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Shining a light upon our AML failings

Written by Martin Woods, Compliance Week on Tuesday June 23, 2020

The answer to being more effective at stopping money launderers is to challenge the value of processes that are clearly failing. Financial crime expert Martin Woods explains.

Earlier this year, David Lewis, the Executive Secretary of the Financial Action Task Force (FATF), was asked to provide his opinion on how effective the global anti-money laundering (AML) community is performing. His answer was profound and honest: “Everyone is doing badly, but some are doing worse than others.” Credit to him, as he included himself and the FATF in the answer, but it is a damning indictment of our collective AML efforts.

As the Executive Secretary of the FATF, Lewis has all the necessary data to enable him to see this bleak picture. It has been estimated only 1 percent of laundered funds are seized globally. Seen another way, this is a 99 percent failure rate and should no longer be tolerated. Thus, the biggest threat in the fight against money laundering and the harm caused by money laundering is to tolerate the failing status quo of our AML policies, procedures, and practices.

I posit that we fail because we lack focus, leadership, training, and the courage to admit to our failings. All of this is predicated upon a blunt approach, which all too often sees firms seeking to be all things AML, to all customers and all transactions, at all times. All over the world, AML professionals, including regulators, apply a risk-based approach, but do not tolerate failure and therefore do not understand how a risk-based approach works.

As we return to the workplace after lockdown, we will be presented with changes as well as the opportunity to implement AML changes. In addition, we will face less: less space, less funding, fewer customers, fewer resources, and fewer face-to-face meetings with colleagues as well as customers. Nonetheless, we have learned to work remotely, thus establishing non-face-to-face business as a 21st century norm and that the notion that this presents a higher risk for money laundering is outdated.

As our own businesses shrink, we will be asked to do more with less, but I propose we also need to do less with more. It is likely some of our colleagues will lose their jobs, because there will not be the same number of customers, transactions and, as a consequence, funds to pay salaries. Therefore, we will need to take on extra work, but how can we do this when we already work at capacity?

The answer to all the above is to identify what we can do less of and to challenge the value of processes that are clearly failing. We need to ask ourselves: Is it really our job to establish who owns the offshore company seeking to open a relationship with our firm? Or is it the responsibility of those who own and control said offshore entity? In the event they are not able to meet our requirements, we should reject the business.

As to individuals, most of us work for a living and are not money launderers. Our employers pay our salaries and we pay our bills. Our account activity is benign: There is nothing unusual or suspicious about paying your gas bill, your rent, or your children’s pocket money. So why do we monitor these transactions? Why do we monitor all transactions? As to the identity of an individual, does the certification of a copy of an official identity document add real value?

Law enforcement officials cannot stop every burglary by posting an officer adjacent to the premises, nor do they issue parking tickets for every transgression. If they did so, more people would get away with murder, literally, because of the misalignment of finite resources. Risk-based means identifying and then focusing on higher risks. All the time, effort, and resources focused upon low risks is time, effort, and resources not applied to those higher risks.

As a result of pursuing policies, procedures, and practices that apply significant resources to lower money-laundering risks, we are failing, and we will continue to do so until we change. Now is the time for that change; now is the time to do less in order to be more effective. If we don’t change, the rating from David Lewis won’t change, and the launderers will be the winners.

This change can only be achieved when regulators and auditors start to focus on what the AML professionals do, rather than what we don’t do. It is about outcomes, effectiveness, risk management, and the appropriate allocation of resources to ensure we are frustrating the money launderers, not the ordinary working men and women trying to pay their bills.

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