Banks and financial institutions exist for one thing – to make as much money as possible. That’s not a criticism, we live in a capitalist society and profits are a basic requirement of any business. Nonetheless, in order to maximise profits, they employ people with certain personality traits and create a culture built on the premise of building wealth. It is ingrained and institutionalised. Hollywood portray these alpha personalities in movies such as The Wolf of Wall Street, The Big Short and Margin Call. Sure, this is a grand stereotyping statement, but you get my drift. The intrinsic driver for many employed in financial institutions is to make money.
The other side of the AML/CTF regime are the law enforcement and intelligence agencies, who are supported through the actions of the national AML/CTF regulator/s. Now, law enforcement and intelligence agencies employ people with different personality traits and build a culture from a totally different mindset and purpose. Speaking as someone formerly of LEA & Intelligence agencies, you don’t go into those careers with a view to amassing great wealth. The intrinsic drivers are more based in helping others and trying to make your community a better place.
Interestingly though, we ask that banks & financial institutions to be the “front line” in defending a national economy from criminal actors. Governments are entrusting, no requiring, financial institutions to hold the keys to the front door and saying, keep the criminals out, even if it means you have reduced profits. This is at great odds to their raison d’etre.
Having peaked behind the curtains of a number of financial institutions, big and small, I think the reality is the people and culture built over decades and centuries is so far removed from the AML/CFT regime there is little interest or commitment from people who see themselves as ‘money makers’ and not as ‘police officers’. We have seen this similar approach in the aviation security sector, where airlines introduced check in kiosks and removed the need to show identification to check-in on domestic flights to improve speed and profitability at the expense of not really knowing who is onboard an aircraft. Airlines said, we aren’t law enforcement agencies, and the fraudulent use of airline tickets is a policing matter not an airline matter.
So, if we therefore accept that financial institutions aren’t very well experienced and possibly not greatly interested, in being the front line of defence, are we truly protecting the financial system? When you step into tier 2, and 3 financial institutions, the profit margins are thinner and yet the cost is still very high. Technology is best when you have economies of scale working for you, and when the volumes aren’t there, the cost per transaction increases. So in these cases the desire to spend profits is under greater pressure. We understand that the AML/CTF regime is ‘risk mitigation’ not ‘risk elimination’, so are these factors coming together and manifesting themselves in the form of poor compliance and then ultimately through penalties enforced by global regulators?
Most developed nations have a sophisticated AML/CTF regime which has been in place for over a decade, however, if you Google any major global bank and add “money laundering breach” in the search engine, you’ll find that most have received some form of penalty. Herein lies the problem. On one side of the coin is the need for increasing profits, on the other is the cost of risk mitigation through compliance. With this perpetual contradiction, we run the risk of “AML theatre”. That is, creating the illusion that an AML/CTF regime is in place to provide a level of confidence to the market and they appearto be making efforts, but the reality is far from effective.
I hasten to add that at an operational level, I have seen genuine efforts by staff working in AML units. They are keen to do their job to the best of their ability. However, as we know, the driver for business and the senior executive is profits and the cost of staff and technology impacts adversely on those precious profits. I am hopeful that this, more altruistic, attitude permeates through the culture of an organisation to provide a meaningful contribution, protecting the business and its reputation, and in turn protecting the national economy.
Culture plays a big role in the effectiveness of the systems implemented into an organisation. If the culture is negatively affected by a lack of support from senior executives who authorise expenditure for technology and people, the effectiveness of the regime is equally affected. People become frustrated and defeated by an organisations culture of apathy.
So, the dichotomy of the AML/CTF regime, as I see it, is that organisations are not culturally aligned to law enforcement, nor are they skilled in the function, are having a law enforcement function forced upon them at great expense. Is this a sustainable approach or do we need to invest more in organisational culture? Are we, as a society, satisfied with “AML theatre”?
This may be a cynical point of view, so I’m very interested to learn if anyone has an alternative opinion, based on their experience. If, however, this is a widely shared opinion, do we need to reassess the manner in which ML/TF risks are assessed, managed and mitigated?