Ever since the dawn of “modern” anti-money laundering (AML) legislation and regulation in the mid-70s in the U.S., the creation of the Financial Action Task Force (FATF) in the late 1980s and the implementation of increasingly sophisticated and targeted requirements throughout the subsequent decades, the world has always been one step behind the money launderers. While frequently described as a “global problem,” the success of money launderers lies in their ability to exploit the gaps in information held and cooperation between the dizzying array of governmental institutions, supranational organizations, regulators and financial institutions.
Each one of these bodies has their own set of rules, objectives, culture and ability to effect change and cooperation across borders. These often conflict with one another as each seeks to discharge their own responsibilities, but it the ability to exchange information and cooperate cross-border is the most critical.
There is a reason why money laundering is a global problem. Criminals know that by interposing jurisdictional barriers between the various elements of a money laundering scheme they can exponentially increase the amount of protection against a successful prosecution. This is increasingly so given the ease and speed with which assets can be transferred across the globe. At a jurisdictional level they know precisely what levels of information are required by financial institutions in order to be successfully taken on as a client, and this can often differ wildly between firms in the same jurisdiction and, more commonly, between jurisdictions. This highlights one of the challenges in the fight against money laundering, despite the acknowledgement that it is a global problem and the creation of bodies such as FATF which set standards by which all jurisdictions should abide, there is a wide divergence between how jurisdictions actually implement them.
These discrepancies are driven by a number of factors which are jurisdiction-specific:
- Data privacy regulations
- Bank secrecy laws
- The strength of institutions to implement international standards and police them through governmental bodies, regulators and law enforcement
- The inherent risks posed by the risk appetite and structure of the domestic financial services industry. On this note, the recently published National Risk Assessment (NRA) for Jersey identified that the island has a high proportion of non-resident customers predominantly serviced by trust and corporate service providers, fund management firms and banks – a risk profile which will differ significantly from than say, the UK
- Political will to enable international co-operation laws and functioning practices to enable the efficient sharing of information
It is somewhat ironic that on one level we permit private organizations in the technology sector to gather, analyze and exploit vast amounts of data about us for commercial gain because it makes our lives easier, but when it comes to fighting money laundering, the gathering and exchange of information becomes far more problematic.
There is no doubt that the focus, up until recently, has been on better frontline execution of AML programs and regulatory activity designed to encourage the submission of Suspicious Activity Reports (SARs). Paradoxically, firms are disincentivised from screening out “false positives” on the basis that the penalties for non-submission are so great, i.e. “if in any doubt, report.” This has rendered the quality of information coming through to law enforcement of dubious value in prosecuting individuals for the commission of predicate offences.
These issues are now starting to be recognized by international bodies and, unsurprisingly, they have made their way into Jersey’s NRA in identifying “national vulnerabilities.” More specifically, the areas attracting the lowest scores and therefore increased vulnerability were:
- AML policy and strategy;
- The quality of FIU intelligence gathering and processing;
- Capacity of resources for financial investigation (including asset forfeiture); and
- Effectiveness of international cooperation.
Interestingly, the high scoring areas such as the independence and integrity of the legal framework were the focus of earlier assessments by the IMF and MONEYVAL and these no longer feature as areas requiring development.
The weaker areas and their accompanying recommendations point towards future developments at a government and law enforcement level rather than at a financial institution level which will seek to address some of the efficiencies identified earlier in this article. In broad terms these will improve the quality of information provided to the authorities and its onward dissemination to other jurisdictions to break down the jurisdictional barriers which are relied upon by money launderers.
But the onus on the authorities to facilitate this is also accompanied by recommendations to increase the level of guidance and communication to industry to explain what is required on their part.
This is a frequently raised topic by the financial services sector. Accordingly, we are likely to see more communication from the FIU on the outcomes of SAR reporting, trend analysis, themes and typologies and also far more expansive public statements when enforcement action is taken.
To answer the question in the title of this piece, AML compliance is a Sisyphean task but by focusing on greater levels of information sharing and cooperation to secure positive outcomes—prosecutions for money laundering offences—it is likely to become more effective in what it was designed to do.
This article was first published in the Jersey Evening Post’s Focus on Tax and Finance Report in October 2020.