‘Fincen files’ underscore urgency of AML reform

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The so-called “Fincen files” that circulated after a BuzzFeed News collaborative investigation revealed flaws in the global anti-money-laundering framework was, in fact, nothing new to the finance industry and enforcement authorities.

For years, those in the AML and countering the financing of terrorism (CFT) space have known much of what the article exposed: that millions of suspicious activity reports (SARs) are filed with authorities and very few become actionable; that enforcement authorities do not provide regular feedback to financial institutions; that financial institutions in most cases can’t legally share information about their clients; and criminals use loopholes to hide their identities behind corporate facades.

Despite institutions investing tens of billions of dollars into the fight against financial crime globally, stemming the tide of illicit flows remains incredibly challenging. The amount of money laundered globally each year is estimated to be 2% to 5% of global GDP, or $800 billion to $2 trillion in U.S. dollars, according to the United Nations Office on Drugs and Crime.

Of that, the system catches as little as 1%.

The AML framework’s effectiveness must be measured in terms of risk management and success. A 1% interdiction rate doesn’t look like success. This is why the Institute of International Finance and its more than 450 members have long advocated for a shift to an intelligence-led approach as an essential step toward improving outcomes.

There are three AML-related changes that could have an immediate impact: increased public/private sector cooperation; meaningful reforms to beneficial-ownership regimes; and the increased use of technology.

The latest news investigation detailed a frustrating lack of communication between the public and private sectors. Rather than a one-way dialogue that consists of filing SARs, it’s critical that the feedback loop between law enforcement and the private sector is strengthened. And that financial intelligence sharing partnerships are created in order to target risk management in a more effective way.

Financial institutions can be the eyes and ears, but law enforcement must position it for success. Leveraging the combined powers of the public and private sector is the only way to meaningfully curtail illicit cash flows and bring those responsible for these crimes to justice.

Access to thorough, transparent and accurate data is also essential. In many jurisdictions including the United States, it’s relatively easy to obscure the identity of individuals exercising control in a business relationship.

In response to feedback from the industry, Congress is considering a bill (called the Illicit Cash Act), which would create a secure beneficial-ownership registry of legal entities. This transparency will provide law enforcement and the private sector with needed information to help identify criminals looking to exploit the financial system.

The legislation also modernizes Treasury Department authorities and certain AML/CFT requirements, allowing financial institutions to better assist law enforcement in its efforts to detect and deter financial crime and terrorism.

Finally, all involved parties must continue to deploy, and then leverage, emerging technologies. Machine learning and digital identification in particular have bolstered financial institutions’ financial crime compliance and risk management efforts.

Machine learning techniques could address some of the challenges financial institutions are grappling with as it relates to the AML/CFT framework, such as reducing false positives and improving the effectiveness of transaction monitoring.

Similarly, policymakers should promote widespread implementation of digital identification — the process by which institutions compile data to build a unique profile for each customer. At the individual level, digital evaluation of identity documents could reduce fraud. For corporate accounts, digital identification could verify corporate ownership structures, which could then be reliably reused when applying for new products and services, for example.

These are not moonshot solutions. These proposals are practical, applicable and ready for deployment in any jurisdiction. It would make a big difference, not just for financial institutions and enforcement authorities, but for society as a whole.

The costs of financial crime are real and manifest in ways that are detrimental to the public good, such as through human trafficking, terrorism and drug smuggling. Policymakers must look beyond the headlines of the Fincen leaks and seize the opportunity to implement these long-needed changes.

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AML FinCEN Money laundering International banking