Modernising the Fight against Financial Crime by focussing on Effectiveness

Prepared Remarks from a Key note speech by John Cusack, Co Chair of the Wolfsberg Group at ACAMS Europe in Berlin in June 2019 on “Modernising the Fight against Financial Crime through a focus on effectiveness.”

The Wolfsberg Group is an association of 13 global Banks, which aims to develop frameworks and guidance for the management of financial crime risks, particularly with respect to Know Your Customer, Anti-Money Laundering and Counter Terrorist Financing policies. In essence we are about 3 things: Standards, engagement and benchmarking.

Recent priorities for the Group have culminated in work that has recently come to fruition, in particular, we have published a revised enhanced correspondent banking due diligence questionnaire which is becoming the de facto standard for Correspondent Banking Due Diligence.

We believe this will contribute to financial crime risk management by boosting preventative measures and help to avoid unwanted derisking. From 27th June 2019 we published on our website a range of, very detailed guidance to support the core questionnaire. This year we have already published guidance on Sanctions screening and updated our collaborative Trade Finance paper as well as publishing Guidance on Tax Evasion. We are also progressing well, aiming for publication this year, on guidance relating to Source of Wealth and Source of Funds.

In our scope of work, we have asked ourselves “what risks are we most concerned about?” – the areas that come out on top include: sanctions risks and sanctions compliance, correspondent banking, money service bureau’s ,threats from cyber and on the emerging financial crime threats linking virtual assets to financial institutions, where the absence of a clear regulatory framework and supervision across many parts of the industry create significant challenges to many banks and from Fintechs, that bring both threats and opportunities to the sector. The risk theme that interlinks with all of these and something that everyone in the industry would like to improve, centres on “Effectiveness” – including sustaining and improving the current model and aligns to affordability and scaleability of current activities.

The work on effectiveness has examined many areas, included discussions with countless other banks and industry groups and, I think, that there is a growing consensus now around many of the inherent effectiveness themes. This certainly feels the case from the private sector – shaping what we think the future could look like and the direction the industry is going. That said, we acknowledge that we won’t get there alone and need to bring regulators, policy makers and the wider financial crime risk ecosystem with us. This is a significant challenge and will take time and need universal support.

So why effectiveness and why the need to modernise? A few figures may help to qualify the reasons: beyond the headlines that Financial Crime is a top ten global industry and arguably the most profitable, the combinations of traditional organised crime with the extension to other criminal enterprises such as an increase in fraud, tax evasion, human trafficking, illegal wildlife trafficking and cyber enabled criminality, these developments should be of concern to everyone inside and outside of this conference.

Why modernise now?

  • It’s almost 20 years since the Wolfsberg Group first met and committed to playing our part in raising standards and sharing best practice with the industry, standard setters, regulators and others. Our journey has allowed us to focus on Private Banking, Terrorist financing, Correspondent Banking, Payment standards, Politically Exposed Persons, Trade finance and many more significant industry areas but increasingly, today, we are predominantly concerned to see a transition from existing ways of working to a more modern approach, underpinned by effectiveness.
  • It’s 30 years since FATF was established and this year FATF’s mandate was extended “indefinitely”, recognising their work remains valid and that FATF is likely to be around for a long time to come. Examining the FATF Country Evaluations that seek to measure compliance, at a country level, with the 40 Recommendations and 11 Effectiveness Outcomes, it is obvious there remains plenty to do both at a national and public sector level as well as an industry and private sector level. The Mutual Evaluation process is the FATF standard and notwithstanding any criticism, is the core measuring tool to assess effectiveness. By my own assessment, using a simple scoring model aligned to the Mutual Evaluation scores, you can describe overall compliance with FATF 40 Recommendations, after 75 Countries have been assessed, at around 64% technically compliant. The more important effectiveness assessment, sits at only 31% effective. Europe, on average, is the best performing region on effectiveness scores, but is still only at 45%. I wonder what the consequence of a bank only scoring 45% on its effectiveness regime would be – likely, censure, enforcement action and other penalties.
  • t’s 40 Years since significant economic sanctions were imposed on Iran by the US, following the storming of the US Embassy in Tehran by Iranian students and holding diplomats as hostages.
  • It’s almost 50 Years since the US Bank Secrecy Act came into force, the first Anti Money Laundering focussed legislation that brought FI’s directly into the fight to safeguard the financial system and tackle financial crime. 
  • t’s a 100 years, this month (28 June 1919), since the signing of the Treaty of Versailles was signed, officially ending World war 1. In that Treaty, Article 254 stated that for the first time, world powers committed to work together against dangerous drugs which were criminalised. 100 years later, the war on drugs continues, with drug trafficking still a major contributor to global proceeds of crime and estimated to continue to generate hundreds of billions of dollars a year.So it’s clear we have been at this a long time and whilst I think it’s important to say that much of what has been done is helpful and is making a difference, we have to accept the “must do better” report card and to do that, we must evolve further.

It is also important to note that this is evolution and not revolution, building on what works. It is interesting to remember that these suggested changes would have sounded somewhat radical, only a few years ago. The fact that we are proposing them demonstrates how far we have already come, how receptive and collaborative stakeholders have been and how there is an opportunity to continue to develop.. So we don’t want to throw away what has been built.I In fact, there are strong arguments to suggest that as we have developed in the past few years, we have never had such strong defences and the growth in partnerships and understanding of criminal typologies has allowed for greater insight into risk and vulnerabilities in the system, more than ever before. But to continue to improve we need to determine what are the most important factors for reform or transition and will continue to evolve and deliver improvements over the next 5 years. We have grouped these around 6 themes. There is no “silver bullet” but will necessitate incremental change and the subsequent aggregated impacts will demonstrate improvement. These areas to modernise are where we see significant opportunities that can improve our ecosystem and help to be more effective in that fight against financial crime, but it will only do so if the right conditions, environmental factors, and incentives are in place, meaning there are numerous interested parties that are critical to achieving wider success.

The Wolfsberg Groups proposals: Key areas to modernise

  • taking 1 & 2 together, arguably the most difficult, but almost certainly most important and impactful, are these 2 items. What we mean can be best described by the phrase “running a current financial crime programme is like running a restaurant for the benefit of the health inspector”. Yes, the restaurant needs to be clean and safe but the purpose is not to be compliant it’s to feed the customer (for us, law enforcement) with the best offerings you have (for us, intelligence and information) so they can benefit (and more effectively combat financial crime). That then leads us to consider what are the priorities, from a national, regional and global perspective and what areas of financial crime are most relevant to certain regions and countries to allow visibility, reporting and support to usefully inform not just our own internal risk assessment but also support a National or Country related Risk Assessment. Therefore, re focussing the current approach on this, whilst recognising the broader aims of Compliance are important, this results in a FATF type approach to effectiveness in prioritising the effectiveness, rather than technical compliance aspects.
  • SAR Reform is broader than the title suggests and much more than improving the filing of a Suspicious Activity or Transaction (SAR/STR) report. We believe that to improve effectiveness, there is an opportunity to re-structure the end to end SAR process. This means looking at those key processes that generate the bulk of the cases that are investigated and then, consider the numbers of SARs filed and the usefulness of all these SARs to Law Enforcement. A number of Countries are undertaking their own comprehensive SAR Reform and I’m confident improvements will soon be seen that can shape programmes and encourage others to engage also. Fellow FCC professionals understand the need to make our Transaction Monitoring (TM) systems more efficient and effective. That is thesame for KYC processes, screening and much else besides and yes this will include use of new technologies, with a recognition that whilst they can help, they cannot, on their own, solve these problems. 
  • n our opinion one of the most promising areas that can improve effectiveness is data sharing or information sharing. There have been numerous successful pilots, conducted globally, for it to be clear to all involved parties, that Information Sharing is achievable and has made a difference, predicated on being appropriately resourced and subject to enabling legislation and regulation whilst ensuring the safeguarding of privacy. Wolfsberg Group Members are founder participants of many of these, and continue to be huge supporters of such Financial Information Sharing Partnerships. FATF have also commented favourably on these programmes during Country evaluations so it’s likely we will see more being established. If you look at the recent issues centred on the Baltic’s and in particular, affecting the Nordic region and banks, there is a case to be made that, with information sharing in place, this could have been avoided and/or identified more efficiently quicker and post investigation activity better co-ordinated.
  • the case for utilities (item 5), back office consolidation, platforms and partnerships has been made not just in fighting financial crime but in many areas within financial services. The aggregated costs and inefficiencies, the scarcity of expertise and the costs of getting things wrong, indicate we could be looking at some major changes in the industry, with regulators being much more supportive, (provided safeguards are in place) than they have been in the past.
  • lastly we see cybercrime presenting real and present danger and the convergence of organised crime, cybercrime as a service and state cyber activities as creating a potential perfect storm of increased threat and opportunities. In many FI’s, cyber risks are beginning to topple fighting financial crime as the number 1 non financial risk. Whilst cyber security concerns are clear, much of this risk also involves financial crime, sanctions and fraud. Therefore co-ordination of such cross-cutting activities becomes key as does an understanding of the holistic threat picture. 

So, to conclude, we are at a fork in the road. Do we go straight on or do we take a turn and take that different path? Still a long journey but with the prospect of greater success. To paraphrase an African saying – “if you go alone on a journey you can go fast, but if you want to truly go far then go together”. We believe we must go on this next journey together.

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Melvin Leong
Melvin Leong
4 years ago

Fighting financial crime is a long journey which need us tirelessly together execute in terms of governance , monitor, and prevention, educate the public with raising up their awareness is a must!