Banks have long struggled to spot illicit transactions among the multitudes they process daily because criminals move dirty money from one institution to another to cover their tracks, leaving compliance staff with only a partial road map of their actions.
That has started to change, with financial institutions and service providers in several countries creating information-sharing platforms and messaging tools with the potential to vastly improve the detection of money laundering and fraud.
A research project supported by the Royal United Services Institute, a U.K. think tank, has identified at least 15 information-sharing initiatives around the world. Although most countries don’t allow banks to share information, several recent efforts have shown significant success in identifying crime, according to the Future of Financial Intelligence Sharing project.
Countries with information-sharing platforms include the U.S., U.K., the Netherlands and Estonia. The types, uses and origins of the platforms studied by FFIS vary widely. Some focus on specific problems, like money mules, or simply offer secure messaging to participating banks. Others have brought sophisticated technology to bear to help banks comply with far-reaching anti-money-laundering obligations.
One cutting-edge example is Transactie Monitoring Nederland (TMNL), a joint venture of the five largest Dutch banks. The utility-style platform, launched in July 2020, allows participating banks such as ABN AMRO Bank NV, ING Groep and Rabobank to pool encrypted transactional data about customers.
Consulting with the banks and the Netherlands’ financial intelligence unit, TMNL has developed models that let the group search shared data for potentially unusual transaction patterns that could indicate money laundering or terrorist financing. Privacy-enhancing technology permits TMNL to generate alerts from the pool of anonymized data it oversees while shielding the identity of bank clients.
TMNL, a private entity with about 70 employees, is tight-lipped about initial results at identifying potential money-laundering activity. Chief Executive Norbert Siegers said TMNL is still experimenting and hasn’t yet developed outcome metrics. So far, the platform has generated around 2,000 alerts, which were sent to relevant banks for further investigation, he said.
“We are basically an analytics factory, where we create [anti-money-laundering] models to find potential patterns, but the investigation of the alert is still done by the banks,” he said.
Anti-money-laundering rules require financial institutions to monitor transactions and report suspicious activity to regulators. Many banks have monitoring software to help flag potentially suspicious transactions, but the hope is that by pooling data, TMNL will spot patterns its members wouldn’t otherwise see.
In some cases, alerts generated by TMNL’s models have led to banks filing suspicious activity reports with the Dutch financial intelligence unit that, in turn, prompted further investigation by law enforcement authorities, Mr. Siegers said.
Hennie Verbeek-Kusters, the director of the Netherlands’ financial intelligence unit, applauded TMNL’s work. “This is really a very straightforward way to take information exchange and cooperation between banks to the next level,” she said. “We are very positive about the initiative.”
An early pilot exercise described in the FFIS study allowed TMNL and Dutch authorities to cut the time needed to map out a complex anti-money-laundering network from three weeks to two days. Ms. Verbeek-Kusters said the partnership with TMNL involved a lot of trial and error, as the group refined its models to produce more useful results.
“It finally led to really very good reporting from the several banks, to analysis that we might have gotten to in the traditional way of working but it would have taken us months more,” she said.
One limitation of TMNL is that it is currently focused exclusively on business clients of banks. While the platform uses technology that allows only its member banks to decipher its alerts, privacy protections are much tougher for individual bank customers than for legal entities such as companies.
Data privacy concerns are one of the primary obstacles to more widespread adoption of information-sharing platforms in most countries. For TMNL, the next step would be to recruit more banks and add transactional data from individual customers. But that would require legislation clarifying how such information sharing relates to the European Union’s stringent data protection rules, a move the Netherlands is considering, Mr. Siegers said.
The U.S. was among the first countries to give financial institutions a legal gateway for sharing information about customers to identify money laundering or terrorist financing activity, with the enactment of the USA Patriot Act in the aftermath of the Sept. 11 terrorist attacks. But such information-sharing is voluntary, and use of the gateway has been slow to pick up.
The legislation has led to the creation of several platforms and partnerships by service providers and financial institutions. Verafin Inc., a software company offering a transaction-monitoring and case-management product, has developed a messaging portal through which about 2,500 banking users can submit information requests to each other.
Oracle Corp. is building a similar tool in partnership with Duality Technologies Inc., which would include automated query and response capabilities—meaning a requesting financial institution wouldn’t need to reveal the existence of their query to the party from which they are requesting information.
A more formal association of five of the largest U.S. banks has also produced some interesting results, according to the FFIS study. The partnership, launched in 2015, enables participating banks to pool investigative resources, generating thousands of new subjects of potential interest to law enforcement.
Still, most such collaboration in the U.S. and elsewhere remains fairly limited, according to the study. Nick Maxwell, the head of the FFIS program, said the main obstacles are pre-existing legal frameworks. Governments, he said, need policies that explicitly pave the way for further information-sharing initiatives.
“Technology is not the issue,” he said. “It’s really about whether the country has a clear policy environment to support sharing, which is rare.”
July 25, 2022 Published by The Wall Street Journal.