A lack of clarity and feedback from regulators only makes financial crime more difficult to weed out.

At a time when everyone is talking about how to come out the other side of the Covid-19 pandemic with a better world, the allegation of involvement in global money laundering has come back to haunt the correspondent banking industry.

The recent leak of documents, mainly suspicious activity reports (SARs), from the US Treasury’s Financial Crimes Enforcement Network (FinCEN) has revealed that the world’s largest lenders have effectively allowed criminals to move about $2tn in illicit gains around the world unhindered between 1999 and 2017, despite stringent know your customer (KYC) and anti-money laundering (AML) regulations in most jurisdictions and the threat of hefty fines (some banks have already had to pay out for compliance lapses).

Under such rules, banks are required to submit SARs to their supervisory authorities if they detect shady activity. In their defence, banks are saying that they have met their legal obligations by reporting such transactions through SARs.

However, there are three main issues with SARs. First, the information provided often lacks clarity on the reasons for suspicion and therefore is not investigated thoroughly. Second, the loose definition of what should be included has led to over-reporting — banks in the US filed more than 1.1 million SARs in 2019 alone, according to FinCEN — which makes it difficult for the authorities to cut through the noise. Third, regulators do not provide feedback to the reporting institution, so there is no learning process.

While greater information sharing, from regulators to institutions and between institutions, can help the correspondent banking industry as a whole, emerging technologies like artificial intelligence can help improve the accuracy of recording, provide better insights through data analytics, and modernise KYC and AML processes by automating time-consuming tasks. It will also reduce the cost of compliance — which is important considering that the average bank spends $48m a year just on AML.

Financial instructions and regulators should be embracing regtech and supervisory technology, or ‘suptech’, to step up the fight against drug dealers, human traffickers and terrorists. Money laundering is not a victimless crime.

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