With London’s ‘laundromat’ moniker for dirty money back in the spotlight since the Russian invasion of Ukraine, evolving rules around KYC and AML may prove timely, Daniel Lanyon writes.
London has grown a reputation for financial innovation over the past decade. But also, over the same period for money laundering. The Russian invasion of Ukraine has brought that into sharper focus.
Nonetheless, dirty cash is still pushed through UK banking and other financial services institutions each and every day.
Charles Delingpole, CEO of ComplyAdvantage, says money laundering is a serious problem owing to the crime, terrorism and sanctions evasions that stem from it.
“What is constant is the growing revulsion across society of moral transgressions, as well as the fact that regulators started casting the net narrowly on the highest problems and most advanced geographies, and now every year a new industry or geography becomes regulated, and limits are constantly reduced. Regulation is where it is because technology is where it is.”
Prime Minister Boris Johnson recently has promised “a crackdown” on money laundering but what is the best way to deal with the problem?
Cash limit
Currently, every transaction over £10,000 needs to be explained for Anti-Money Laundering (AML) rules, leading to some creative use of the limit such as multiple transactions of £9,999.
Is there a better way of streamlining the process so that knowledge of the customer (KYC) takes precedence rather than a limit-based approach which doesn't really serve the intention of the rule?
The £10,000 figure is a deliberately arbitrary threshold which allows regulators to triage which entities are worthy of further consideration, says Delingpole.
“In an ideal world, this would be simply one risk indicator amongst many, and all teams would have systems that would factor in the huge range of threats and data sources that could signal that the threat was the most material. But, historically, if someone is moving £10k, then it’s worth checking out in detail,” he said
“This has led to some behaviour where people deliberately give the game away - multiple transactions just below the limit of £10k indicate that someone has a knowledge of and a reason to avoid the system - a definite red flag,” he added.
Henry Balani, Global Head of Industry and Regulatory Affairs for Encompass agrees that rules could be streamlined.
“KYC is critical. Knowing who the customer is, how much funds are and where it is coming from helps a lot,” he said.
On the rise
While Balani says there hasn’t been a noticeable uptick in money laundering yet owing to the Russian invasion, the UK’s financial regulator last week warned that “some” challenger banks showed weaknesses when it comes to managing financial crime.
“Challenger banks are an important part of the UK’s retail banking offering. However, there cannot be a trade-off between quick and easy account opening and robust financial crime controls,” Sarah Pritchard, executive director for Markets at the FCA said.
The FCA says that there has been a rise in Suspicious Activity Reports, alerts to the National Crime Agency. This means there were potential instances of money laundering or terrorist financing, although it didn’t name any specific banks.
“That some challengers banks fall short of their more established rivals when it comes to financial crime compliance controls is perhaps unsurprising, but it is something they should urgently address. While it is encouraging that the FCA found evidence that the technology focus of challenger banks confers benefits when it comes to rapid client identification and verification, challengers need to leverage technology yet further to better know their clients and identify key risks,” said John Wilson, UK Managing Director at Avaloq.
Technological advance
Automation is key for this, he says, with automation anti-money laundering and know-your-customer checks ‘as-a-service’, enabling banks to quickly strengthen and scale up their controls without significantly expanding their middle office.
“By leveraging AI, machine learning and automated compliance processes, challenger banks can better detect potential financial crime while increasing the speed at which they perform.
“As a challenger bank matures, its financial crime controls will grow in complexity, and automation will be vital to implementing robust and efficient processes, for example around sanction and embargo monitoring, and prevention of insider trading and market abuse.”
Of course, challenger banks are fast becoming the more established part of the boom in financial technology - or fintech - disruption evident in the City. Crypto is the new growth explosion in financial services with billions of dollars being invested into crypto startups in 2021 and volumes of transactions growing rapidly.
“Crypto is here to stay. It presents a huge attack space for all manner of nefarious individuals, and also an opportunity to correct some of the underlying problems in financial infrastructure,” said Delingpole.
“The high profitability of many exchanges, producing multi-billion dollar profits, means there is significant capital to invest in further innovation. Because of these significant flows, there is ample opportunity to hide small amounts of illegal money transactions, whose beneficiaries are insensitive to price, further producing margin for participants for reinvestment,” he added.
Crypto further complicates the KYC process says Balani “to a certain extent” but as firms increasingly want to be part of the financial system compliance is generally accepted by firms.
“Does AML happen in crypto, yes? It not to the extent people think and it is still easier to launder the money through fiat,” he said.
“To launder millions of pounds or settle contracts is really hard,” he said.
The ‘on and off ramps’ between crypto and fiat currencies are where KYC is best used, he says.
As the digitalisation of banking and finance continues to grow at an exponential rate, for banks, fintechs or crypto firms the need for innovation grows by the day as hackers' and criminals' ambitions also increase becoming ever more audacious.