Anti-money-laundering rules have always been a challenge in the financial services arena, with regulatory bodies demanding high standards of compliance and levying fines for noncompliance. Financial institutions have long struggled to meet those demands.
But the high regulatory burden of satisfying these rules is not an excuse for the current de-risking phenomenon, in which financial institutions are pulling out of regions and client relationships seen as carry money laundering risk, rather than face the costs and regulatory risk of maintaining those relationships. The conundrum associated with satisfying AML regulations has as much to do with a failure of imagination in efforts to follow the rules as it does with how onerous the regulatory requirements are.
Banks have a propensity to blame regulators and excessive compliance costs for their pulling out of business lines without necessarily trying to find a way to make it work. Compliance teams and other stakeholders have resisted being honest about the need to innovate. There has been a failure to experiment and an overreliance on “conventional” AML standard operating procedures.
Banks’ frustration with current industry tools, practices and standards have prompted a lobbying effort to call for reforms. A February 2017 report released by The Clearing House provided some excellent suggestions regarding information sharing, prioritization of AML/combating-the-financing-of-terrorism (AML/CFT) standards and beneficial ownership reporting requirements, among others. However, the report failed to acknowledge the possibility that existing regulations may be purposely broad and open to interpretation. The risk-based approach is a recurring theme in regulatory guidelines, but why must regulators have to clearly define priorities and standards for banks?
Banks can test hypotheses and discover new trends where guidelines may not exist, but the industry has discouraged deviations from accepted norms. The Clearing House report suggests that banks are afraid to innovate for fear of regulatory sanction. One can only wonder whether this is a palpable risk or a manufactured fiction spread by the AML industry. The explosion of funding in regtech startups by venture capital firms demonstrates that investors realize there is an opportunity to redefine the AML industry because it is evident that innovation will not come from within.