Fighting financial crime in the smartphone era
You want to fund a notorious terrorist cell. You plan to slosh dirty money through bank accounts in sunny islands. You intend to pay a Dark Web merchant for stolen credit card details.
Actually, you just need to send your Australian grandson some money for his 18th birthday. But you are presumed guilty until you prove otherwise. So tell us who you are and we’ll judge you.
Let’s rewind. July 1989, Paris.
Simply Red just topped the charts in the US with their cover of If You Don’t Know Me By Now. And leaders of the most powerful countries in the world are meeting at the latest G7 Summit.
They established a task force to combat money laundering. One year later, this Financial Action Task Force (FATF) published international standards to combat money laundering. After 9/11, these were strengthened further. 34 countries, between them representing the major financial centres around the world, are signed up to these standards.
The objectives of these standards implemented across the world are important. Stop criminals from hiding their ill-gotten gains. Clamp down on corruption. Reduce the economic power of nasty organisations, from drug cartels to terrorist groups.
In some respects this is a remarkable success story. A deadly challenge requiring international agreement between governments. A policy response co-ordinated at a global level. Detailed and regular reviews carried out on national implementation. You might ask, where is the FATF for climate change?
So yes, the intention is laudable. As a company, we believe passionately in doing our bit to fight financial crime. However, the reality is that these rules have not kept pace with technological change. There have been unintended consequences to the regime. And the rules vary a lot between different member countries.
A very simple summary of the standards set out by FATF is this: financial institutions need to find out some particulars from their customers, and verify that they have been told the truth. Then they need to keep an eye on what their customers do in case anything smells fishy. If it does, they report it. So far, so simple.
In most jurisdictions, proof of address is required as part of verifying that customers are who they say they are. 10 Downing Street. The White House. Imperial Palace, 100–8111, Tokyo. Sometimes where you live proves who you are. For the rest of us, life is more complicated. I have personally lived in six different places over the past five years.
My current employer is a better indicator of who I am. Where I spend my holidays. Which football team I support. The reliance on a narrow definition of identity in the rules (name, address, date of birth) is not sensible anymore. My smartphone knows more about me than my electricity company — so why should I send in a utility bill? Why should I have to submit anything at all?
It is frustrating to stop, scan a passport, and email it through. Or in some countries, visit an office. Or in Japan, sign a letter I receive at home. In an increasingly frictionless world, we expect better. We make our customers lives as easy as we can. And they love us for it. Last month, a quarter of all contacts from customers were related to verifying their identity. Each contact represents hassle for a customer. Modernising the AML rules will help us to make their lives better.
The current rules are biased against digital and “non-face-to-face” transactions. The reality is that smart online verification is more effective at identifying somebody than looking them in the eye. So we are delighted to have contributed to the UK Government’s review of the rules and the UK financial regulator’s study of where regulation is holding back innovation. FATF and its member countries should embrace this rare win-win in the policy arena: a chance to reduce hassle for ordinary people and at the same time, to more effectively tackle financial crime.
We are working with UK authorities to modernise AML rules in three specific ways:
- Remove the bias against digital services, which requires tougher customer verification for online transactions.
- Allow electronic documents to be used as proof of address — an online utility bill should hold the same weight as a bill received by snail mail.
- Broaden the definition of identity beyond name, address, and date of birth.
The world has changed, for the better. It is time for the fight against financial crime to catch up.
Who do you think you are? Tell us what makes you, you.
Any other thoughts or comments about improving the fight against financial crime? Please share with us or feed in directly to the Government’s consultation on improving the anti-money laundering regime.
By Lukas May — TransferWise.
Lukas opens new markets for TransferWise. This involves building relationships with both banks and regulators around the world. He previously worked at the FCA where he created and led a new team dedicated to supporting innovation in financial services. He studied Philosophy, Politics, and Economics at Oxford.
