Where are we and where do we go from here?
The challenge of tackling financial crime
Within the past three years, the number of suspicious activity reports (SARs) filed in Switzerland has doubled, with a total value of almost SFR 18 billion. Global money laundering schemes such as Russian Laundromat, Mossack Fonseca (the Panama papers), 1 MDB, and other corruption scandals have been linked to Switzerland and its banking system.
However banking secrecy laws and the stringent regulations for GDPR, which in many cases apply to Switzerland, restrict the ability of banks to share information. Cross-border sharing is currently not on a scale that allows detection of elaborate money laundering networks.
Regulatory developments in Switzerland
Like other countries, Switzerland has regulations in place to prevent money laundering and terrorist financing, and it applies the international standards of the Financial Action Task Force (FATF). Additionally, a 2019 revision to the Swiss Anti-Money Laundering Act comes into force in 2020. This extends due diligence obligations to ‘advisers’, including multi-family offices, trustees and lawyers. Other provisions in the revised Act relate to the periodic checking and updating of client data; the duty to report to the Money Laundering Reporting Office Switzerland (MROS); and the registration for money laundering purposes of associations (e.g. charities) that collect or distribute assets abroad. The new obligations require institutions to re-assess their existing financial crime strategies and detection systems, and incorporate anti-financial crime measures into ‘business as usual’.
More than ever, institutions need to be proactive and focused on managing their financial crime risks so as not to be caught up inadvertently in laundering schemes. The Swiss regulators are taking a pro-active approach towards enforcement both in Switzerland and internationally. There is now much greater international collaboration between regulators and agencies, which increases their effectiveness, and so encourages global financial institutions to deploy holistic approaches in their management of financial crime risks.
A holistic approach to the design of anti-money laundering activities should incorporate conducting client intelligence, whilst also undertaking enterprise level investigations into any detected suspicious activity.
Measures that are taken should include consistent application of FATF standards; public-private partnerships between law enforcement agencies and financial institutions; improving cross-border and domestic information sharing; improving the quality, collation and standardization of data; and improving the use of technology to identify and combat illicit finance.
Additionally, the implementation of an overarching effective compliance program is a must.
Using technology to manage the risks from AML
More recently global banks in Switzerland have been focussing on the use of technology to detect, manage and prevent risks from money laundering in a holistic way. Rather than restricting monitoring to individual transactions or customers, they are using technology increasingly to connect large volumes of existing data across domains (transactions, KYC, email, voice etc.) to provide compliance teams with more complete and targeted information.
We have been able to achive ‘quick wins’ for our clients by is applying automation and robotics to prioritize AML risk alerts, allowing their investigators to focus on high-risk cases rather than on false-positives.
We also consider that organizations should embed technology in their protocols. Standard protocols on the acceptance of what is normal would allow organisations to focus their efforts on red flag behaviour. Rather than trying to look for ‘needles in a haystack’, technology can reduce the overall size of the haystack, thereby increasing efficiencies in detection.
Applications like Privacy Enabled Technology (PET) enable the use of cross-border tools to detect unusual behaviour, without breaching client privacy. Such sharing of data would also lead to the creation of industry-level training sets for unusual behaviours, which in turn would enable the detection of red flags.
However, given that cross-border data sharing is not currently deployed on a scale that would allow detection of elaborate money laundering networks, further investment and regulatory regime support for this is required.
We believe that organizations should also seek to deploy more data-driven validation of machine learning models. This will increase trust in the use of algorithms and facilitate the development and acceptance of more advanced surveillance systems.
The risks from complex and ever more sophisticated money laundering schemes will surely increase over time. As detection systems improve, so too will the sophistication of the money launderer. For instance, as banks and consumers push for the simplification and digitization of on-boarding, new risks arise with the use of ‘deep fakes’ to defraud. Institutions that are already dealing with fake passports and ID cards now need systems for detecting biometric frauds. Another example is the ease of creating and spreading ‘fake news’, which undermines the efficiency of media due diligence searches.
Financial institutions will need to improve their surveillance and mitigation systems continuously and in a holistic way. Hand in hand with that continued and increased regulatory regime support for technology will be a prerequisite to enable financial institutions to further collaborate in building and improving their systems.
Chief Compliance Officer support | Investigations team
New options and challenges for corporates