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Deloitte’s Global Head of Investigations Deirdre Carwood on three recommendations to combat illicit finance and the pathway forward

By Deirdre Carwood
By Deirdre Carwood

Global Head of Investigations & Crisis Management

Illicit finance is all around us. 

The financial and human costs to society are enormous.

Billions are spent annually on illicit finance and financial crime compliance, yet the view from government, regulators and the financial services industry in Ireland is unanimous: the current approach does not effectively or efficiently empower us to combat the continuously evolving tools of criminals who are not only committing financial crime such as fraud, money laundering and bribery, but also human, wildlife, arms, drugs and organ trafficking.

Only 1% of the proceeds of crime are ever recovered and less than 5% of bad actors undertaking this type of activity are successfully prosecuted.

This article explores the existing challenges faced by public and private stakeholders and provides achievable recommendations in key areas which, when taken together, provide a way forward through a combination of regulatory reform, international cooperation, and an increasingly intelligence-led approach.

The following three recommendations are critical for us not to continue to have the same conversation about failure in this space.

 1. Advancing Public Private Partnership (PPP) as a combative tool

Since the inception of the UK JMLIT in 2014, PPPs to enable the sharing of intelligence and information have been established in over twenty countries across Asia Pacific, the Americas and Europe. 

In addition, a number of “single issue” PPP initiatives have been established, bringing diverse global parties together to improve the response to specific threats such as wildlife or people trafficking.

Europol’s Financial Intelligence Public Private Partnership has continued to develop its role as the first multilateral PPP. 

The growth in PPPs has also been encouraged by the Financial Action Task Force (FATF) in policy statements and through the Mutual Evaluation process, and there is now a broad consensus that by developing frameworks which better enable more intelligence and insight to flow between parties, it is possible to disrupt bad actors more effectively and better prevent criminal misuse of the financial system.

Critically, PPPs have begun to change the relationship between public and private sector stakeholders, building frameworks that encourage and enable parties to share as much as possible, rather than as little as is required. 

However, while global developments in PPPs are a fundamentally positive story, opportunities to do more remain to strengthen the role of PPPs going forward.

From a policy perspective PPPs should be embedded within the financial crime policy architecture at the national level to ensure that insight and input from across the AML community is captured and used to drive development of effective legislation and regulation.

At the strategic level PPPs should be used to drive exponential growth in the development and distribution of strategic intelligence products and typologies. This intelligence should be shared at scale to help inform the effective application of the risk-based approach.

At the tactical level PPPs should find ways to share operational intelligence between public to public and public to private players, to expedite investigation and drive outcomes. 

Tactical information sharing demands robust governance frameworks and clear legal gateways, but it is vital in driving effective outcomes against priority threats.

Policymakers could consider how participation in PPPs can be incentivised through regulatory and supervisory frameworks, with a focus on reduction/detection of economic crime and the provision of highly useful information to law enforcement.

While the value of PPPs have been recognised by policymakers at both the national and global levels, participation by members of the regulated sector is for the most part voluntary. 

The absence of regulatory recognition acts as a limiting factor on the amount of time and resources that institutions can invest in PPP, when balanced against meeting wider regulatory obligations.

Collaborate Cross border Public and Private sector stakeholders should continue to drive efforts to encourage and enable PPPs to collaborate cross border. 

Similarly, it is important that where single issue PPPs exist, they work closely with national PPPs in order to share insights against potential areas of overlap and ensure that shared learning is not lost by looking at issues in isolation.

And finally, PPP participants should explore the development of digital typologies. 

By combining traditional law enforcement skill sets with participation from technologists, PPPs may be able to move from paper-based typologies to the creation of digital typologies, coded as a set of rules, that could be more easily and quickly ingested into the transaction monitoring systems of a wider range of institutions.

2. Risk prioritisation.

The maturity of financial crime frameworks across different jurisdictions will vary, as will levels of trust and confidence in the robustness of each country’s framework. 

lreland, by way of example has a lot more to do to enable our financial institutions, digital platform companies and payment companies to address criminal transactions in the online banking and digital capital markets.  

In jurisdictions that are less mature, the focus of policymakers, regulators and supervisors should remain on ensuring the effective implementation of global standards into national AML frameworks.

In countries with more mature financial crime frameworks, however, there is a growing consensus that establishing national priorities – which are the money laundering and terrorist financing risks to which a country is exposed – can help shift the primary focus from maintaining technical compliance to a more risk-based, outcomes-oriented approach.

Specifically, a risk-based approach focused on national priorities can assist the public and private sectors with detecting and reporting more meaningful suspicious activity aligned to areas of importance to the national government.

Once these risks are properly understood, countries should be able to implement anti-money laundering and counter terrorist financing measures that help mitigate these risks.

In some countries, such as the US, governments have already established official national priorities. For example, FinCEN recently published national priorities that are composed of longstanding threats such as international terrorism and emerging threats such as cybercrime.

Once a financial institution (FI) understands how it is impacted by risks associated with the national priorities, it will need the flexibility to refocus resources on higher-risk customers and activities consistent with its risk profile.

Since existing threats will evolve and new threats will emerge, the FI’s threat assessment methodology should be agile, straightforward, and structured to quickly incorporate information from law enforcement and other sources instead of mirroring the enterprise-wide risk assessment which tends to be very long, complex, and focused on data, documentation, and process rather than outcomes.

Financial institutions should consider how they will incorporate additional data and intelligence into their anti-money laundering (AML) and combatting the finance of terrorism (CFT) programmes on an ongoing basis and it is likely that most financial institutions will also need to develop metrics and examples to demonstrate how their programs align to the priorities.

There is also a need to provide a platform to pilot, evaluate and refine the implementation of priorities into AML and CFT programmes. 

The global AML community should embrace pilots and a regulatory sandbox approach for evaluating new risk, compliance and government practices, and they could consider allowing a cross-sector participation of financial institutions, supervisors and law enforcement to participate in the development of new programmes in the sandbox.

3. International cooperation and capability building.

Inconsistencies in the application of anti-financial crime matters across jurisdictions continues to impede broader efforts to prevent and mitigate illicit financial flows.

There is no doubt that there has been positive developments in this area of late. 

The EU is in the process of revising its standards for AML/CFT regulation and supervision, with a focus on consistency in application of rules EU wide, a push toward more central supervision, and greater cooperation among national authorities and law enforcement.

Also the US is driving reforms embedded in the US AML Act which aims to move its system toward a regime focused more on effective outcomes and less on technical or “check the box” compliance.

However, there is still a lack of uniformity in progress across the globe around these issues and further work should focus on increased international cooperation and coordination.

Alongside efforts of global forums like FATF and the Financial Stability Board (FSB), countries themselves should enhance cross-border dialogue on areas of mutual concern.

On-going dialogues across multiple countries currently exist in the area of financial services and is already taking place in other policy areas.

The US and Singapore recently signed a memorandum of understanding to expand cooperation on cybersecurity, which includes data sharing. 

Such a process could be replicated across financial crime data and across other jurisdictions. Though the limitations arising from different legal, regulatory, or supervisory regimes are recognised, where comity can be advanced it should be considered a priority.

Finally, on the necessary capability building, this can be achieved via the crosspollination of expertise between the public and private sectors.

PPPs and other mechanisms for collaboration have worked to enable secondments between FIs, law enforcement, supervisory bodies and advisory firms such as Deloitte operating in the space of illicit finance prevention.

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