.

Although Sir Rob Wainwright said that putting a figure on exactly how much is laundered each year is not so easy, the industry still references a 2009 UNODC report to put a number on the problem. This rather dated report estimates that the total amount of criminal proceeds generated in 2009 may have been approximately $2.1 trillion, or 3.6 per cent of GDP in that year (2.3 to 5.5 per cent).

(Incidentally The Financial Action Task Force (FATF)  maintains that owing to the illegal nature of the money laundering, precise statistics are not available, so it is impossible to produce a definitive estimate of the amount of money that is globally laundered every year, and therefore the FATF does not publish any figures in this regard.)

But over and above the poor criminal profit recovery rate, we should also consider the amount spent on our collective efforts at preventing financial crime.

The most recent and most cited report into that cost is the Lexis Nexis True Cost of Compliance, published in 2020, which estimates that the worldwide annual spend on AML compliance is $180 billion.

Going on the statistics from 2009, if 1% of $2.1trillion equates to $21 billion dollars, then we are spending more than eight times more on compliance than we are recovering. Eleven years later, would it be foolish to guess that this figure is vastly increased?

What exactly is going so badly wrong and how can this rate of recovery be improved?

Sir Rob Wainwright highlighted several issues that contribute to the poor recovery rate, including:

  1. Criminals continue to use tech to form sophisticated collaborations
  2. AML systems are not keeping pace
  3. Too many regard compliance in AML as a box ticking exercise

But I argue that there are more factors to consider. Below are my views on the problem:

1. The importance of customer behaviour has been overlooked.

Money laundering through financial institutions (FIs) and other regulated entities couldn’t take place if criminals weren’t onboarded in the first place. But the reality is, 100% of money launderers are successful at ducking and diving their way through the Know Your Customer (KYC) and onboarding process.

It’s only once they are onboarded that their behaviour and risk profile changes. Crucially, it’s these changes that are subsequently missed.

With financial crime as sophisticated as it is, the practise of simply monitoring transactions isn’t enough. We need to hit the restart button; to supercharge AML programmes with real intelligence and targeted prosecutions.

At Napier, we’ve developed our pioneering Client Activity Review to create the missing link between AML and KYC. Our Client Activity Review enables perpetual KYC by bringing together transaction data and customer profile data from KYC onboarding systems into a single easy-to-use platform to measure risk and detect suspicious financial behaviour.

A holistic view of client activity is so important in AML. You can learn more about this in our eBook.

2. We need more industry collaboration.

Let’s imagine the ideal world where all entities that come under anti-money laundering regulations adopt AML systems that can promptly and effectively detect suspicious activity.

That would be an amazing result, but it does not resolve the enforcement bottleneck problems: suspicious transaction reports (STRS) and policing. The responsibility to recover criminal profits is stacked upon the enforcement agency, which needs to be able to review all the STRs and prosecute accordingly.

A recent article from The Economist highlights the recovery of criminal profits is hampered by the fact that many enforcement agencies lack the funding they need to analyse the millions of STRs that are filed every year.

To assist enforcement agencies, it’s important that regulated entities move away from defensive reporting to submit only high quality STRs.

To fight back stronger, we also need to move away from operational silos to enable better collaboration. The regulator, the enforcement agencies and banks all need to work together to collectively set meaningful goals and targets that will make a real difference to improving profit recovery rates. There should be an overall target between all three.

Saying that - in the UK, much headway has been made to improve the reporting system and to enable engagement between public and private sector. But as promising as this is, money laundering is a global problem. So now the task becomes replicating the start of good things on an international level. And where do we start with that?

The Economist article also calls for governments to work harder together, quoting “Blaming banks for not ‘properly’ implementing [AML] laws is a convenient fiction.” While FIs can facilitate financial crime, so too can non-bank actors.

And while it’s a great step forward that the risks associated with other sectors are reflected in the latest European money laundering regulations, the reality is that that while banks have seen sharp rises in fines for poor AML controls, obligated entities in other sectors are getting away with “slaps on the wrist”. For example, in the UK, HMRC, which supervises more than 30,000 businesses, issued just 31 fines in the 2019-20 financial year, averaging £290,000.

My list of reasons for why we need more industry collaboration could go on, but here’s one final reason: to be effective in driving up the profit recovery rate, the policies, and procedures of FIs and other regulated entities must align with both what the regulator expects and what the prosecutor needs. This simple change has the power to make a big difference.

In summary…

We all know there is no simple fix to solving financial crime.

Every person, in every organisation, in every country, needs to play their part. But what we can do is take small steps.

At Napier, we’ve made it our responsibility to make the latest advances in artificial intelligence and machine learning accessible and relevant to the fight against money laundering and terrorist financing.

Guided by their regulator, obligated entities need to implement sound policies and procedures that use the very best AML technology available. Doing so will not only assist enforcement agencies by greatly improving intelligence; it will also improve system performance to reduce the burden of compliance (specifically false positives) on all those bearing the responsibility for detecting suspicious activity.

Looking to improve your compliance processes with a trusted solution?

Contact one of our experts to find out how we can help or book a demo to see our Intelligent Compliance solution in action.

Julian has more than 20 years of financial services experience gained at major investment banks including Deutsche Bank, JP Morgan and Commerzbank. His roles have ranged from front-office sales leadership to private equity. Julian has extensive knowledge of financial services processes and technology.
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