Stick, twist or fold? How best to manage emerging trends and best practice in money laundering and terrorist financing

Written by Lee Byrne on Tuesday October 22, 2013

I was delighted to represent the International Compliance Association at the Compliance Officer conference in Warsaw recently which focussed on the subject of new payment technologies and emerging money laundering and terrorist financing risk management.

Day one covered new technologies and began with a presentation from the founder of a new Bitcoin enterprise which was followed by an animated and enthusiastic follow-up presentation from a representative of a regulatory department of the Polish authorities.

There was an obvious concern and very real fear amongst the conference delegates concerning Bitcoin technology and other new payment developments. It was clear that despite the seemingly intelligent and well considered compliance awareness that was demonstrated by the Bitcoin panel, compliance officers were genuinely concerned about the prospect of allowing Bitcoin operators to enter the market and how this would open up the jurisdiction to criminal enterprise.

These concerns and reservations are well founded and on day two I was offered the opportunity to reflect upon these exchanges and to provide an international update on new payment technology, including mobile financial services, stored value cards, virtual currency including Facebook and Bitcoin, and the associated risks, including Liberty Reserve and Silk Road.

My view, I hope, provided a more balanced argument that is supportive of the continued growth of new payment technologies in markets where there is no electricity or access to laptops, much less a branch banking network. But that also ensures regulation of the ‘unbanked’ so that we may offer an alternative to black market money exchanges and the alternative remitters such as Hawala and Hundi.

The risk of handling the proceeds of crime or of financing terrorism are very real and the recent terrorist atrocities in Kenya, Nigeria and Pakistan prove very starkly that when we fail to deter, detect and disrupt such activities, the consequences can be very dire indeed.

It is clear to me that banks are no longer in control of financial service development. Historically they exclusively provided money value services, coinage and, more recently, on-line banking services. However, new players have entered the market in a very well organised manner and have seized upon the opportunities that traditional banks have been slow to recognise or to accept.

Mobile technology providers such as M-Pesa in Kenya have demonstrated how they can extend financial services to the ‘unbanked’ whilst adopting a risk based approach to systems, controls and training that mitigates most (but not all) risks. M-pesa is not the only success story, but does provide a healthy example of how new technology providers can be trusted to provide services which are supported by appropriate systems and controls.

I do however understand the reservations of many compliance professionals when you contrast this success and positive development with the gross failings and abuse that has been attributed to Liberty Reserve in the US and the exchange Silk Road.

Bitcoin development has been an international success and is now used to support real estate purchases in some jurisdictions, as well as pizza in others. Indeed, details of Bitcoin were published in a journal that was presented to the leaders of the G8 at their meeting in the UK. It appears to me that this transparency and willingness to be examined does not support a view that Bitcoin has been designed by criminals for criminals.

Undoubtedly the allegations made against the founders of Liberty Reserve are concerning and damaging to the perceptions of new payment technology and in particular virtual currencies. However my view remains that good old fashioned due diligence could and should have exposed Liberty Reserve as having no sensible commercial rationale from the outset.

My closing view in Warsaw was simply that change has happened and will continue to accelerate in both form and international reach. Compliance practitioners cannot simply therefore ignore these changes, but must instead engage with the technology providers and those respondents who are providing downstream products and services so that they fully understand the risks that they must manage.

Since man first developed coins and paper as a means of extending the previous methods of bartering of animals and stock, through to recent development of virtual currency, there has been and always will be change.

It is a testament to the ingenuity of mankind that we are constantly driving change and innovation and it is not going to stop now. Regrettably, this progress has been persistently hijacked by those with criminal intentions and so the fight between poacher and game keepers will continue unabated. It is a fight we cannot afford to lose!

The ICA Specialist Certificate in Money Laundering Risk in New Payment Products and Services (NPPS) will be available in November 2013. View more information here