Human trafficking and slavery. Terrorism. Illegal game hunting. Drug trafficking. These are just a few of the horrors facilitated by money laundering and other white-collar financial crimes.
Today, the European Union is taking action to help stop them by proposing a new ambitious anti-money laundering (AML) package. Through the proposed package, the EU establishes a more risk-based regulatory framework that also broadens its scope and clarifies requirements. Moreover, while enhancing cooperation between public authorities, especially between financial intelligence units (FIUs), it also fosters tighter coordination between the private and public sectors.
Today’s development is an important step in the fight against financial crime.
According to the United Nations, money laundering is an almost $2T problem that accounts for 2-5% of global GDP. In our experience working with commercial, retail and investment banks, these organizations have several tools to prevent and detect money laundering; however, the prowess and motivation of money launderers, the number of methods they use, the volume of alerts, changing behavior patterns and high compliance costs often thwart efforts to stop it.
COVID-19 exacerbated these challenges with so much business globally moving digital, changes in investment behavior to money markets and other cash conversions, and the abnormal spending patterns caused by the up-and-down economy. Additionally, many banks rely on large analyst populations and high-touch methods to manage thousands to even hundreds of thousands of alerts. With much of the world impacted by COVID-19 – either being stricken by illness or stay-at-home orders – the backlog of investigations increased due to decreased physical staff availability.
The good news is that technology has come an incredibly long way over the past several decades. Technologies like AI, machine learning, behavioral analysis and homomorphic encryption can greatly level the playing field in the fight against financial crime, particularly when combined with a strong collaboration between the public and private sectors.
One promising area that aims to reduce the burden of the 200,000 to 300,000 alerts a month that can be triggered by a single bank’s AML Transaction Monitoring (AMLTM) system in extreme cases is in investigations automation. While automation has already played a significant role in compliance areas like surveillance and KYC, the space is a historically underserviced area of financial crime operations that presents a significant gap in the investigation management process for banks.
As institutions and jurisdictions alike look to detect, manage and capture financial crime networks more effectively and efficiently, the ability to cut through a vast sea of noise is critical. Many techniques are used to launder money, which puts banks in a pickle: tune systems to cast a wide net to catch perpetrators and risk triggering thousands of false-positive alerts or tighten parameters and models in transaction monitoring systems to reduce alerts but risk missing criminal activity and create exposure to regulatory sanctions. Intelligent Agents leveraging advanced technologies, like those in our Automated Investigator solution, can help intelligently crunch through all alerts generated – not just a sampling – to focus analysts´ time on the alerts that matter, instead of those that can be explained without human intervention. Explainability of machine learning models is, of course, critical for regulators and banks alike as we look towards technology to improve our arsenal in the fight against crime.
Beyond making the investigations process more efficient, transparent and consistent, we must find better ways to break down siloes to investigate crime networks more holistically across institutions while keeping data privacy intact. Verafin, a company owned by Nasdaq, has already successfully created a centralized platform for information sharing that allows investigators at SEC 314(b)-registered financial institutions in the United States to easily send, receive, and respond to requests for information directly in our secure environment, expediting decision making in the investigation process.
The EU’s proposed legislation also supports establishing a similar concept with the creation of an anti-money laundering authority and/or EU-level FIU to ensure collaboration and cooperation between national FIUs and direct supervision of the risker financial organizations. These are major steps in thwarting crime networks globally.
Technology can and must play a significant role as we continue to improve our collaboration capabilities in a safe environment. The powerful combination of cloud, federated learning and homomorphic encryption shows promise in enabling sharing and analyzing data for purposes such as fighting financial crime and improving market integrity in a safe and compliant way. The cloud is a neutral, secure infrastructure for internal and external stakeholders to share, analyze and act upon data, and the hyper-scale cloud providers have tools to help organizations do it. With federated learning, organizations can share insights without actually sharing data. Moreover, homomorphic encryption is emerging as a technology that can allow an organization to share data, retain complete control over who can access or perform analysis on it, and have auditability of that process.
We are inspired by and supportive of the moves made by the EU Commission today and see their measures as transformational in efforts to crack down on financial crime through more consistent controls and collaboration.
As a market practitioner and technology solutions provider, we are hyper-focused on enabling a world that is safe for investors of all kinds and empowers inclusive prosperity in economies everywhere. It is both our obligation and ambition to bring transparency, efficiency and integrity to the financial ecosystem with a mission to help root out and eradicate illegal money in the financial system.
We look forward to collaborating with other like-minded organizations and authorities not only in Europe but worldwide in the weeks and months ahead to advance and accelerate these efforts.