NextGen AML: ecosystem-driven change

Collectively, Financial Institutions (FIs) are the gatekeepers of the financial system, responsible for keeping criminal money out. However, currently their efforts are largely executed in isolation and hence disconnected. FIs each have their own AML approach implemented by their own compliance teams. And following high-profile money-laundering investigations in recent years, these teams have become steadily bigger. FIs do realise though, that more coordination is needed, and they are working hard to achieve this. A good example is the launch of Transactie Monitoring Nederland (TMNL): a joint transaction monitoring utility set up by five major Dutch banks, in which they monitor a subset of their transaction data in encrypted form on multibank networks.

Public-private partnerships

In the broader financial ecosystem, however, there are also public sector organisations with a crucial role to play in improving AML practice, such as legislators, supervisors FIUs and law enforcement agencies. They need to work effectively with FIs to make all AML efforts worthwhile. There is no lack of good intentions in the field, and there are numerous small-scale initiatives. One of such initiatives is the Serious Crime Task Force (SCTF), in which tactical information is shared between Dutch law enforcement agencies and FIs in order to close the feedback loop and speed up response times. The leads produced by SCTF are for the most part actionable for law enforcement, and are much more effective than the avalanche of unusual transaction reports coming from FIs. However, to deliver its full potential, public private cooperation should be more than a flurry of isolated initiatives, with signals of overlap and duplication. Parties should place such cooperation at the heart of their strategy, where operating in ecosystems is the default rather than an add-on to regular AML activities. And they should do so because they genuinely believe that it’s the right way to go.

Believers

So where should that that belief in public-private cooperation be grown? The first step is to enhance the mutual trust between the parties. The success of the current small-scale initiatives has already sown valuable seeds of trust throughout the ecosystem, and these need to be cultivated. Public sector parties should cultivate the seedlings by incentivising cooperation and remove barriers. If and when they do so, FIs can afford to invest more in impactful AML actions and feel less scrutiny. The common purpose all ecosystem parties should be working towards is to make money laundering as difficult as possible, and to make the financial benefits of criminal activities much less appealing. Public and private sector parties should feel that they are part of the same team – each with their own roles and responsibilities – and should have similar incentives and targets to act on their common purpose.

Central coordination

Above all, a national AML coordinator is needed to steer the many existing initiatives and ensure that public-private cooperation gains momentum. This coordinator should be a real connector, not by micromanaging tactical and operational issues and procedures, but by aligning public and private parties on strategy, priorities and efficient use of the available resources and by guarding the execution thereof. The AML coordinator could be a public sector role, similar to the National Counter-Terrorism Coordinator. But it should also be complemented with appointees from the financial sector. Cooperating within an effective and efficient governance model, they should jointly steer the ecosystem of all public and private parties, determine the overall course and enable optimal cooperation by providing a frictionless framework for operational cooperation. Such coordination will merge the individual initiatives into a connected, strong and effective defense system. And needless to say, sufficient funding is essential to achieve strong central coordination.

Secure information highways

Another important task for the coordinator is to enable the financial ecosystem to share more information in a faster way. It’s time to open up secure and selective information highways across private-private, public-private and international borders. Currently, FIs are afraid to open up to their competitors or supervisors. Parties fear overstepping perceived restrictions following legislation and EU directives. In fact, however, the AML and privacy legislation offers more wiggling room than parties are using right now. FIs and public sector parties should establish together how far they are willing and able to go and how this can be explained and accounted for towards all relevant stakeholders in society. By conducting a transparent and due process, enabled by technological advancements, a careful balance should be found between fighting crime by sharing information and protecting basic and important rights of individuals.

Common plan of attack

To ensure that that all ecosystem partners realise the full potential of a common public-private agenda against financial crime, a common plan of attack is needed. The National Risk Assessment (NRA) against money laundering could serve as such a strategic management document — if it described joint strategic goals and priorities, was more frequently updated, received broader attention and support, and if it was operationalised to a deeper level to make it actionable in practice. Such as common plan of attack would also enable public and private parties to focus and maybe even pool their resources in order to develop and implement AML innovations responsibly and more cost-efficiently. Let’s not forget the financial benefits that this would bring.

Public-private cooperation on steroids

Public-private cooperation in the financial ecosystem at its current level is promising, with plenty of good intentions and smaller-scale developments. However, in order to reach the desired nextGen AML state, this cooperation needs to be gathered up, coordinated and put on steroids. Not just because it’s a recipe for higher-quality AML reporting by FIs and for faster feedback and action on these reports. But also because participation and active collaboration in the ecosystem should be seen as a key metric of maturity of the AML framework. Moreover, this ecosystem-driven change is essential to enable the next kind of change we’ll be discussing in this blog series: intelligence-driven change. Watch this space!

Click here for an overview of the blog series