How to Effectively Tackle Financial Crime in 2020: Refocusing on Effectiveness
Money fuels serious crime, including drugs trafficking, human slavery and terrorism. The UN has estimated that between USD 800 billion and USD 2 trillion is laundered around the world each year. That’s why banks and governments need to avoid a “box-tick” compliance culture and focus more on the effective implementation of FATF standards, which combat money laundering and terrorist financing. The recently published Statement on Effectiveness by the Wolfsberg Group of international banks is a positive step, encouraging greater implementation of the approach FATF takes to evaluating jurisdictions.
Criminals launder money to make their illegal profits appear legitimate. While the rules governing the international financial system have gradually become more sophisticated and larger global banks are increasingly making big investments in their Financial Crime Compliance (FCC) programmes, more can still be done by the private sector and some banks still lag behind.
“It has been estimated that just 1% of illicit finance is eventually confiscated.”
This is not because the rules are wrong, although they can always be improved. Technical compliance – meaning sound rules and regulations – is the base to build from and not the end goal. Information from nearly 100 FATF country assessments, as well as a look at continuing financial crime scandals, all point in the same direction: regulators and supervisors of the finance industry, as well as financial institutions themselves, need to focus on effective outcomes as their guiding principle.
The Wolfsberg Group’s Statement on Effectiveness advocates that supervision of financial institutions should align with FATF’s approach to mutual evaluation of jurisdictions, meaning to be more focused on effective outcomes. Does the financial institution understand its unique inherent financial crime risks and implement tailored controls? Does the financial institution provide highly useful information to relevant government agencies in defined priority areas? Does the financial institution participate in available public-private partnerships to share financial intelligence? Does the financial institution undertake a regular assessment of processes yielding risk irrelevant work and refine as appropriate?
Promoting a focus on effective outcomes
The FATF is currently holding a strategic review, including how to better promote a focus on effective outcomes. It is already clear that supervisory authorities and the private sector can enhance their work in a number of areas.
The first is innovation, where new technology could be used to improve supervision and to help banks identify risky transactions. Tools such as machine learning and smarter screening can help both financial institutions and government authorities become more effective. For example, algorithms can track anomalies in data to identify more efficiently “false positives” when looking for suspicious transactions reports. This would allow staff to focus on pursuing suspected high-risk cases.
The second area to enhance is information sharing and international cooperation. Actionable, timely intelligence and information can be the turning point in a criminal investigation. The exchange of information within the private sector and with the authorities, but also between authorities nationally and internationally is the most effective way to identify potential criminal activity. Public-private partnerships in the UK and several other countries provide good examples of where this is happening. However, different data privacy regimes frequently make it difficult to share information. We must do more to build trust and enable better information sharing, making the most of new technology to facilitate this.
Thirdly, there is a need for better education, training and guidance. This includes working with the private sector and with national supervisors. Global banks can work with local banks and correspondents to help safeguard the global financial system and develop capabilities against financial crime. The Wolfsberg Group Correspondent Banking Due Diligence Questionnaire is one such example, helping local banks meet agreed international standards to support correspondent banking relationships and help ensure an inclusive financial system. The FATF itself also trains government officials and public agencies, including supervisors, to promote effectiveness.
These three areas – innovation, greater collaboration and information sharing, and education – can help create an effective system to prevent financial crime and assist law enforcement in identifying those involved in criminal activity. Those who work in the financial system will see a greater impact from their investments into compliance and controls; but more importantly, a partnership between governments and global banks means we can better disrupt the financing behind organised crime and terrorism and make society safer.