9/11@20: Why Complying with AML Reforms Still Pose More Questions Than Answers


Post By: Ned Kulakowski at Fenergo

As the 20-year anniversary of 9/11 looms, Ned Kulakowski at Fenergo explains why the effectiveness of US anti money laundering (AML) reforms are under the spotlight…

As the world reflects two decades on from this horrific act of terrorism, complying with the regulations that followed 9/11 may not have made for a safer world, particularly when it comes to the complex issue of anti-money laundering (AML) and counter terrorist financing (CTF).

The direct response to the attacks was the USA Patriot Act. The act itself is a substantial piece of legislation that made considerable strides from an AML perspective– from strengthening banking rules against money laundering to providing a greater emphasis on financial institutions (FIs) and law enforcement communicating with each other. The issue is that the FIs who have to comply with this legislation have been at a loss. Given the legislation failed to address the overall effectiveness of exactly what FIs have been doing around AML – including everything from information sharing to technology, companies have been forced to adapt their own technological solutions to keep up with the every-changing financial crime advancements The most sweeping change in twenty years, since the passage of the USA Patriot Act, has been the Anti-Money Laundering Act of 2020 (AMLA).  The AMLA has taken numerous steps in modernizing AML regulations, but it remains to be seen as to how FIs will adapt to its implementation.   The various provisions of the AMLA come into effect over the next few years, hence, the reaction of its addition will demonstrate how effective it will be in the fight against financial crime.

While there has been the publication of the Federal Financial Institutions Examination Council (FFIEC) Manual, starting in 2005, along with regular guidance issued by government bodies such as FinCEN, the general reaction of FIs shows they struggle to identify with the legislation’s focus.   Overall guidance also appears to be missing, particularly in relation to the actual effectiveness of a FI’s AML policy. Today, it is difficult to define the exact percentage of funds illicitly moving in and out of the global banking system, but it is generally accepted to be quite significant there should be an is even greater emphasis on the effectiveness of AML the BSA and subsequent AML regulations. Given FIs can do little in terms of changing legislation, their problem lies in complying with it, even if they consider it to be inattentive of the issues that lie.

The trouble is, the downside of non-compliance stretches much further than just a fine; the reputational risk it can cause to an FI can be significant, with many understandably choosing to concentrate their efforts on protecting their reputation. In order to combat recent scandals, such as Pegasus spyware which demonstrated that where technology has developed, so has criminal sophistication, financial services providers must adopt a technology-first, approach. In the same way as criminals move to communicate in ways beyond a telephone line, it’s increasingly important that the banking and FIs adopt their own technology-based solutions.

Initiatives like the Beneficial Ownership registry, a significant portion of the AMLA, are going to help. Although numerous FIs are saying has to the potential to be great, is it just going to be a load of data shoved into a database that nobody can decipher? This speculation may appear beyond an FI’s control, but the impact of complying with the legislation is worth considering. While this may not affect the large corporate clients of, say, a larger bank, it will present a massive administrative burden on a mid-tier bank with smaller corporate clients who – will now have to work through copious amounts of additional paperwork with a lot of repetition.

In addition to the Beneficial Ownership registry, the Panama Papers and FinCEN files have unquestionably moved the needle in the right direction with regards to AML reform. Having said that, the FinCEN files merely exposed the volume of illicit funds in circulation. Now, FIs have little choice but to cooperate and evolve technologically and operationally to keep up with the financial crime advancements.  Looking back through at all the rules that have come into force since 9/11, banks have struggled to comply with a legislation that does not reflect the modern-day data challenge. Hence, the nod towards the requirement of technology.

20 years on the world of financial crime is a very different place. It is no longer just about people creating shell companies to launder their cash, the flow of dirty money to unquantifiable levels continues to grow as technology evolves and is to be used by bad actors to exploit the global financial system.  With that, FIs must evolve technologically to keep up.

Perhaps the only way forward, is a greater emphasis on FIs utilising technology while adopting a risk-based approach. By preventing the cause as opposed to treating the infection, and by focusing on sharing information harvested by technology, this should provide the FIs the tools to comply with current and future legislation in a timely and efficient manner.  By sharing information, this will give firms the crucial evidence, to combat the global and constant flow of illegal money twenty years on from9/11.