Deloitte last week published a report asserting banks and regulated financial service businesses in Asia need to be more than reactive to money laundering issues. The report posits firms in the future will be judged using a philosophy that if they could have known about a money laundering problem then they should have known. This would mean the days of passive anti-money laundering (AML) practices would be over.
In 2019, U.S. and U.K. regulators imposed a financial penalty in excess of $1 billion against Standard Chartered Bank for money laundering failures and sanctions breaches. Within the enforcement notices the regulators referenced failures related to the bank’s “reactive anti-money laundering program.”
In Australia, it was law enforcement that confronted the cash money laundering within Commonwealth Bank of Australia (CBA), when it watched a drug dealer spend hours at a smart ATM filling it with hundreds of thousands of dollars. With Westpac, authorities investigating tourist pedophiles sought out the international fund transfer instructions (IFTIs) that should have been filed by the bank. The IFTIs were not there, because the bank had failed to file them. Subsequently, the CBA paid a penalty of $700 million, and Westpac is facing a penalty in excess of $1 billion.
Reactive AML is troublesome, inefficient, obviously ineffective, and all too often very expensive. Firms caught in this trap find themselves facing challenging resource problems. Simultaneously, the weaknesses and deficiencies within the existing resources—in particular inexperienced, unqualified staff—are laid bare. When the money laundering problems surface, they soon grow, as do the costs and size of the financial penalties applied by the authorities.
Nowadays, regulators instruct miscreant banks and firms to appoint monitors to ensure future compliance with AML laws and regulations, as well as adherence to commitments made within any regulatory settlement. Moreover, regulators demand firms abstain from specified high-risk businesses; initiating any new business or client relationships in specified countries; and selling high-risk products and services as well as undertaking business with high-risk individuals, such as politically exposed persons. Thus, reactive AML is expensive in more ways than one.
Prevention is better than the cure
It is universally acknowledged prevention is a far better option than a cure. The financial implications are simple and logical: A sick worker/broken process is not productive. All of this is presently playing out around the world as COVID-19 devastates communities and economies while doctors and scientists work diligently to find a vaccine. Absent a vaccine, the costs are huge in both human suffering and economic damage.
The same logic of a vaccine applies to money laundering, but for far too long there have been inadequate proactive endeavors to find the same. While scientists fully exploit all of the coronavirus data to find a vaccine for COVID-19, the global AML community has not done the same for its issues.
The AML community, including regulators, is guilty of tolerating the failing status quo, and very few have dared to confront, challenge, and disrupt the inefficient and ineffective practices. Put very simply, our collective, repetitive conduct squarely fits Einstein’s definition of insanity: doing the same thing over and over again but expecting different results.
Proactive AML as a solution
A proactive AML program is on the front foot, with staff and resources looking for money launderers, risk, unusual activity, missing information, clients, and even bankers who are reluctant to provide basic information and like to cut corners. Proactive AML practitioners ask themselves, “How do I launder $50,000 in this firm/bank?” When they discover the answer, they apply a remedy and move on to identify the next vulnerability or weakness.
The proactive AML practitioner does more than deter, detect, and report suspicions of money laundering: He/she stops money laundering; blocks or rejects transactions; closes accounts; terminates relationships; and even exits high-risk businesses, products, or jurisdictions.
This type of program constantly evolves and improves as reactive data is added to the proactive process. Prior learnings are applied to the present AML framework to ensure repeated instances of money laundering with the same clients, companies, or related parties are avoided.
We need to move to a more proactive AML program, in which we find, confront, and frustrate the money launderers, rather than waiting for law enforcement officials and regulators to tell us the launderers have been using our services for a long time without our knowledge. As a result, AML will become more effective, more efficient, and less expensive. That’s something every firm should embrace.