The Case for Anti-Money Laundering Cooperation

Source: Harold Cunningham/Getty Images

In a February Bloomberg Business article, Charles Kenny proposed the creation of a new order of “global cooperation to track illicit financial flows and catch tax cheats” as an alternative to the dysfunctional Financial Action Task Force, an international policy-making body seeking to prevent money laundering and terror financing (ML/TF). Kenny drills down into the economic cost associated with the current system, which discourages financial institutions from doing business in developing countries that could certainly benefit from improved economic activity, yet are made unattractive by their high risk of money laundering.

Despite his keen diagnosis, Kenny doesn’t offer more than a call for reform by the world’s institutions. I agree with Kenny that, if developing economies are to grow in spite of the ML/TF risk they present, a more robust Anti-Money Laundering (AML) framework is required, and I believe that a collaborative solution by the part of financial institutions represents the best chance of closing this divide.

Money launderers thrive in secrecy and obfuscation. After placing their funds in financial institutions, they are able to disguise their ill-gotten gains in a process known as layering, where clean and dirty money is mixed and the source of the illegal funds can be hard to trace. Funds are then integrated into the legitimate financial system and later withdrawn. Money laundering has occurred. This type of activity represents great reputational and regulatory costs, the JPMorgan-Bernie Madoff scandal and the HSBC probe by Swiss prosecutors being recent examples.

Anti-Money Laundering operations involve the identification of sources and uses of funds, and the detection of irregular or suspicious transaction patterns. Whether counterparties to a transaction present negative information, if clients are seen to be moving money so as to avoid reporting limits, or if proxies are employed to withdraw or deposit amounts simultaneously are some of the questions that AML analysts must answer in order to assess ML/TF risk. Analysts count on government databases (Office of Foreign Asset Controls, Sanctions List Search, etc.), public commercial systems (Lexis-Nexis, Google, etc.), as well as their internal client Know-Your-Customer (KYC) information and transactional activity history to make these determinations.

Of these sources, KYC and transaction information can only be found within the banks’ walls. Once money leaves or enters the bank, there is only one degree of separation: the sender or recipient of the funds outside the institution. The sharing of client and transactional information is one potential area of cooperation between financial institutions to help mitigate risk. Through strict confidentiality agreements and guidelines, financial institutions are able to create alliances that allow for the sharing of client and transactional information, which would greatly help analysts to better assess a transaction’s risk profile.

Another option is the creation of AML as a financial service, where financial institutions outsource their AML operations to firms that specialize in such analysis. As these firms grow and gain access to their clients’ data, the richness of their analysis increases, reducing the area available for money launders to hide.

Over time, improvements in information technology will multiply the effectiveness of AML operations. Today, many global banks have disaggregated systems that don’t talk well to each other, and improved information sharing would certainly benefit from their consolidation. Additionally, the use of machine learning and big data analytics can help analysts make better sense of the available information where human eyes and minds can only do so much.

Though nothing can replace financial institutions from being vigilant, their ability to prevent ML/TF risk is greater when they stand together. Institutions must weigh the costs of inadvertently contributing to money laundering with the loss of business that such aversion creates. By creating alliances and businesses founded on principles of confidentiality and protection of client information, financial institutions have the ability to mitigate both risks.


Originally published at frankrcastillo.tumblr.com.

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