illicit finance

Sweeping changes to the US’s anti-money laundering laws will modernise the fight against dirty money.

gary-kalman

Tucked into the massive $740bn defence spending bill for 2021, recently passed by the US Congress, were some of the most sweeping changes to the nation’s anti-money laundering (AML) laws in a generation. Anti-corruption organisations, law enforcement officials, national security experts and leaders in the banking sector lauded the bill as an historic achievement.

The reforms set the US on a course to vastly improve its ability to effectively identify and prosecute corrupt and criminal actors that seek to abuse financial systems.  

Broken system

Currently, despite a significant investment of time and resources by government authorities and financial services firms, experts estimate that we capture less than 0.1% of the illicit cash sloshing through the world’s financial system. As Raymond Baker of the Washington-based think-tank Global Financial Integrity puts it, we are “a decimal point away from complete failure”.  

In the US, approximately two million suspicious activity reports are filed each year. Estimates are that less than 0.004% have led to an investigation.  

For banks, it can feel like their reports are going into a black hole. The regulatory system seems antiquated. Supervision and examination of bank AML programmes may seem more about checking boxes than fighting illicit finance.   

The new AML law brings several promising changes to upend the old system and bring compliance into the modern era.  

Supporting due diligence 

Among the most important reforms is the creation of a database at the Financial Crimes Enforcement Network (FinCEN), the US financial intelligence unit, to collect beneficial ownership information for US corporate entities and crack down on the criminal use of anonymous shell companies.

Anonymous companies are the primary vehicle for money laundering. For a nominal cost, bad actors hide and move money through a complex network of shell companies, avoiding detection, and investing, profiting and spending with impunity. A 2011 study by the Stolen Assets Recovery Initiative, a partnership between the World Bank and the UN Office on Drugs and Crime, found that in a review of 30 years of grand corruption cases globally, anonymous companies were used to hide money in nearly 70% of the cases

Unlike similar information collected by the UK and the EU, the US database will not be open to the public. It will, however, be open to US and international law enforcement — and to US banks. The new FinCEN database will provide banks with a new means of confirming beneficial ownership information and providing additional assurance for compliance. Banks will still have their due diligence obligations, but this new resource will facilitate the ownership identification step in that process.

Utilising technology 

Other important, albeit less heralded, reforms include expanding the use of technology, identifying AML priorities to better align law enforcement and bank examiner concerns, and a pilot programme to begin sharing information between multinational bank affiliates. 

Experts estimate we capture less than 0.1% of the illicit cash sloshing through the world’s financial system

Algorithms and machine learning programs are increasingly available, yet previous rules have limited their use for AML compliance programmes. Under the new law, banks seeking to use artificial intelligence in their compliance efforts will need to inform FinCEN and ensure any such programs meet certain standards. Additionally, technology will be able to be shared between banks. Over time, with proven effectiveness, banks will be allowed to expand their use of machine learning for compliance purposes. While adoption of this technology will, at first, likely be affordable only for larger institutions, in time, commercially available programs will gain wider acceptance and costs will come down.

The current mismatch between what law enforcement needs and what bank examiners require is a source of frustration for compliance officers. The new law requires FinCEN to issue priorities to banks and examiners in order to reduce these differences. The law also allows for greater information sharing, so requests by law enforcement to banks to keep questionable accounts open for investigation purposes are shared with examiners as a way of mitigating examination risk.

International effort

The law also establishes a pilot project to allow multinational banks to share AML information with their affiliates across borders. Recognising differences in privacy laws among jurisdictions, the law allows these banks to create and test programmes for cross-border information sharing.

Criminals and their networks have become far more sophisticated money managers over the past two decades. Gone are the days when drug cartels bury their money in empty fields. And yet, those who monitor and protect our financial system have had to operate with outdated tools.  

Once the changes are in place, law enforcement will have more useful information and banks will be able to update their systems, save time and better protect their institutions from abuse.

While more needs to be done to fully address all the modern day mechanisms for laundering money, this new law will provide important tools to more effectively and efficiently combat global illicit finance.

Gary Kalman is the director of the US office of Transparency International, a global anti-corruption network.

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