![Page 1: The Impact of Anti Money Laundering and ... - ARI.UiTM · –Negligence, –Criminal fraud on a grand scale, –Money laundering on a grand scale, –Legislators who totally abrogated](https://reader030.vdocuments.us/reader030/viewer/2022040904/5e786a01ffcef579c80d3c8e/html5/thumbnails/1.jpg)
The Impact of Anti Money Laundering and Combating Terrorist Financing
Activities on the Business and Operations of Financial Institutions
John Broome
Centre for Transnational Crime Prevention
University of Wollongong
![Page 2: The Impact of Anti Money Laundering and ... - ARI.UiTM · –Negligence, –Criminal fraud on a grand scale, –Money laundering on a grand scale, –Legislators who totally abrogated](https://reader030.vdocuments.us/reader030/viewer/2022040904/5e786a01ffcef579c80d3c8e/html5/thumbnails/2.jpg)
LOOKING BACK …..LOOKING FORWARD
• 3 Decades of global AML activity
• Constantly expanding obligations
• Major impact on financial institutions (FIs)
• Will examine that impact but in the context of how we
got to the present position
• Also address some fundamental questions:
– What are we doing?
– Why are we doing it?
– Does it work?
– Does it pass a cost benefit analysis?
![Page 3: The Impact of Anti Money Laundering and ... - ARI.UiTM · –Negligence, –Criminal fraud on a grand scale, –Money laundering on a grand scale, –Legislators who totally abrogated](https://reader030.vdocuments.us/reader030/viewer/2022040904/5e786a01ffcef579c80d3c8e/html5/thumbnails/3.jpg)
THE MONEY TRAIL
• In the 1980s money laundering was all about
crime
• Following the money trail was intended to
lead us to the major drug traffickers
• Criminalise money laundering
• Use financial intelligence
– Establish Financial Intelligence Units (FIUs)
• Intended to allow us to recover large
amounts of proceeds of crime
• It was a law enforcement tool within a law
enforcement paradigm
![Page 4: The Impact of Anti Money Laundering and ... - ARI.UiTM · –Negligence, –Criminal fraud on a grand scale, –Money laundering on a grand scale, –Legislators who totally abrogated](https://reader030.vdocuments.us/reader030/viewer/2022040904/5e786a01ffcef579c80d3c8e/html5/thumbnails/4.jpg)
PROTECTING THE FINANCIAL SYSTEM
• Concerns about ML impacts on financial institutions and systems
• G7 decides to establish the Financial Action Task Force (FATF)
– Limited remit and limited life
• Asked to develop best practice recommendations
• These cover legal, financial system and law enforcement issues
• Based on a financial system paradigm
![Page 5: The Impact of Anti Money Laundering and ... - ARI.UiTM · –Negligence, –Criminal fraud on a grand scale, –Money laundering on a grand scale, –Legislators who totally abrogated](https://reader030.vdocuments.us/reader030/viewer/2022040904/5e786a01ffcef579c80d3c8e/html5/thumbnails/5.jpg)
DEVELOPMENTS IN THE 1990s
• Major spread of AML initiatives
• Regional FATF style bodies
• Legislation introduced in many countries
• Mutual evaluation process adopted
• Many organisations involved
– European Commission
– Council of Europe
– Basel Committee
– Wolfsberg Group
– UNOODC
– World Bank and IMF
– Development banks like ADB
• FATF 40 Recommendations revised in 1996
![Page 6: The Impact of Anti Money Laundering and ... - ARI.UiTM · –Negligence, –Criminal fraud on a grand scale, –Money laundering on a grand scale, –Legislators who totally abrogated](https://reader030.vdocuments.us/reader030/viewer/2022040904/5e786a01ffcef579c80d3c8e/html5/thumbnails/6.jpg)
OBLIGATIONS ON FINANCIAL INSTITUTIONS
• The 40 Recommendations required FIs to
– Report suspicious transactions
– Report cash transactions in some cases
– Verify customers and conduct KYC and CDD
– Train staff
– Keep records
• System applies to FIs
• Initial opposition but general acceptance
• Concerns about cost and benefits emerge but system remains
![Page 7: The Impact of Anti Money Laundering and ... - ARI.UiTM · –Negligence, –Criminal fraud on a grand scale, –Money laundering on a grand scale, –Legislators who totally abrogated](https://reader030.vdocuments.us/reader030/viewer/2022040904/5e786a01ffcef579c80d3c8e/html5/thumbnails/7.jpg)
TERRORISM
• It all changed on 11 September 11 2001 • The focus shifted to preventing terrorism • Target terrorist financing • Use the existing AML system (despite obvious
problems) • New FATF Recommendations directed at terrorist
financing • The paradigm now shifts to protecting national
security • Much more intrusive laws • No opposition - Whatever it takes !
![Page 8: The Impact of Anti Money Laundering and ... - ARI.UiTM · –Negligence, –Criminal fraud on a grand scale, –Money laundering on a grand scale, –Legislators who totally abrogated](https://reader030.vdocuments.us/reader030/viewer/2022040904/5e786a01ffcef579c80d3c8e/html5/thumbnails/8.jpg)
PROBLEMS WITH THE FATF 40+9
RECOMMENDATIONS
• Developed by developed economies for developed economies
• One size fits all approach
• A rule based approach
• This was due to the idea they were Recommendations
• But they had become Standards and were set in stone
• FATF recognised the problem in 2008 and said low capacity countries (LCCs) should focus on core issues
• LCCs were narrowly defined
• The reality is that countries need flexibility and reasonable time
• This is not an excuse for inaction
![Page 9: The Impact of Anti Money Laundering and ... - ARI.UiTM · –Negligence, –Criminal fraud on a grand scale, –Money laundering on a grand scale, –Legislators who totally abrogated](https://reader030.vdocuments.us/reader030/viewer/2022040904/5e786a01ffcef579c80d3c8e/html5/thumbnails/9.jpg)
RISK BASED APPROACH (RBA)
• Developed in 2007 as a response to concerns about the rule based approach
• Idea is to assess the ML and TF risks of customers, products, locations and delivery methodologies
• Not compulsory – rule based approach can be used
• Hopes it would reduce compliance costs
• In fact good risk based analysis requires skills and resources – it does not save money
• Creates problems in low resource countries where the skills are not available
![Page 10: The Impact of Anti Money Laundering and ... - ARI.UiTM · –Negligence, –Criminal fraud on a grand scale, –Money laundering on a grand scale, –Legislators who totally abrogated](https://reader030.vdocuments.us/reader030/viewer/2022040904/5e786a01ffcef579c80d3c8e/html5/thumbnails/10.jpg)
GLOBAL FINANCIAL CRISIS (GFC)
• Why?
– Greed,
– Stupidity,
– Negligence,
– Criminal fraud on a grand scale,
– Money laundering on a grand scale,
– Legislators who totally abrogated their responsibility and
repealed useful laws,
– Regulators who failed to take action, and
– Failure by the ratings agencies to accurately rate investment
risks in products
• Result was a new paradigm – focus on making system
sustainable
• G20 emerges with more influence
• Regulation was back in fashion (sort of)
![Page 11: The Impact of Anti Money Laundering and ... - ARI.UiTM · –Negligence, –Criminal fraud on a grand scale, –Money laundering on a grand scale, –Legislators who totally abrogated](https://reader030.vdocuments.us/reader030/viewer/2022040904/5e786a01ffcef579c80d3c8e/html5/thumbnails/11.jpg)
A TIME TO ASSESS
• Review of the FATF Recommendations underway
– Two year process with external consultation
• Failed to address the fundamental questions
– What Are We Trying to Achieve?
• Changed over time – the four paradigms
– Can We Claim Success?
• Limited at best
– What Lessons Have We Learned?
• We know what works but focus on form over substance
– What Has Been the Cost?
• We don’t know!
– Does it Measure Up on a Cost Benefit Analysis?
• Can’t tell
![Page 12: The Impact of Anti Money Laundering and ... - ARI.UiTM · –Negligence, –Criminal fraud on a grand scale, –Money laundering on a grand scale, –Legislators who totally abrogated](https://reader030.vdocuments.us/reader030/viewer/2022040904/5e786a01ffcef579c80d3c8e/html5/thumbnails/12.jpg)
IMPACT ON FINANCIAL INSTITUTIONS
• Varies between different sized FIs – International and domestic
• Varies between developed and developing economies – OECD and the rest
• Asia not homogenous major differences within countries eg China, India, Thailand
• Substantial obstacles to AML CFT – Lack of political will, – Inadequate resources, – Poor regulatory practices, – Corruption, – A lack of trained staff, – Poor international support, – Competing priorities, and – A view in many counties that it’s not their problem.
![Page 13: The Impact of Anti Money Laundering and ... - ARI.UiTM · –Negligence, –Criminal fraud on a grand scale, –Money laundering on a grand scale, –Legislators who totally abrogated](https://reader030.vdocuments.us/reader030/viewer/2022040904/5e786a01ffcef579c80d3c8e/html5/thumbnails/13.jpg)
• Essential prerequisites for effective AML CFT
(see paper)
• Rarely exits even in developed economies so it
is very difficult to achieve
– Needs a public and pirate action and cooperation
– If only one side is trying it cant work
– If government fails to provide resources and
commitment it cant work
– If only some reporting entitles are trying it can’t
work
• The result is wasted resources
• Impacts are both positive and negative
IMPACT ON FINANCIAL INSTITUTIONS
![Page 14: The Impact of Anti Money Laundering and ... - ARI.UiTM · –Negligence, –Criminal fraud on a grand scale, –Money laundering on a grand scale, –Legislators who totally abrogated](https://reader030.vdocuments.us/reader030/viewer/2022040904/5e786a01ffcef579c80d3c8e/html5/thumbnails/14.jpg)
POSITIVE IMPACTS ON FIs
• Enhanced customer knowledge • Good for business
– More business opportunities – Cross servicing
• Fraud prevention and detection – Less likely to be defrauded an more likely to find it
• Reduce disruption and costs of non compliance – Fines and legal costs – Loss of license – Diversion of management time
• Reputational Issues – Avoid high risk customers – Avoid public criticism – ‘banker to despots and dictators’ – Avoid involvement in international sanction regimes – Maintain correspondent relationships – Stay in business (Riggs Bank)
![Page 15: The Impact of Anti Money Laundering and ... - ARI.UiTM · –Negligence, –Criminal fraud on a grand scale, –Money laundering on a grand scale, –Legislators who totally abrogated](https://reader030.vdocuments.us/reader030/viewer/2022040904/5e786a01ffcef579c80d3c8e/html5/thumbnails/15.jpg)
• High Compliance Costs – AML CFT IS NOT CHEAP
– Modify operating systems,
– Develop detailed policies and procedures (many should be standard
business practice),
– Board oversight and sign off,
– Ensure all staff are actively applying verification, KYC, CDD,
enhanced CDD procedures through internal management controls
and audits,
– Software and hardware to operate transaction monitoring systems,
– Detailed and ongoing staff training
– Review the AML CFT risks of all products, customers, markets and
product delivery mechanisms,
– Ensure new products and services are assessed for AML CFT risks,
– Have the risk analysis processes independently verified, and
– Set up systems to link transactions and account names to watch
lists, sanctions regimes and lists of high risk jurisdictions.
NEGATIVE IMPACTS ON FIs
![Page 16: The Impact of Anti Money Laundering and ... - ARI.UiTM · –Negligence, –Criminal fraud on a grand scale, –Money laundering on a grand scale, –Legislators who totally abrogated](https://reader030.vdocuments.us/reader030/viewer/2022040904/5e786a01ffcef579c80d3c8e/html5/thumbnails/16.jpg)
• Competitive Disadvantage
– It is unfair unless everyone has to follow the rules
– Non compliance can produce short term benefits
– Move to the lowest common denominator
– The most often quoted excuse for non compliance
– But …. Remember the positives
• Cultural Norms
– Our clients will not answer questions
– Common to use single accounts for multiple customers
– Threats of adverse consequences to business for following the rules
– Our staff are intimidated
• The answer is public awareness and internal training
– We need to change the time when customers provide detailed KYC information
• Costs of RBA
NEGATIVE IMPACTS ON FIs (cont’)
![Page 17: The Impact of Anti Money Laundering and ... - ARI.UiTM · –Negligence, –Criminal fraud on a grand scale, –Money laundering on a grand scale, –Legislators who totally abrogated](https://reader030.vdocuments.us/reader030/viewer/2022040904/5e786a01ffcef579c80d3c8e/html5/thumbnails/17.jpg)
WHERE TO FROM HERE?
• Are the costs and benefits worthwhile?
– Only if the systems are working
• Acknowledge they often do not work well
• The answer is to improve the AML CFT systems not stop trying
– We must critically examine what we do and how we do it
– Be prepared to change
– Improve levels of cooperation
• Focus on efficiency and effectiveness to reduce impact and increase benefits