In today’s financial landscape, banks must comply with strict regulations associated with Know Your Customer (KYC) and Anti-Money Laundering (AML) laws. Since the 2008 financial crisis, banks and financial institutions have been relentlessly bombarded with financial regulations aimed at protecting financial systems and customers, as well as increasing transparency. If banks don’t comply with regulations, they risk paying huge fees or legal penalties. Recently, the US government determined that US Bank did not have adequate anti-money laundering safeguards in place between 2009 and 2014. US Bank’s parent company, U.S. Bancorp, was ordered to pay the federal government $613 million to settle criminal charges.
As banks look for ways to meet the challenges of complying with KYC and AML laws, it is important to consider the rise of financial technology (FinTech) and how it has the potential to help them in their anti-money laundering efforts.
Current anti-money laundering challenges:
Banks are required by regulators to monitor, assess and report suspicions of money laundering. But their current systems are not sophisticated enough to accurately distinguish illegal activities from legitimate transactions. Their systems are limited to processing a small sample of data and are unable to see the whole picture or make all the connections.
Criminals bypass bank systems and filter their illegal profits into legitimate banking systems by creating a complex chain of accounts and transfers. Large sums of cash are divided into small cash deposits made by different customers – also known as “smurfing” – to stay below the $10,000 reporting threshold. In this way, they manage to turn illegal assets into legal assets. Making it almost impossible to distinguish dirty money from clean.
One of the challenges facing banks is inadequate AML systems, which produce a large number of false alerts. Due to the limited amount of data available for processing, current AML systems have difficulty accurately distinguishing real criminal activity from legitimate transactions. Regulators require banks to investigate every alert generated by a bank’s AML system. Since many of these alerts turn out to be legitimate activity, time and resources are wasted investigating false alerts. It also means that investigators are less likely to recognise and reduce real criminal activity.
As banks look to the future, digital currency brings its own set of challenges. Digital currency poses a high risk of money laundering and terrorist financing due to its high degree of anonymity and ease of cross-border transactions. The Australian government has decided to regulate its digital currency exchange to help combat money laundering in the digital space. DCE must report the social media identifiers, unique device identifiers and digital wallet addresses of its customers to the Australian Transaction Reporting and Analysis Centre (AUSTRAC). This removes the anonymity of the digital currency, allowing AUSTRAC to track suspicious transactions and trace them back to a person’s digital wallet.
