Regulators and anti-money laundering (AML) enforcement officers are fighting a losing battle when it comes to transaction monitoring – so much so, a panel of AML experts agreed that even transactions in the low millions are likely to fly under the radar.
The panel was composed of Nichola Peters, partner and head of corporate crime, Addleshaw Goddard; Milica Delevic, director, governance and political affairs, European Bank for Reconstruction and Development; Tom Keatinge, director, Centre for Financial Crime and Security Studies, Royal United Services Institute; Peter van Veen, director, Business Integrity Programme, Transparency International UK; and Jane Walshe, chief executive officer, Enforcd.
They were gathered for the launch of the Citi Tech for Integrity Challenge (T4I) which was being hosted by Clifford Chance in London.
Van Veen said: "When it comes to transaction reports, what ends up happening is everything gets filed, and then the FCA has to work out what's risky. So they don't really look at anything under £3m ... so make sure whatever you are up to is under £3m."
"We are taking notes," joked the chair, Marc Luet, president, AO Citibank Russia. But there was a grim acknowledgment among the panellists that this was probably the sad truth.
Van Veen referred to a recent report from Transparency International, entitled, "London Property: A top destination for money launderers", which shows that land and property, particularly in places like Westminster, are a popular choice when it comes to laundering the proceeds of corruption. This is normally done through the use of "anonymous" corporate vehicles based in secrecy jurisdictions like the British Virgin Islands, Jersey and Panama, where information about these companies and their real owners is not publicly available.
The report opens with some lapel-grabbing statistics: 91% of overseas companies owning London land titles are registered in secrecy jurisdictions; 986 land titles were found to have links to politically exposed persons; the majority of land titles owned by anonymous companies were in the City of Westminster, followed by Kensington and Chelsea, and then Camden.
"Banks can always do more, but there are practical and human resource challenges," said van Veen. "You end up in a jurisdiction where, not only will they not disclose the official beneficial owner of the company, those records don't exist. Law enforcement can't actually get access to them because they aren't there. So how do you then know how the real beneficial owner is?"
He said that while these are really difficult challenges, the use of open data and technology creates opportunities to fight corruption. The London property report used a range of data sources – Land Registry, Offshore Leaks Database, OpenCorporates and World-Check – to try to triangulate who actually owns property in London.
"That was a hard challenge because quite a substantial percentage of property in London, especially over £1m-£1.5m, is owned by corporates or companies, which are almost always in an offshore jurisdiction. As much as 10% of Westminster is owned by these companies; in total it's about a square mile in London, I believe of properties that are owned by companies in offshore jurisdictions," said van Veen.
"It's very attractive to come to London; the checks and balances on buying properties are very low. The checks and balances of buying luxury goods are non-existent. I recall an interview with head of the yacht brokers association, who said he was basically very happy he doesn't have to comply with financial KYC (Know your customer) rules, because it would kill his industry if they had to go through KYC rules that banks did."
Picking up on the point about manual transaction monitoring, Keatinge said: "What is the future of transaction monitoring – transaction monitoring has no future."
He also pointed out that the Barclays £72m fine for poor handling of financial crime risks involving PEPs, where no actual money laundering took place, begs a wider question about how much of compliance is a total waste of time.
Citing the atrocities in France and Belgium as an example, Keatinge highlighted the way information is shared as a particular knotty problem. "Money moves around the world without a passport because we fail to share information effectively. Regarding the attacks in Paris and Belgium, if you look at the money footprint those guys left behind, it's pretty revealing. But we didn't realise that until the Belgians and the French and the Luxemburg Garda talked to each other having suffered the atrocities.
"If we cannot share info effectively then we are frankly our own worst enemies. The good news is that in some countries – and UK sets an example here – people get this and are trying to work through the legal issues of sharing information between the public sector and private sector."
RegTech to the rescue!
Keatinge added that technology has an important part to play here. Countries that generally do not like sharing information with European counterparts are able to share information with one another using encoding, which means you only reveal information to one other if you identify it's of use to each of you.
Technology is also good at automating a lot of mundane and mechanical tasks in a much more efficient and cost-effective way. So-called regtech can also help countries that do not have mature or sophisticated financial supervision; better regulation in high risk countries means less economic crime risks overall.
Walshe, whose regtech firm Enforcd is in the Bank of England's technology accelerator, said she was interested by the relationship between fintech and regtech. "So you have challenger banks building their compliance function, but because they are building out their systems from scratch they don't suffer any of the awful legacy issues that the great big banks have.
"Even really big and well-resourced banks can have awful IT," said Walshe. "Challenger banks can embed regulatory compliance at the code level so that compliance becomes part of the workflow and part of day to day operation of the business.
"It's not quite there yet with regtech, but that's the way it's going - so machine readable versions of the FCA handbook that automatically speaks to your policies and procedures.
"Technology can remove a lot of pain and allows you to really focus on spending money really training your people very well, so that when you have a tricky risk case decision the right decision is made."