We opened Pandora’s box and found the same outdated AML systems that allowed Panama and Paradise to happen
By Tobias Schweiger, CEO HAWK:AI
This isn’t the first article you’ve read about the Pandora Papers, and it certainly won’t be the last. This most recent leak shows how the rich and powerful use the global financial system to transfer and manage their wealth. It’s also nothing new, following the Panama Papers, Paradise Papers, LuxLeaks, Russian Laundromat, Mirror Trading, CumEx files, VAT carousels and more. No one is surprised.
So what? While often in a morally grey area, much of what has been reported on already is, in fact, quite legal. But legality shouldn’t be the focus here; the focus should be how wealthy individuals can operate out of sight with a set of rules that don’t apply to the rest of the world. And, if this is how creative the legal operations are, imagine how innovative and obscure the illegal laundering of funds can be.
Financial crime fighters armed with sticks and stones
Crime has existed for as long as there have been laws. More laws often mean more administration for the good guys, while criminals simply move on to new ways of working. The result is an arms race where both sides use the available technology to gain the upper hand. With an estimated $1.5 trillion laundered annually and only 1% recovered it’s clear who has the advantage.
Why is this the case? Because “bringing a knife to a gunfight” doesn’t begin to describe how outdated the technology used by compliance teams is. Many of the systems currently used to combat financial crime are inflexible and cumbersome, with some being more than 15 years old. What does technological progress look like in the last 15 years? Think about your old BlackBerry with a monochrome screen and physical keyboard vs the latest iPhone.
Worse still, rule-based systems trying to identify fraudulent behavior are ineffective when criminals are playing a different game. Legislation can help, but it’s reactive (typically long after an incident like Pandora takes place) and places an additional burden on compliance teams who are already drowning in exploding transaction volumes and 95% false-positive rates.
Modern technology can help more. AI and Machine Learning have already delivered significant value in as many industries as you can name; Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) are no different. Our industry has been slow to adapt to change, but with FinTechs challenging (and augmenting) traditional financial institutions we’re starting to see real adoption of technology that effectively solves business and consumer challenges. There is a place for rules of course. They offer base-level coverage and are still valuable until financial institutions pool resources and data to let AI deliver even greater returns. However, relying only on rules is an incomplete approach.
Can Financial Institutions risk waiting for legislation to force their hand?
While legislation is slow to respond to these leaks, there is hope on the horizon for technological mandates. Austria's Money Laundering Act contains a specific paragraph on the use of transaction monitoring based on AI. Meanwhile, the US Anti-money laundering Act of 2020 looks to expand the scope of enforcement to both modern technology (like cryptocurrency) as well as modern payment companies.
Even if you take the minimum viable approach to comply with legislation, who says this will be enough? Recent fines against the established banking elite like Natwest show that existing implementations may not be enough to protect against unscrupulous behavior and the fines that follow. Can your business afford to launder nearly $500 million from a single customer and pay the upcoming associated fine?
Another consideration is existing proposed legislation, such as the AML Act in the US, being accelerated through congress. If these timelines are expedited is your business ready for compliance?
Proactively technology adoption is how we gain the advantage
If history is any indication, Pandora won’t be the last set of papers. In a few years, a new leak will give even greater insight into the global management and flow of wealth. But, if we’re ready to adopt new technology and address how compliance teams operate, we can ensure the next leak is smaller. More importantly, we can proactively take the fight to criminal enterprises and counter the funding of human trafficking, terrorism, and other activities that benefit from money laundering.
To misquote the Six Million Dollar Man: “We can rebuild the industry; we have the technology.”