NextGen AML: what is driving the change? has been saved
NextGen AML: what is driving the change?
Accelerate enhancements in five key areas
Are the outcomes of current Anti-Money Laundering implementations worth the vast efforts that players in the field put into it? In our previous blog, we presented our perspective on the case for change. To increase impact, reduce unnecessary efforts and keep up with criminal inventiveness, a new approach is needed. But how do we get there? Creating NextGen AML calls for change in five driving areas.
To spot the shortcomings in the current AML approach, it’s good to zoom out and look at the entire AML chain (see Figure 1). It starts with money laundering itself. Crime doesn’t really pay until criminal money finds its way into the financial system, and can be used to buy for instance houses, cars, luxury goods, financial assets, and political influence. Money laundering is what makes criminality worth trying, and why criminality is a disruptive force in the financial system and in society.
Legislators, who observe the cost to society of money laundering, draft their law with the goal of fighting financial crime. The law appoints financial institutions as gatekeepers and obligates them to (1) perform review and monitoring on clients and transactions and (2) report unusual transactions to the Financial Intelligence Unit.
Losing sight of the goal
But somewhere along the line, the original goal of the law has drifted away. The law and directives, and regulating financial industry obligations that may be seen as following from this law, became an end in itself. Financial institutions, fearful of fines, have become heavily focused on their own regulatory safety. In response to the increasing public and regulatory expectations, they perform more checks and checkpoints. More and more checks. With more and more people.
This has resulted in a clear increase of clients and transactions reported to the Financial Intelligence Unit (FIU) as ‘unusual’ in recent years. The additional checks and reports arguably have resulted in less potential forms of money laundering going unnoticed. However, the FIU and other public parties, meanwhile, have been struggling with limited budgets. So just a fraction of these reports from the FIs actually got followed up by law enforcement. Apart from the potential remedial and preventive effects that arise from efforts by financial institutions, this means that the output of these well-intended but uncoordinated efforts was inevitably modest. Financial crime continues – maybe less unnoticed but still far from eliminated.
Change in five driving areas
This, admittedly simplified, story reveals an AML framework at end of life, suffering from a variety of shortcomings. Initiatives are underway to tackle some of them, but accelerated and more ground-breaking change will be required to fix the AML framework. In our analysis, we have identified five kinds of change that need to be accelerated:
- Ecosystem drive: AML is not the sole responsibility of the “gatekeepers”. Lets make effective cooperation between public and private parties, now emerging in many (and perhaps to many different) places, the default. Let’s get parties sharing information and aligning their core strategies and intended outcomes.
- Intelligence drive: Intelligence, consumed by both rapid response and careful thinking, is key. Let’s replace the current reactive, static, rules-led processes with proactive and agile ones that go deep and fast on detecting real criminal networks.
- Output drive: Let’s remember what these processes are supposed to deliver: less money laundering, more justice. Let’s rethink wat “risk-based approach” really means: not screening everything so as not to miss a single risk, but directing efforts where risk is highest.
- Data drive: Data is a plentiful and rich resource, but to make AML more effective, it needs to be properly organised and cleaned. And it needs to be shared among ecosystem partners without compromising cyber security and privacy.
- Technology drive: The days of “compliance by workforce” are over. To make sense of the mountains of data, while reducing human effort, let’s make radical choices and rack up investment in (AI) technology. And let’s do it together, financial institutions and the public sector, as that’s the only way to keep innovation on track.
Together, the measures proposed here will result in a smarter, more digitalized AML approach with far more impact. One that turns isolated efforts into a connected defense and prepares an adequate response to emerging crime schemes.
Building NextGen AML
We see first steps being taken in all five areas. However, change is not fast, coordinated and foundational enough. It’s a matter of scaling up and accelerating the many promising initiatives, while creating maximum space for cooperation and innovation. We’ll be devoting a blog to each of these themes in the coming weeks, analysing the current situation and proposing what we think it will take to achieve NextGen AML. So watch out for our next blog! You can read our introduction blog here introducing the case for change.