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Digitization of financial services has opened the doors for more complex financial crime

The continuing modernization and digitization of the financial services industry made easier access to financial services more available to everyone, but it also has created the opportunity for illicit actors to concoct more complex, digitized crimes.

In an interview with Thomson Reuters Regulatory Intelligence, Rick McDonell, executive director of the Association of Certified Anti-Money Laundering Specialists (ACAMS), discusses this crucial development and notes how important it is for financial institutions to ensure that their compliance departments and officers are properly trained to detect this new strain of financial crime.

McDonell previously served as executive secretary of the Financial Action Task Force (FATF) between 2007 and 2015, and was chief of the United Nations Global Program against Money Laundering at the UN Office On Drugs and Crime. He also established the Asia-Pacific (APAC) Group on Money Laundering and served as its first executive secretary. He is a lawyer by training and has had extensive experience both as a federal prosecutor and in conducting complex investigations; he also took charge of many multidisciplinary investigation task forces into organized crime cases, both nationally and internationally.

Rick McDonell: I’ve been in the anti-financial crime industry for a long time, and the most satisfactory aspect has been to see the increase over time in our capacity to deal with crime and, more specifically, the expanded information-sharing and availability across borders. The end-goal of the work I do is to prosecute financial crime, and to do that we’re very dependent on information. It’s been very gratifying to see the extent to which we’ve been able to improve regulators’ ability to exchange information across borders, together with the establishment of 160 financial intelligence agencies dedicated to doing this work.

Rick McDonell: Sometimes you “follow the money” as far as you can, but still get stopped. It doesn’t happen as much anymore, but there remain a number of legal impediments that limit mutual legal assistance between countries.

I’ve been in the anti-financial crime industry for a long time, and the most satisfactory aspect has been to see the increase over time in our capacity to deal with crime…

Today, the laws have become much clearer, but sometimes the process is still slow and cumbersome. I’d love to see things speed up at our end, because financial crime is multiplying more quickly than ever.

Rick McDonell: The digitization of financial services has greatly improved access and convenience for everyone, but it’s also opened the doors for more opportunity, diversity and complexity in terms of financial crime. For financial institutions and regulators, ensuring that compliance departments and officers are properly trained to detect financial crime, and empowered actually to do something about it, is paramount.

History has shown that the financial and reputational risk of being non-compliant can be devastating, and being able to keep up with or stay ahead of financial crime will only become more important as we continue to move toward a more digital, virtual world, as the experience of the COVID-19 pandemic in 2020 has shown.

Rick McDonell: Compliance and regtech go hand-in-glove. For there to be a seamless partnership, it’s important that regulators help systemize the kinds of information they require, that there is regulatory certainty as much as possible, and that the technology itself is created and designed for a digital world and easy to work with. These sound like simple things to achieve, but in fact haven’t been fully mastered.

It’s important that compliance teams act as a feedback loop for the development of regtech, and that regtech is developed with the end-operator or user in mind.

Rick McDonell: Financial institutions have made great strides in recognizing, developing, and empowering their compliance departments and teams. It can, however, be very hard to shift the mindset that some organizations still have, which is that compliance is a cost function; that it is an investment with potentially no clear “return”. What do you call something that you spend money on with no expectation of return, but rather to gain peace of mind? It’s insurance, and most of us have it for a reason. For businesses, compliance is a necessity, not a choice: the more robust and holistic your compliance function is, the less you will hear about, or have to deal with, compliance issues — and that’s a good thing because it means it’s working.

Rick McDonell: The COVID-19 pandemic has accelerated a trend that’s been happening for some time — the move toward more digitization and electronification. For a long time, the front lines of know-your-customer and anti-money laundering compliance began with physical customer identification, and during the pandemic there’s been little opportunity for such face-to-face interaction. Any systems which relied on that physical identification have had to find an alternative, digital, option.

“Today, the laws have become much clearer, but sometimes the process is still slow and cumbersome. I’d love to see things speed up at our end, because financial crime is multiplying more quickly than ever.”

The same goes for the availability and verification of key documents, which can no longer be seen in their original form and certified. In this sense the entire mindset of the compliance function is shifting, and while it’s been happening for some time, there is a great sense of urgency to determine the alternative solutions that still fit the fundamental compliance requirements, that still achieve the same level of certainty, but which will require different technical capabilities.

Rick McDonell: I was able to travel to the Asia-Pacific region earlier in my career, and worked on the establishment of an APAC governance group on money laundering. They have very different ways of doing things there and we were considered outsiders, and our work was initially met with pushback. Ultimately, we were successful, and it’s been great to see how far many of the APAC countries have come in terms of participating in, and even leading, actions against financial crime.

I’m also very proud of the role I was able to play as executive secretary of the FATF, especially during the revision of the international standards, which are now embedded in the FATF member countries’ regulatory systems.

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Lindsay Anderson, January 2021, by Thomson Reuters Regulatory Intelligence

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