Problems around money laundering and tax evasion persist worldwide, and it’s clear that the regulatory landscape designed to prevent them from happening isn’t as robust as it ought to be.
The reality is that banks and financial institutions generally view fines resulting from breaches of anti-money laundering (AML) and know your customer (KYC) regulations as more of a thorn in the side than anything else.
A case in point — the August AML/KYC Tracker by PYMNTS and identity verification firm Trulioo shows that financial institutions worldwide faced fines totaling more than $10.6 billion for regulatory non-compliance in fiscal 2020.
Yet, criminal activity continues to run rampant, with digital fraud against consumers growing by 24% between January and April 2021.
“Fines do not change behavior,” Trulioo Senior Vice President of Identity Solutions Garient Evans told PYMNTS. “It’s accepted in the financial services world these fines for regulatory violations are just a kind of tax, or the cost of doing business.”
Read more: AML/KYC: Obstacle or Opportunity for Banks and FinTechs
Paying the fines is often cheaper than working to achieve compliance. One of the problems banks have is that they’re still using legacy technology for payment processes and identity checks. It costs a lot of money to deploy new technology that can help banks achieve compliance — even more so at institutions that operate globally and have multiple regulations they need to adhere to, Evans said.
Adding to that nonchalant attitude is a lack of willingness to do anything about it by the legislators themselves. While most people associate money laundering with secretive offshore accounts, the truth is that a lot of suspicious activity occurs right here in the U.S.
The recent Pandora Papers leak showed that South Dakota, for example, is allegedly a haven for secretive accounts where individuals have stashed away millions of dollars. Investigators believe a significant proportion of those funds could be the proceeds of illicit activity or hidden away from the taxman.
Evans said it isn’t clear who the ultimate beneficial owners of those funds are in many cases, yet that seems perfectly fine with South Dakota’s legislators.
“It raises the question: Do legislators have the willpower to oblige that there be public registries for these trustees, corporations and shell companies that own these assets, or will they continue to allow it to be opaque?” Evans said.
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The European Union’s Sixth AML Directive, introduced earlier this year, is one regulation that may change things. Evans said the directive is the most cutting-edge directive he’s ever seen, both in terms of its scope and how it articulates what illicit behavior is.
More importantly, he said, banks need to make themselves aware of the Sixth Directive. For the first time, it includes some real consequences for the executives who deal with money launderers and people engaged in funding terrorist activity — either knowingly or unknowingly.
“The Sixth AML Directive has some real consequences relating to jail time,” Evans said.
Banks have options to help them achieve compliance while still offering flexible services to their customers. Evans’ company, Trulioo, provides financial institutions with real-time access to business verification services worldwide, allowing banks to avoid some of the costly upgrades they’d be lumbered with otherwise.
For example, Evans said Trulioo could leverage negative media publicity to identify whether or a person or company might be considered an undesirable client. Evans said Trulioo uses advanced algorithms that crawl the internet to look for evidence of bad actors, so it can avoid providing services to persons who might be on a sanctions list anywhere in the world.
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Evans believes that this new technology, combined with the threat of actual jail time for not complying, should be enough to convince organizations to start taking AML compliance seriously.
“If there’s a global financial service entity, a credit card issuer or a payment company that needs to get certainty that they’re not accidentally dealing with somebody the hot list, they can work with a state-of-the-art service that’s available today,” Evans said.
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