Don't Blame Banks for #FincenFiles
The AML Regime Is Not Supposed to Be Effective
Simon Taylor recently wrote a really well thought out blog that I recommend reading on this topic for a more detailed exposition of what the leaks might mean for banks.
Thanks to Simon, I can again keep this particular story relatively short and focus on why I don’t think banks are to blame for this fiasco at all.
The AML regime is not about money laundering
If you are an Indian migrant in the US, UK or Switzerland, you can’t not be amazed by the sheer wealth that citizens of India, China, Russia and the many countries in the Middle East and Africa export to the developed nations globally. I’d really like to believe that all of this money is hard earned by enterprising individuals but there’s an extraordinary amount of data to show that our beautiful London has well earned title of the money laundering capital of the world.
… and this is in addition to the various US and UK tax havens that have sucked up trillions in no questions asked dirty money from around the world.
The top 10 countries that have done the most to proliferate corporate tax avoidance and break down the global corporate tax system are:
1. British Virgin Islands (British territory)
2. Bermuda (British territory)
3. Cayman Islands (British territory)
4. Netherlands
5. Switzerland
6. Luxembourg
7. Jersey (British dependency)
8. Singapore
9. Bahamas
10. Hong Kong
The AML regime is about Geopolitics
Indeed, NATO (and other) countries are quite tolerant and potentially even welcoming of all sorts of money laundering as long as it is friendly money laundering. Once the geopolitical situation changes and war is declared on whatever or whoever was formerly an ally, the AML regime suddenly finds a whole new set of teeth.
Exhibit A: War on Drugs
Exhibit B: War on Terror
Who funded the Taliban when the Taliban were fighting the Russians?
Who funded the Contras in Nicaragua?
Who funded… never mind
The Guardian: “Osama has extensive financial interests in the UK”
Exhibit C: War on Embarrassment
Ever heard of 1MDB? If not, you’ve been living under a rock and sure, you should continue to believe that the purpose of the current AML regime is to prevent ALL money laundering rather than selectively penalise unfriendly money laundering by individuals and entities around the world. It also never hurts to congratulate oneself on presumed moral superiority…
The AML Regime Is a Trade Barrier
Banks spend an extraordinary amount of money in implementing KYC procedures and transaction monitoring and suspicious activity reporting solutions. Indeed, Europe vastly outspends the US in this area because since the beginning of the crisis, AML enforcement against Deutsche, Danske and other European Banks has also been an competitive weapon i.e. a trade barrier.
“The True Cost of Financial Crime Compliance Global Report, released Tuesday and compiled by LexisNexis Risk Solutions, estimated that the annual cost of financial crime compliance in Europe was $137 billion, followed by North America ($32 billion), Asia Pacific ($6 billion), Latin America ($5 billion), and South Africa ($2 billion). The estimates were determined by polling 898 financial crime compliance decisionmakers, compiling an average spending amount for large/medium and small institutions in a particular market, then multiplying the average by the number of such firms in a given market. “
“The LexisNexis survey found that European financial institutions generally had larger compliance departments than those in other regions, with an average of 83 full-time employees in their financial crime compliance departments, compared to an average of 57 FTEs in North America. European compliance departments also needed more time to complete business account due diligence, an average of 47 hours versus 25 hours in North America. “
The AML Regime Is Rather Poorly Implemented
Various types of money launderers have the following advantages over compliance functions in banks who in fact do an extraordinary job with relatively limited resources.
Higher motivation… it’s not a job they do in a bank, it’s their millions (sometimes billions) to be cleaned.
Ability to hire more expensive lawyers and specialists than banks.
Focus on effectiveness rather than box ticking, report filing and paper pushing.
No need to hire auditors to write extremely expensive paper reports every year that satisfy the authorities in that year, while repeating the exact same errors and omissions year after year.
Access to better technology (vs say paper or the multitudes of tools and awful data quality one finds in a bank). In fact if AML compliance functions use AI tools, some regulators don’t particularly approve “because the AI is not explainable”. Money launderers don’t need anything to be explainable as long as it’s effective.
Creativity: Compliance functions are forced to follow a rules based approach. Money launderers follow the exact opposite.
So by the time the enforcement agencies come up with the vendor proposed “MINIMUM VIABLE COMPLIANCE” standard that ticks the “risk based approach boxes” , odds are that every guy in the proverbial Ozarks has hired a well paid and highly capable lawyer, analyst and compliance specialist to do the opposite of what they do - beat the system.
Is It Hopeless?
Systemically, it’s worse than hopeless. Not only does the poorly designed AML/CTF regime fail to stop the elephants walking through the banking needle, it systemically excludes the poor from the financial system causing extensive human tragedy. This is in addition to the systemic persecution of people in sanctioned countries where people are often caught between bloodthirsty dictators at home and oppressive sanctions from abroad.
“Yes, we don’t feel that in the UK but its what you know growing up in Asia or Africa, every day. Not enough paperwork to satisfy western standards of documentation? Well, sorry then, no bank account, no credit, no future.”
However, for banks and fintech firms, it’s not hopeless at all. While it’s fashionable to blame banks and FincenFiles do expose several cases of gross negligence and potential corruption, almost everyone I know in compliance functions in banks do an extraordinary job with the limited resources, technology and tools they are permitted to apply to the job.
My point is that odds are stacked against banks and compliance functions, especially because these functions are forced to live in an era that’s at least one, if not two, generation behind the technological sophistication of money laundering. Money laundering is already digitally transformed whereas compliance and regulation are stuck in the license-paper-auditor-raj.
Why then, blame the banks for #fincenfiles? They were never set up to succeed.