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According to the World Economic Forum, up to 5 percent of the world’s total gross domestic product (GDP) may be attributed to illicit proceeds from criminal activity. Yet, less than 1 percent of this is intercepted by law enforcement officials, effectively allowing criminal elements to write off these losses as the cost of doing business.
This volume of financial crime has very serious consequences for the world’s economies as well as for individual communities. Perpetrators of financial crime are most often terrorists, human traffickers, rogue states, drug cartels, secessionist groups, and other elements the world community generally regards as destabilizing.
As these groups are largely sanctioned or otherwise unable to participate in open trade in mainstream economic systems, perpetrating financial crimes through the mainstream banking system remains their primary method of accessing and transferring funds for their operations. Given this, banks have a central role in preventing financial crimes and mitigating any damage related to these incidents.
How Are Financial Crimes Fought Today?
The fight against these financial criminals is primarily spearheaded by special law enforcement agencies working together with banks and other financial institutions (FIs).
Because malicious actors tend to commit their crimes through banking systems and infrastructure, anti-money laundering (AML) experts at banks are often the first to identify and classify these crimes. With the help of AI-powered sanctions screening software, they log potential illicit activities in suspicious activity reports (SARs) which are then passed on to the right authorities.
After they are filed, SARs are then reviewed by law enforcement authorities to build cases, discern new patterns of criminal activity that may be affecting multiple FIs, and deliver information that may help FIs detect novel methods of fraud and criminal activity.
What Are the AML Challenges Facing Banks?
Banks are already at the front of the fight against financial crimes. As most sanctions evasion activities, money laundering, and financial data breaches involve the platforms of mainstream FIs, banks are unable to avoid the consequences of financial crimes. In short, banks have the responsibility to take action and put a stop to these illicit activities.
Today, banks find themselves facing several challenges in taking on financial crimes. These include the following:
An Exponential Increase in Financial Crimes
Fraud, money laundering, and other financial crimes skyrocketed at the onset of the 2020s and are expected to increase through most of the decade. The high volume of incidents has necessitated banks to review their AML compliance processes and to further invest in technologies that aid in identifying and sorting extremely large volumes of potential criminal activities.
High Rates of False Positives
Compounding the issue of high financial crime volumes is the perennially high rate of false positives. Rules-based AML screening and compliance will typically result in over 90 percent of flagged activities being false positives. This can result in high screening costs as well as negative customer experiences.
Investments in machine-learning technology as well as closer cooperation between banks and law enforcement promise to reduce the rate of false positives, consequently reducing the cost to identify each illicit transaction.
Siloing of AML Responsibilities
While FIs and AML authorities do work together to fight financial crimes, the frameworks for cooperation remain uneven, resulting in the inefficient sharing of information and allocation of resources. This often gives financial criminals leeway to avoid detection and prosecution.
To solve this issue, more banks are opting to work more closely with AML authorities in public-private partnerships to break down information silos, thus closing the information gaps malicious actors depend on to perpetuate their crimes.
The International and Interorganizational Nature of Financial Crimes
Financial criminals typically target multiple banks in different countries, often relying on regulatory red tape and different legal frameworks to obscure the movements of illicit money.
Because of this, banks not only have to work more closely with authorities in their home countries, but also with each other, regardless of where their counterparts are based. The need for such teamwork makes it important for banks to meet international banking standards to vastly simplify cooperation between different parties.
Technological Gaps Between Institutions
Banks that update their AML solutions regularly are typically in a better position to fight against money laundering and other financial crimes. Current generation AML compliance systems leverage highly advanced machine learning and artificial intelligence capabilities to quickly sort suspicious incidents according to threat levels, saving massive amounts of labor and reducing the cost of identifying real criminal activities.
Many banks, however, are for different reasons unable or unwilling to update their technologies. Over time, this leaves them and their stakeholders vulnerable to innovative malicious actors and potentially opens them up to regulatory fines. Thus, banks who are serious about their roles in safeguarding their clients’ interests and the financial systems they are a part of have to seriously validate their sanctions screening capabilities and update them if necessary.
Final Thoughts
Because banks run and maintain the primary systems that facilitate global trade, they are natural targets for money launderers and other financial criminals. The failure to appreciate the tenacity and creativity of malicious actors can result in serious consequences not only for banks, but also for the clients they serve and the economies they are a part of.
By regularly validating sanctions screening capabilities, working closely with other banks and law enforcement authorities, and making smart investments in technology, banks can become more effective at stemming the rising tide of financial crime.
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