Anti-Money Laundering: Is the Industry Taking the Correct Approach
Are you a fan of the AMC series "Breaking Bad?" In this story, the unsavory lead character Walter White engages in money laundering to "cleanse" the illegal proceeds of his highly lucrative criminal enterprises. Throughout the course of the series, he launders funds via numerous and increasingly complex methods.
Despite his concerted efforts, at the end of the story, Walter is sitting – literally – on a pile of yet-to-be laundered money. This cautionary tale illustrates an important takeaway for financial institutions and other organizations: There is, apparently, a never-ending amount of money to be moved illegally. Industry estimates are that 2 to 5 percent of global GDP is laundered. Not surprisingly then, spending on anti-money laundering (AML) programs continues to grow.
The technology necessary to scan for money laundering in real time and preempt suspicious transactions exists, and there are a number of valid use cases for it. However, there are many considerations to this approach for companies and even industries as a whole to consider.
For years, the industry has been focused on reporting suspicious transactions retrospectively rather than intercepting and stopping in real time transactions indicative of money laundering. In this environment, organizations typically would report Walter White's suspicious financial activity to the authorities – but they would not stop his transactions.
Yet, a closer look at regulations reveals language that implies if the transaction is not consistent with what is expected, it should not be completed. In a nutshell: reject the suspicious transaction. This model would stop Walt immediately – and perhaps thwart the additional harm his actions cause his community and the broader economy.
So, should we as an industry be aware of and report Walt – or should we stop him in his tracks?
This is a complicated puzzle. The technology necessary to scan for money laundering in real time and preempt suspicious transactions exists, and there are a number of valid use cases for it. However, there are many considerations to this approach for companies and even industries as a whole to consider.
The Argument for a Proactive, Real-Time Approach
The most persuasive argument for a proactive, real-time anti-money laundering approach – where financial institutions bring suspicious activity to a full stop – is that the ancillary crime or harm caused by any laundering is immediately mitigated.
As a leader in AML monitoring solutions, Fiserv has observed a number of use cases where there is clear need for and positive outcomes stemming from real-time AML. For example, in the Mediterranean, real-time AML can be used to stop serial launderers who move from bank branch to bank branch to process their money. Because activity is flagged immediately, the entire financial institution is alerted, preventing the fraud and its related activities.
Real-time AML also aligns with regulators' efforts to curb de-risking, where a financial institution pulls out of a transaction or customer type entirely to prevent all money laundering risk. Regulators prefer an approach where money laundering risk is addressed on a case-by-case basis, which is healthier for the financial industry on the whole. Real-time AML monitoring technology is the only way this approach is made viable at scale.
Considerations for Real-Time AML Practices
The most apparent challenge to a more proactive AML approach is the possibility of alienating good customers. Stopping transactions that are not criminal can be severely detrimental to organizations' future business. However, this is increasingly less of a concern as technology solutions improve the ability to be very accurate in our analysis and resulting actions.
There are also instances and industries where real-time AML is not practical. Clearly, high-volume retail payments, such as cash deposits at an ATM, do not lend themselves to the rigor of a real-time analysis. There are also logistical and technology infrastructure challenges to consider.
Ultimately, perhaps the industry needs to re-evaluate the costs of the current AML approach versus its benefits, and compare that to the alternative of preventing money laundering. The stakes are high, but this is a complex question that is not going to be answered quickly. Perhaps it is time to accelerate the pace of the conversation and analysis.