The sham and shame of AML

I was talking with an AML guy this morning. That’s anti-money laundering, for those unfamiliar. AML. Might as well call it MAL, as in the French word mal, as AML is bad. It’s really bad. It doesn’t work. So, why bother?

Well, banks have to bother as governments have rules about who can bank and who cannot. That being said, how do you know the person opening an account is the person using the account? That is the problem.

It doesn’t matter whether you have digital identities, PEP (Politically Exposed Persons) databases, onboarding rules that are onerous and excessive and more. The fact is that if you cannot track and trace that Chris Skinner is opening an account on behalf of Julian Assange, what’s the point? And yet that simple statement illustrates the point. Chris Skinner has bona fide details. He’s onboarded and recognised. But Chris Skinner is funded by Oleg Shevchenko who gets his funds from Julia Austin who gets her funds from Kate Schevlinko who is funded by Julian Assange.

There’s the issue, and it’s nothing to do with identity management. It’s more to do with behavioural analytics to track relationships. This is what PEPs is meant to track and trace … but it doesn’t. The Economist highlighted this the other day:

A study published last year by Ronald Pol, a financial-crime expert, concluded that the global AML system could be “the world’s least effective policy experiment”, and that compliance costs for banks and other businesses could be more than 100 times higher than the amount of laundered loot seized. A report based on a survey of professionals, published last year by LexisNexis, an analytics firm, found that worldwide spending on AML and sanctions compliance by financial institutions (including fund managers, insurers and others, as well as banks) exceeds $180bn a year …

AML compliance has since become a huge part of what banks do and created large new bureaucracies. It is not unusual for firms such as HSBC or JPMorgan Chase to have 3,000-5,000 specialists focused on fighting financial crime, and more than 20,000 overall in risk and compliance.

A City of London report released last week, similarly builds on this theme:

There is no doubt that regulatory compliance is an expensive business – and that these costs continue to grow. In the UK, the projected annual cost of financial crime compliance alone is $49.5bn48, whilst another study found that more than a third of financial services respondents said they would be spending more than 5% of their revenue on compliance49. If this 5% figure is accurate, the annual cost of compliance for the UK’s top five banks50 (based on 2019 revenue figures) is around £5.2bn.

However, by improving the efficiency and effectiveness of regulatory and compliance processes, RegTech also promises to deliver cost savings to financial institutions. Using the figures stated above, and applying a very conservative assumption that RegTech could save at least [5% sic] of total compliance costs, there would be an annual saving of £523m for these five banks alone – £523m which could be redirected to improve the profitability and therefore the competitiveness of individual firms and the UK financial sector more generally.

On reflection, it’s not easy to do anything about risk and compliance. Just look at Dodgy Dave Cameron and Blustery Boris Johnson if you want to know more. Or Tony Blair meeting with sponsors and co. Or Donald Trump and his predecessors doing deals in the corridors of power.

Or just look at how effective companies are at avoiding tax by using nested accounts. Barclays has been accused as one of the leaders in this field, but there are others.

What this means is that the average Joe and Jane work hard, pay tax, get a pension and hope they can afford to own their house. The connected Jack and Jill network money around the world, know the guys in power, buy assets using money that is not theirs to spend and own your house, their house and many other houses.

I know, I know. I’m sounding cynical but hey, I’m just a realist.