Looking at AML in the New Era of Money Laundering: Where we’ve been and what’s to come

The United Nations has estimated that between $800 billion and $2 trillion are laundered every year, though it’s almost impossible to know the true amount. In an attempt to deter this crime, we’re seeing fines continue to increase. In 2020, authorities handed out $5.6 billion in money laundering fines – a massive uptick from prior years – and when the final numbers are released for 2021, it’s certain to be even higher.   

Bad actors, for their part, are continuing to find new ways of laundering money to fuel heinous crimes – and the rise of cryptocurrency has provided an increasingly appealing vehicle to do so.  

And despite new attempts at regulations, banks and regulators lag sorely behind, even as the anti-money laundering (AML) industry continues to grow. Let’s take a look at what we’ve seen this year and what we should expect to see in 2022. 

The orthodoxy and nurture of failure continues 

The pandemic enabled money laundering to flourish to a greater extent than it already had been. For example, the number of shell companies skyrocketed. Though money launderers were still selling drugs and committing other crimes, they couldn’t launder all their cash through their normal channels due to closures and lockdowns. So, they switched tactics and started buying small, distressed businesses for cash. 

Those in the AML sector are still using a Model T Ford to catch criminals in Ferraris. The technology being used is antiquated; the regulations lag behind.  

Innovation is hard to prove beyond large marketing budgets and over-promises 

Innovation in the last year has been difficult to find, even as enormous amounts of capital are flooding the market. The global AML software market is rapidly growing, with BIS Research predicting it will grow at a CAGR of 14% from now until 2025.  

There are new vendors throwing their hats in the ring all the time, but what’s happening is that for banks, it’s harder to see the forest for the trees. Not all these technologies are created equal, and the crowded market makes it even more difficult to figure out what solutions are actually going to help fix the problem. It’s difficult for IT buyers to understand the differences in toolkits, especially when you have small but impressively capitalized vendors and consulting firms saying they have a product (but they’re really stretching the truth.)  Proof of innovation will be aggressively focused on rapid, materially, and measurable comparisons on the delta of improvement in the innovation. Most critically these tests must use exactly the same data as previously used, otherwise apples to apples comparisons and real value measurement will never be understood. 

We have opened a Pandora’s Box: The gap between understanding technology and regulation continues to grow 

The fundamentals of enterprise technology have radically changed, and that change is accelerating.  

There are a lot of questions right now. That includes everything from  how exactly blockchain is changing the financial supply chain to how crypto is being used more effectively to commit financial crime. Are new payment mechanisms making access to the financial markets easier and opaquer?  How are deep fakes and robust synthetic identity designs changing the risk in understanding and predicting risk? How is social media stimulating new global communities, both good and bad?  

Legislators and regulators significantly lag behind on the answers to these and other questions. Sen. Richard Blumenthal’s recent (embarrassing) failure to understand Instagram is just one example of the knowledge gap that exists with technology and those tasked with trying to understand it,  know how it can be used to facilitate crime and then regulate it.  

 It won’t be next year, but over the next few years a generational improvement in understanding will be needed to curb new technology exploitation. Otherwise,  government and regulator legislation will remain focused on the market as it was 20 years ago - not as it currently is -  leaving the banking system full of holes for exploitation, arbitrage, and outright crime.    

A glimmer of hope 

It’s not all doom and gloom; there have been some bright spots. We are starting to see some institutions take the higher road and recognize that the status quo can’t continue. Banks are finally starting to acknowledge that a new approach is needed, that they are using antiquated systems and they can’t just bury their heads in the sand. 

BSA/AML regulations were an important step in the right direction, though late by about a decade. The Anti-Money Laundering Act of 2020 was a big positive, containing some of the most significant changes ever made to the Bank Secrecy Act of 1970. It’s encouraging to see the federal government finally paying attention to AML. 

The Corporate Transparency Act (CTA) was another positive advancement. Its purpose is to keep shell companies from becoming havens for money laundering and other illicit activity. It creates a registry and requires millions of domestic and foreign companies registered that do business in the U.S. to disclose information about their beneficial owners. However, the Secretary of the Treasury won’t have to implement these reporting requirements until a year after the rules were passed – that will be Jan. 1, 2022. 

Crypto is the future 

We can expect to see a significant redirection of crime funded by money laundering moving away from traditional banks and such institutions and into cryptocurrencies. There may actually be a decline in money laundering involving the world’s biggest banks, simply because they’ve been left behind by technology. But we’ll see an increase in crypto-based extortion and other crypto-based crime. 

This will create an enormously problematic challenge to the system and the regulators. On the upside, governmental bodies are taking notice, and we should expect to see more of that, although regulation is always several paces behind the technology and the bad actors using it. 

For example, in November, the Financial Action Task Force released a new report urging crypto platforms to do more to verify the identities of their users and regularly report suspicious activity – the takeaway being that regulation must happen now. And the U.S. government announced in October the creation of a National Cryptocurrency Enforcement Team. This team will combine the expertise of several sections of the Department of Justice Criminal Division. Its members will fight money laundering and “assist in tracing and recovery of assets lost to fraud and extortion, including cryptocurrency payments to ransomware groups.” 

What’s to come 

We’re living in a time of constant technological evolution, but most financial institutions are still lagging. And bad actors are always several steps ahead – using new technologies to further advance their nefarious activity. At the same time, the status quo isn’t financially sustainable – and this is likely to finally start to push forward more innovation.  

Sometimes the past predicts the future, and sometimes the human race is able to forge a new path. The new year has signs of hope as well as growing dangers. Banking and financial professionals, along with federal regulators, will determine – either by their diligence or their inaction – who gets the upper hand in 2022 and beyond.