Understanding this wider scope of responsibilities, it is clear that the FinCEN files expose the errors and challenges related to the reactivity in processing SARs, not the wrongdoing of banks, and that improvements are needed across the entire AML ecosystem.
What needs to be fixed?
Financial institutions struggle to harness data and have a limited view on transactions, which is a huge disadvantage to both finding hidden connections and for Know Your Customer (KYC). They are diligent at identifying simple, recurring money laundering patterns, but connecting elaborate schemes or international players, accounts, interactions and payment methods is much harder, allowing criminal activities to fly under the radar. Speaking from years of experience as an AML expert, Miguel Aguado, Senior Manager of the Financial Intelligence Unit at RIA Financial, adds: “Detecting suspicious activities is challenging, particularly in a very changing environment where new trends appear constantly. Likewise, an effective detection methodology that is effective today may not be effective tomorrow. Moreover, managing large databases with millions of customers and transactions is an additional challenge.”
- Outdated Information Systems
Traditional AML and KYC applications use relational databases that store data in tables, which is an approach well-adapted for simple analytics, but not suited for sophisticated investigations. Another weakness is that financial institutions have detection rules that use action-based logic focused on only simple transactional behavior, which will never successfully identify complex money laundering operations.
On top of that are mixed signals to manage. “On one hand, intelligence agencies (like FinCEN) ask banks for data and SARs; and advise them not to ‘de risk’ or block suspicious activity, which makes the money harder to trace because it gets sent to off-shore institutions in less-compliant jurisdictions,” describes Kellam. “On the other hand, regulators say they must block suspicious transactions.”
Financial institutions also have to keep up with changing laws, regulations and standards set by the Financial Action Task Force (FATF), or face hefty fines. And the cost of failure is climbing, with $8.14 billion in global AML penalties handed out in 2019, double that of the year before.