How to be effective in the fight against financial crime

Expensive, but not effective?

The cost of financial crime compliance has increased exponentially over the past few decades. In recent years, perhaps inevitably, we have seen growing questioning of the cost-effectiveness of such efforts. The effectiveness of compliance is extremely difficult to measure. At the macro level, this could mean a tangible reduction in predicate offenses or an increase in the number of people facing justice for their crimes. At the financial institution level, this is arguably more difficult to assess – does an increase in Suspicious Activity Reports (SARs), as a possible measure, indicate a more or less effective program? The answer could be argued both ways. The reality for most financial institutions producing information in the form of SAR is that there is often no feedback as to whether or not the information was helpful to law enforcement.

Consideration of efficiency was highlighted by the Financial Action Task Force (FATF), the global standard setter for anti-money laundering, in 2019 when it announced a strategic review of their country’s review process. One of the objectives of the strategic review was to examine ways to make changes to the FATF methodology to encourage countries to fight money laundering and terrorist financing more effectively. It was noted that the existing FATF process encouraged countries to take action to avoid a bad report, rather than focusing on reducing harm to society or protecting the integrity of the financial system. In other words, the focus had been on implementing a process rather than evaluating results.

A risk-based approach

When resources are inevitably stretched, focusing on risk is more likely to produce effective results. The FATF Strategic Review was finalized in March 2022 with the approval of the procedures for the fifth round of mutual evaluations, which will place greater emphasis on risks to ensure that countries focus their efforts on areas where risks are the highest. The next cycle of FATF evaluations will also be shorter, with an enhanced follow-up process that will focus primarily on improving effectiveness.

Previously, in March 2021, the FATF issued guidance to help countries adopt a risk-based approach to supervision. Supervisors play a key role in helping regulated entities understand the risks they face and how to mitigate them, for example by providing advice on the link between a national risk assessment and the country risk assessment. ‘an entity.

The 4 of the EUe The Anti-Money Laundering Directive (4AMLD) requested the European Commission to carry out an assessment of the risks of money laundering and terrorist financing affecting the internal market and linked to cross-border activities, and to update it at least every two years. These assessments provide useful information on identified money laundering risks that can be exploited at the national level. 5AMLD further required that Member States make the results of their risk assessments available to the European Commission and other Member States, and that a summary version, without classified information, be publicly available.

The European Banking Authority, also in 2021, issued revised guidance on money laundering and terrorist financing risk factors, addressed to both financial institutions and supervisors. The guidelines set out the risk factors that financial institutions should consider with respect to customer relationships and transactions. They also note that company-wide risk assessments should be carried out at least once a year and that they should take into account specific sources of information, including the Commission’s supranational risk assessment European mentioned above.

Information, information, information

The risk-based approach, in terms of assessing where higher risk is likely to exist (e.g. within a specific product, customer industry or geography) and targeting those areas, is without any logical doubt. But what is even more effective is the sharing of information where there is already identified crime.

The traditional transaction monitoring model produces a large number of alerts that are typically manually reviewed to determine if activity appears “suspicious”. A single institution examining a client’s behavior may find it extremely difficult to determine this suspicion. However, the potential penalties for not filing a SAR are such that a large number of “defensive” SARs are submitted annually by institutions; the aim being to protect the institution in case of doubt. However, the compliance cost of this work is significant and, far from being helpful, it can instead overwhelm underfunded law enforcement teams with reports that have little or no value in the fight. against financial crime.

When law enforcement and financial institutions are able to work together, it is much more likely to produce a tangible result. Initiatives such as the United Kingdom’s Joint Money-Laundering Intelligence Taskforce (JMLIT) allow prosecuting authorities to share details of the subjects of an investigation live with participating institutions without compromising investigations. This allows financial institutions to very quickly identify where they hold information directly relevant to an ongoing criminal investigation. Law enforcement agencies that gather data from many banks will get a much better picture of financial funds flows, as well as information and supporting documents provided in relation to account opening and periodic KYC checks that can significantly improve or advance an investigation.

Legislation in place to protect the privacy of personal data poses challenges to information sharing, but some regulators provide assurances regarding information sharing in the context of anti-money laundering. In December 2020, FinCEN issued updated guidance that provided broad latitude in the ability of financial institutions to share relevant information with each other under existing legislation – Section 314b of the USA PATRIOT Act 2001. The guidance clarified that the financial institution need not have specific information regarding the proceeds of a crime or have conclusively determined that the related activity is suspicious. He also said information about attempted transactions and information that includes personally identifiable information (PII) can be shared, and financial institutions are not limited in their methods of sharing information, including verbally.

What financial institutions can do today

Some areas of improvement that would make financial institutions more effective in the fight against money laundering are beyond their control, including the creation of complete and accurate UBO records to facilitate KYC. However, the developments discussed in this article reveal two areas where financial institutions can and should act: first, to truly understand and focus their efforts on areas of higher money laundering risk by conducting regular and rigorous assessments risks ; and second, to actively participate in information sharing to the fullest extent possible within their jurisdiction. We see a growing trend of public-private partnerships and, in some areas, financial institutions sharing information directly with each other – a positive trend that will only continue.

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