Anti-Laundering Rulemakers Could Learn from the Mall Cop

Editor's note: This post appears in the forthcoming April issue of American Banker Magazine.

Over the next year, a task force of federal policymakers, functional regulators and enforcement agencies will develop recommendations on anti-money laundering rules to the Treasury Department, which has announced it is stepping back to review its current approach and correct existing "gaps, redundancies and inefficiencies."

This is potentially good news for financial institutions, large and small. The task force has a real challenge ahead, however, if it intends to enhance the industry's effectiveness in the fight against money laundering. And if that's not the intention, it should be.

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Financial institutions need a framework that allows them to focus more on zeroing in on the bad guys in their world, and less on dotting every "i" and crossing every "t" for the purpose of getting through examinations unscathed. In that sense, there is an important lesson to be learned from mall cops. Yes, mall cops.

When merchandise disappears from a mall retailer, security personnel use their training, knowledge and experience to find, apprehend and turn over the thief to local authorities. Ideally, when the suspect is caught, the merchandise is returned to the retailer. By effectively performing their duties, the security creates a "win" for everyone—with the exception of the bad guys, of course.

With AML, the government must somehow move the primary focus beyond program management and compliance. We still need BSA/AML rules and program-specific examinations, but if identifying the bad guys is the real goal of AML, then the efforts behind it must be reprioritized so that the means (the rules) don't overwhelm the ends.

Although different in several ways, it's worth comparing AML compliance to the fraud environment. In the fraud world, dedicated regulatory examinations and examination ratings don't exist. So, it's not surprising that fraud resources focus on the end goal—catching the fraudster and minimizing fraud losses. By comparison, the AML world has a well-defined means—a 400+ page BSA/AML Examination Manual published by the Federal Financial Institutions Examination Council. Compliance is a struggle broadly, but it's particularly burdensome for small- to mid-sized institutions with too few employees to staff robust compliance functions. For them, AML is all about compliance and getting through an examination without too many bruises. The means overshadow the ends.

What if the mall cops in our example worked every case by following procedures from A to Z but never caught a perpetrator? Would they be considered effective? Obviously they would not. For them, the concrete measure of success is apprehending the perpetrator.

Local and federal authorities, including the Treasury Department's Financial Crimes Enforcement Network, all have vested interests in financial institutions' effectiveness in fighting money laundering, which includes terrorist financing. Shouldn't the measure of AML success also be on apprehending perpetrators?

One extremely effective AML tool is the ability of financial institutions to share certain customer information for the purpose of identifying money laundering activities. But here, too, the desire to avoid scrutiny on a compliance matter can outweigh the desire to act effectively. Institutions want to tread carefully and stay on the right side of strict consumer privacy regulations. So they sometimes keep potentially relevant information to themselves, even though sharing that information might bring them closer to identifying money laundering suspects.