Money laundering is the oxygen that criminal networks breathe to survive. And in doing so, they'll creatively bypass regulatory barriers that are both watered down and arrive years-too-late. The implementation of the EU's 5th Money Laundering Directive (5MLD) is the latest in a global march of regulatory guidelines that attempt to play catch-up with increasingly adept money launderers and the criminals they support. Since the Global Financial Crisis, regulations like 5MLD attempt to tighten the noose around money laundering funnels with stricter definitions of client risk and lowering the threshold for the application of enhanced due diligence.
But for many financial institutions, providing a higher level of investigation on their Clients is not a means to an end, but an end in itself, as long as it narrowly satisfies that compliance checkbox of "doing more."
For some financial institutions, applying these checks, even in the narrowest terms, can backfire easily, and waste key business opportunities. Screening solutions are most commonly applied method for high risk clients, but offer little protection against both false positives or black and white interpretations of what constitutes a risky hit.
For example, a legitimate businessman in South Africa can be rejected by a bank because he was appointed by Malta as an honorary council, thereby earning himself a profile on a risk database. But a local municipal official in Taipei accused by local media of accepting bribes from construction companies can get away scot-free under those same checks, and put the financial institution at risk.
It's no wonder that criminals of all shapes and sizes resort to sophisticated networks of front-men and shell companies to clean dirty money, beating out the screening processes they know will be used by banks and other financial institutions on the beneficiaries of new accounts.
Take the whopping 200 billion-plus money laundering scandal that continues to rock Europe's Nordic banks. There, dirty cash from Russia found its way into the EU's most reputable banking institutions via a handful of insider bank employees and several dozen front-men.
Eventually, it took investigative journalists and law enforcement in numerous countries to detect these schemes. In doing so, they demonstrated a dangerous paradigm; that today, we expect bankers and other financial professionals to carry out law-enforcement level investigations to shield against dirty cash, but have few answers for how they are supposed to get the training and tools to do so – all in a manner that doesn't change their pro-business DNA.
By implementing Artificial Intelligence and other new technologies, it's up to the private sector to provide practical solutions that translate crude regulatory directives into actionable defensive measures, while remaining sensitive to the commercial goals of those using them.
According to numerous surveys, and circulars put out by regulators themselves, static screening databases are no longer sufficient, as money launderers are able to easily bypass them, while powerful, corrupt businessmen and politicians use legal action to simply remove themselves from these lists. To properly identify risk in today's world, huge amounts of data must be retrieved and analyzed from local news, social media, corporate registries found in the "deep" web of sources not indexed by Google and other search engines – even the dark net.
Even the most cunning investigators cannot possibly process these huge amounts of data, even if they know where to find it. But by deploying artificial intelligence to detect negative sentiments, analyze networks, and identify anomalies, researchers at financial institutions can focus on matching the intelligence insights they receive with their own risk policies.
Failure to adapt and implement artificial intelligence in a world where clients look for the fastest, smoothest onboarding process will result in loss of business to the competition, greater risk in clients being accepted, or both.
Governments and regulators shouldn't reinvent the wheel, but in each jurisdiction they should actively promote and encourage the development of artificial intelligence in the financial sector. If Financial Institutions are going to be placed on the front lines in the fight against money laundering, they should have the right tools to win.
Daniel Nisman is the Head of Financial Investigations Solutions at Cobwebs Technologies. He is a career financial crime intelligence analyst and AML specialist.
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