NextGen AML: a Point of View

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NextGen AML: a Point of View

Today’s AML framework has reached end of life, introducing the case for change

Amid growing regulatory and public scrutiny, financial institutions are mounting massive efforts to fight money laundering through their systems — but the actual effect on financial crime is as yet disappointing (see Figure 1). We believe it’s high time for a radically new approach: NextGen AML. What that means? First, going back to the legal basis of current anti-money laundering practices. Then, focusing on deep impact and clear outcomes.

When financial institutions appear in the media these days in connection with financial crime, the spotlight is on fines and sanctions, or on the huge army of staff involved in detecting money laundering. Only incidentally do these reports highlight the actual outcomes of the collective AML efforts. This illustrates the case for change we see for AML. A better AML approach, we believe, would be driven by impact, become smarter and digitalised, turn wasted efforts into a connected defence, and prepare an adequate response to emerging crime schemes.

Mounting pressure on FIs

In April 2021, the Dutch financial sector was once more shaken-up by the second major settlement for violation of anti-money laundering and counter-terrorism financing regulations. Moreover, the Dutch regulator has just confirmed that yet another financial institution is under criminal investigation, proving that the regulatory pressure on our financial institutions is not going to ease up any time soon. A trend that is also seen globally.

Too many people, too little impact

So what is the financial sector’s response to this growing regulatory scrutiny? Snowballing more and more resources into remediation and enhancement programmes. The most noticeable symptom being the exponential rise in the number of employees active in an AML/KYC role (see Figure 2). Financial institutions are paying thousands of people to perform compliance checks. But the impact of these ever-increasing efforts is questionable: will they produce a more vigilant financial system, and in the end make the world a safer place?

Box-ticking

Consensus is growing that the current AML framework, while costing billions of euros annually, is not as effective as it should be. And more fines will not necessarily lead to better outcomes. Why is this? Firstly, within operations, there is a strong short-term focus on ‘technical compliance’, which comes down to mere box-ticking. Additionally, the total system is by its very nature painfully slow. In many cases it takes years before a criminal transaction is even identified as suspicious, let alone before the originator gets prosecuted. By contrast, financial criminals are extremely quick to adapt to changes in the financial landscape.

Reinventing AML

So just doing more of the same will not stop the problem. The sheer complexity of financial crime and its far-reaching social consequences calls for broader solutions involving partnerships and ecosystems. This was also underlined in the presentation of the ‘Nationaal Plan Witwassen’ in 2019. We believe that current implementations of the AML framework have reached end of life and are ready for reform. Especially considering the challenges yet to come. To upgrade the AML approach, parties must:

  1. Increase impact — Transform to more effective efforts, and give a strong push on actual crime reduction.
  2. Be smarter — Digitalise the fight against financial crime with more and better data and the latest technology.
  3. Reduce waste — Stop unnecessary efforts and align cooperation in the entire chain of actors against financial crime, creating a connected defence.
  4. Be prepared— Anticipate and adjust to new modus operandi of financial criminals, in existing infrastructure as well as future platforms.

New perspective

What’s needed is a new perspective about how financial crime should be combatted in a joint effort spanning the whole chain. Still based on the legally bound roles of actors, but with enhanced and better aligned strategies. This is what we call NextGen AML. In the weeks ahead, we’ll be revealing our view on the drivers that will help to achieve this required change in the whole industry. We’ll share our analysis, explore possible solutions and organise dialogue between stakeholders in the field. Being a part of the ‘financial crime ecosystem’, we see it as our responsibility to connect views and actors to make the world a more secure place. Stay tuned!

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