Intelligence-Led Investigations and Better Information Sharing Hold...

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Intelligence-Led Investigations and Better Information Sharing Hold the Promise of Improving the Disruption of Financial Crime

Lora von Ploetz, Head of Global Financial Crime Unit, Commerzbank AG

The scale of money laundering is hard to evaluate, but it’s considered to be substantial. The United Nations Office on Drugs and Crime (UNODC) estimates that between 2 and 5% of global GDP is laundered each year. Europol assessment shows that is approximately between EUR 715 billion and 1.87 trillion each year.

Last significant financial crime schemes exploited certain vulnerabilities on the EU and national level, including the misuse of various types of corporate vehicle and shell companies; the use of third-party professionals and professional money launderers and the close dependency of small regional banks to their non-resident portfolio. The use of systematic transaction surveillance tools had proven that financial crime incidents (e.g. such as Laundromats, Paradise Papers etc.) are so well orchestrated and executed on a large scale with particular knowledge of the thresholds and internal bank’s controls that those remained undetected for a large period of time. Additionally patterns in the complex sanctions circumvention related techniques require tactical intelligence.The prompt and adequate identification of those is critical importance. 

Well-timed and adequate identification and mitigation of financial crime risks can be improved by facilitating of sharing of financial crime relevant information group-wide. Nevertheless, inconsistent legal frameworks, data privacy restrictions, and bank secrecy present barriers that inhibit intelligence sharing. Regulatory expectations impose on banks to obey with highest standards for data protection, data security and customer privacy. As a result, financial institutions, law enforcement and regulators are constrained in seeing the complete picture of underlying criminal activity and illicit funds which flow across the global financial system.

The following factors can help to improve the joint public and private efforts for the disruption of financial crime:

Unilateral and multilateral efforts to improve financial crime information sharing -  some good development has been achieved in addressing above barriers within the work of the Financial Action Task Force (FATF).  Banks shall further wider pursue opportunities to share financial crime information where the principle of “legitimate interest” under the GDPR requirement applies. In order to develop and implement appropriate measures to mitigate risks stemming from certain customers, products, services, as well as jurisdictions, it is crucial to obtain adequate information on customers, their transaction patterns, expected location of transactions/activity as expressed by the customer, products and services used and, where necessary, on the source and/or destination of funds.

December 2020 FinCEN issued updated the guidance on Section 314(b) of the USA PATRIOT Act, where provides financial institutions with the ability to share information with one another, under a safe harbour that offers protections from liability, in order to better identify and report activities that may involve money laundering or terrorist activities. The new guidance also explains that there is no limitation under 314(b) on the sharing of personally identifiable information or any restraint on how the information can be shared. This clarification is significant as includes, for example, an attempted transaction, or an attempt to induce others to engage in a transaction.

National and multinational Public-Private Partnership (PPP) as platform for collaboration between financial institutions (FI), law enforcement, financial intelligence units to join efforts and responsibility to tackle financial crime with the use of an intelligence-led financial crime model. Some of them already agreed on or already implemented Innovation Hubs, which main objective is to share developments and use cases related to enhance technology: homomorphic encryption, secure multiparty computation, machine learning, artificial intelligence, cryptography and, in the future, possibly distributed ledger technology although most still in proof-of-concept stage.

There are several initiatives by banks and start ups which aim to apply privacy – enhanced technology for data sharing. A prominent example is the Dutch multi-party transaction surveillance model. Interesting use cases are observed further by AUSTRAC’s Fintel Alliance Alerting Project which intends to resolve the privacy issues by mapping transactions and relationships to known suspicious accounts across various encrypted data pools without giving access or "transparency" to the underlying data.

Establishment of a centralised and dedicated global expert group and central information hub in the Compliance organisation for receiving, tracking, analysing and reporting ML/TF and sanctions events. This special unitenables (as minimum requirement)the following : a) enhancing the exploitation of financial intelligence across the group; b) to act as a main repository on financial crime intelligence, threats and trends related to fraud, money laundering, corruption and various forms of economic crime c) provision of analytical and other forms of support to Group global investigations; d) acting as centre of expertise and/or think tank.

By definition the centralised and dedicated global expert group isthe first place capable to conduct intelligence led investigations on large-scale events or trends with similar impact, based on information received from around the globe. Sharing and exchange of financial crime intelligence enables banks to develop an overall picture of the financial crime environment. This will lead to improvement of a bank’s methodology to assess money laundering and terrorist financing risks; enhancement of its monitoring and surveillance strategy by aligning resources; ensuring that the organisation is able to react in an appropriate time when a weakness is identified, including by revising its internal controls and procedures.

Furthermore, those special investigative units will  adopt agile approach and operate cross  different departments and across  multiple  jurisdictions where the workload  is coordinated by a centralised team on a project based.  This team seeks to identify portfolio of clients, specific products and risks that previously would have gone undetected. Finally, the unit is also be responsible for a more effective global client risk management by shared clients managed in multiple locations.

Innovation and new technology

Innovation and new technologies hold the promise to improve the ability of banks to use investigative approaches with more effective or agile detection scenarios primary for timely identification of broad financial crime risks. The priorities of the two-year German FATF presidency shall further update the recommendations and guidance of the FATF (e.g. Digital Transformation of AML/CFT is an objective of the FATF Presidency).

This initiative includes the following projects:

A study of opportunities and challenges of new technology to make the implementation of AML/CFT measures by private sector and supervisors more efficient.

A study of opportunities and challenges for operational agencies, aimed at making systems to detect and investigate money laundering (ML) and terrorist financing (TF) and understanding ML/TF risks, more efficient.

A stock take on data pooling and analysis, aimed at helping private sector making better use of artificial intelligence and big data analytics for AML/CFT, and increasing the efficiency of regulatory compliance, while ensuring a high level of data protection.

Currently the banks have committed millions to drive their legacy system in novel stand alone solutions or project teams internally developed underlying compliance technologies which may in the future become even regulatory expectation. Among such are different Big Data technologies and analysis tools for the prediction of outcomes; innovative solutions for the processing of sensitive data; network mapping through SEPA or SWIFT transactions across multiple jurisdictions; reducing compliance risk with Regression Analysis; pre-defined rule-based queries etc.

Nevertheless that most of the projects are in pilot stage or proof of concept those valuable examples show how investigative approach and new technologies can contribute to the disruption of financial crime.

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