Guest Post. Effective AML Strategy: A Small Country Perspective

Smaller states are often thought to be more vulnerable to money laundering: less resources, fewer personnel, a lackadaisical attitude towards others’ problems. But as Charles Littrell explains in today’s guest post, even the smallest jurisdictions can prevent money laundering if there is the will to do so, and those don’t care or think they will benefit by turning a blind eye towards it are inviting a particularly virulent strain of cancer into their society.  Mr. Littrell is head of bank and trust company supervision for the Central Bank of The Bahamas, including AML supervision.  He was formerly an executive at the Australian Prudential Regulation Authority, and a member of the Basel Committee on Banking Supervision. He founded and is the Convener of the International Research Conference on Empirical Approaches to Anti-Money Laundering. This post represents Mr. Littrell’s personal views.

This post outlines a suggested strategy for small states to engage in the international money laundering movement.  The strategy comprises three elements:

  • Know what you don’t want—which is engagement with dirty money and the people associated with dirty money.
  • Deploy locally successful AML tactics in a globally unsuccessful world.
  • Proactively manage the FATF relationship.

Despising dirty money and dirty people

The core element in a successful small state AML strategy is sincere and comprehensive rejection of foreign illicit money, and the people associated with that money. The world’s major league criminals and their financial facilitators are among the least attractive and most dangerous human beings on the planet, and a successful small state will absolutely not welcome such people, their money, or their activities.

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Will Canada Help Curb Haitian Corruption?

Many Haitians fear for their safety and that of their family as their country slips into anarchic violence after the assassination of their president. But not Haitian Senator Rony Célestin and his family

Courtesy of the Canadian government, they are ensconced in the mansion pictured above. Located in the toniest of tony areas in Quebec, the couple recently settled on it for some $4 million.

 What did the Canadian government have to do with Célestin’s acquisition of the mansion? Everything. Célestin is a high-ranking official of a foreign country.  Any Canadian real estate agent or bank he contacted about buying the mansion was obliged by Canadian law to ask a simple question: How does a public official of one of the world’s poorest countries amass enough to buy such a luxurious home?  

If the July 11 New York Times story on the Senator and the mansion is correct, an inquiry would quickly have raised suspicions that the money did not come from a legitimate source. That in turn would have further obliged the real estate agent or banker to alert Canadian authorities.

Reports by the Financial Action Task Force and Asia/Pacific Group on Money Laundering have repeatedly warned Canadian officials that controls on money laundering in the real estate sector were toothless, that for years corrupt foreign officials have been hiding their money in Canada through the purchase of pricey real estate.  Indeed, in their latest, joint report, issued in 2016, the two flagged the rise of “criminally-inclined real estate professionals, notably real estate lawyers” to cater to the money laundering needs of criminals of all kind.

Is it too much to ask Canadian authorities to stop looking the other way when corrupt officials come to their country to shop for real estate?  Perhaps the picture of the Senator’s mansion juxtaposed with anyone of the thousands of Haiti’s poor might prompt action?  Canadian civil society, where are you?

The Case Against High-Denomination Bank Notes

Although the use of cash continues to decline in both the legitimate and illicit economies, lots of criminal transactions, including bribe payments, still use cash—slipped into pockets or envelopes, or carried in briefcases and suitcases. The anonymity, untraceability, and universal acceptance of cash make it useful for many types of criminal activity, including not only corruption, but also drug trafficking, human trafficking, and terrorism. Cash is also indispensable to money laundering, because it both obscures the source of funds and enables money to flow undetected across borders. (As a Europol report observed, “[a]lthough not all use of cash is criminal, all criminals use cash at some stage in the money-laundering process.”) Indeed, as governments and banks increasingly scrutinize electronic transactions, parts of the illicit economy will embrace cash all the more.

Nobody seriously argues for eliminating cash entirely. But there is a simple step that monetary authorities can and should take to make cash-based criminal transactions substantially harder, without substantially impinging on the legitimate cash-based economy: eliminate high-denomination notes.

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Improving Anti-Money Laundering Models with Synthetic Data

As readers of this blog are well aware, an effective anti-money laundering (AML) regime is crucial for fighting grand corruption, as well as other organized criminal activity. A key part of the AML system is the requirement that banks and other financial institutions identify suspicious transactions and file so-called suspicious activity reports (SARs) with the appropriate government agencies. This is an enormous task, given the volume of financial transactions that banks need to monitor and the challenge of identifying which of those transactions ought to be considered suspicious. Banks spend billions on AML compliance every year, and have developed complex automated systems to assist them in flagging suspect transactions, but existing systems’ ability to efficiently sort suspicious from innocent transactions is limited by the sheer complexity of the task. (False positive rates with current systems, for example, frequently top 90%.)

Many believe that artificial intelligence (AI) systems, such as those employing machine learning (ML), hold enormous promise for improving AML compliance and reducing cost. ML algorithms scrutinize vast datasets to identify patterns that can be used to fashion predictive models. In the AML context, ML algorithms identify those transaction characteristics (or complex combinations of transaction characteristics) that are associated with money laundering, and use these patterns to more efficiently and effectively identify suspicious transactions.  

But some commentators have suggested reasons for skepticism, or at least caution. For example, Mayze Teitler recently wrote on this blog about a number of challenges to operationalizing AI-derived algorithms in the AML context, primarily those arising from limitations in the data on which those algorithms are based. As Mayze correctly pointed out, ML algorithms require vast datasets from which to learn, and the data demands are compounded by the relatively rarity of known money laundering cases in the existing datasets.

Despite these concerns, I am more bullish than Mayze regarding the promise of AI-based AML systems. Many of the challenges and concerns regarding the development of effective AI systems in the AML context can be overcome through the use of synthetic data.

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ML for AML: Is Artificial Intelligence Up to the Task of Anti-Money Laundering Compliance?

Fighting corruption—especially grand corruption—requires effective anti-money laundering (AML) systems capable of efficiently and correctly flagging suspicious transactions. The financial institutions responsible for identifying and reporting suspicious transactions employ automated systems that identify transactions that involve certain red flags—characteristics like transaction amount, location, or deviation from a customer’s typical activity; when the automated system flags a transaction, this triggers further review. But—given the ever-increasing volume and complexity of financial transactions that occur each day, as well as the increasing sophistication of kleptocrats, criminal groups, and others in disguising their illicit activities to avoid the usual red flags—picking out the genuinely suspicious transactions can be extraordinarily difficult. Even the cleverest compliance system designer couldn’t hope to incorporate every potential red flag into the automated system.

The need to stay one step ahead of the bad actors has fueled greater interest in how new advances in data processing technology may help make automated suspicious transaction detection systems more effective. Techno-enthusiasts are particularly interested in deploying deep learning artificial intelligence (AI), as well as classic algorithms that fall under the machine learning (ML) umbrella, in the AML context. ML and AI systems extract patterns from training datasets, and “learn” (by induction) what data patterns are associated with particular identifiable categorizations. Email spam filters provide a simple example. A spam filter, which can be created to conduct a process known as classification, sorts input variables into two categories: “spam” and “not spam.” It makes its categorization based on individual characteristics of the emails (such as the sender, body text, etc.). In the AML context, the idea would be to train an algorithm with data on financial transactions, so that the system “learns” to identify suspicious transactions even in cases that might lack the usual red flags that a human designer would program into an automated system. Advocates hope that ML/AI systems could be used both to filter out the false positives (transactions which are flagged as suspicious but turn out, on review, not to raise any concerns—an estimated 99% of all flagged transactions), while also identifying unusual, potentially fraudulent behavior that may be overlooked by human regulators (false negatives). Indeed, industry experts are understandably enthusiastic about AI systems that will cut costs while improving accuracy, and proponents claim that “AI holds the keys to a more efficient and transparent AML stance[,]” urging that “[b]anks must take hold of this new [AML] weapon[.]”

To the extent that AI tools can improve upon the admittedly-clunky automated systems currently in use, it could be a step forward. But ML/AI systems have a less than stellar track record in other contexts, and a model targeted at AML compliance presents some unique challenges.

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Guest Post: Every Bank Robber Needs A Getaway Car; Banker Held Accountable For Money Laundering

GAB is pleased to publish this analysis by Emile J. M. Van Der Does De Willebois, Coordinator of the World Bank/UNODC Stolen Asset Recovery Initiative, of the significance of a decision of the Gerechtshof Den Haag, the Dutch appeals court in The Hague. As he explains, for too long authorities in the developed world have ignored the role lawyers, bankers, and other “enablers” play in facilitating corruption in the developing world.  Let us hope that the court’s decision marks a turning point in holding them accountable for their role in corruption crimes.  

Last month, a Dutch appeals court ordered the public prosecutor to initiate the criminal prosecution of the former CEO of the nation’s largest bank. The court directed that Ralph Hamers be put on trial for money laundering and other crimes the Amsterdam-based banking giant ING committed during his sevenyear tenure as its chief executive. Financial and legal professionals are rarely prosecuted for crimes they facilitate, and it is even rarer that senior executives, as opposed to the institution they run, are targeted. Until this decision, the indictment of Goldman Sachs bankers for their role in the 1MDB scandal was a notable exception.

The culpability of those who, like the driver in a bank robbery, facilitate a crime is not particularly controversial. We all know that the corruption that happens “over there” needs the services of bankers, lawyers, accountants and other facilitators “over here.” We like to pay lip service to the idea that “it takes two to tango” and acknowledge, at least verbally, that the financial and corporate services in the financial centers of the developed world facilitate the corruption found in large parts of the developing world.

But whether those working on anti-corruption always act upon that notion is another matter. A quick look at the Transparency International corruption perceptions index helps maintain the illusion that the rich developed world is doing well on corruption, and that, looking at the bottom of the table, corruption is really a developing-country problem. We have not really internalized the lessons of the Panama Papers, 1MDB, Danske Bank and, most recently, the FinCEN files, which shone a spotlight on the services provided by banks, lawyers and other professionals in making corruption possible.

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It’s Not Just the Corporate Transparency Act: Other Reasons To Welcome the Passage of the U.S. NDAA

Last week I posted about the Corporate Transparency Act (CTA), the new law requiring companies to provide the government with information about their ultimate beneficial owners. The CTA, which was passed (over President Trump’s veto) as part of the National Defense Authorization Act (NDAA), has been getting a lot of attention in the anticorruption and anti-money laundering (AML) community, and rightly so. The product of decades of tireless and shrewd advocacy, the CTA—despite its limitations and imperfections—will make it substantially harder for kleptocrats, terrorists, organized crime groups, and others to abuse corporate structures to facilitate their crimes and hide their loot. But the CTA is not the only part of the NDAA that may have a substantial positive impact on the fight against corruption and money laundering. And while it’s entirely understandable that most of the attention (and celebration) in the anticorruption community has focused on the CTA, I wanted to use today’s post to highlight several other provisions in the NDAA that may also prove important in combating corruption and money laundering. Continue reading

A Few Thoughts on the Passage of the U.S. Corporate Transparency Act

[Note: I drafted the post below earlier this week, before yesterday’s shocking events in the U.S. Capitol. I mention this only because it might otherwise seem odd, and perhaps a bit tone-deaf, to publish a commentary on new corporate transparency rules when we just saw an attempted insurrection incited by the siting U.S. President. I don’t really have anything to say about the latter events (at least nothing that others haven’t already said), so I decided to go ahead and publish the post I planned to publish today anyway.]

Last week, as I suspect many readers of this blog are well aware, the United States Congress enacted one of the most significant anticorruption/anti-money laundering (AML) reforms in a generation. The Corporate Transparency Act (CTA), which was incorporated as part of the annual National Defense Authorization Act (NDAA), will require—for the first time in the United States—that corporations, limited liability companies, and similar entities will have to provide the U.S. government (specifically, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN)) with the identities of the ultimate beneficial owners of those entities. That beneficial ownership information, though not made publicly available, will be provided to law enforcement agencies, as well as to financial institutions conducting due diligence (with customer consent). This reform will make it substantially harder for kleptocrats and their cronies—as well as other criminals, including human traffickers and terrorists—to conceal and launder their assets in the United States through anonymous shell companies, and will make it substantially easier for law enforcement to “follow the money” when investigating possible criminal activity.

This important reform has already gotten a ton of coverage in the anticorruption/AML community (see here, here, here, and here), as well as the mainstream media (see here, here, here, and here), though mainstream coverage has understandably been overshadowed by both the coronavirus pandemic and President Trump’s attempts to subvert the recent election. And we’ve had quite a bit of discussion of the issue on GAB prior to the passage of the NDAA (see, for example, here, here, here, here, and here). So, I’m not sure I really have that much to add to what others have already said. Nevertheless, it felt strange to allow this landmark event to go entirely undiscussed on GAB, so at the risk of self-indulgence, I’d like to throw out a few additional thoughts and observations related to the CTA. Continue reading

Combating Money Laundering in Africa: John Hatchard’s Latest Guide for African Corruption Fighters

The war on corruption is being fought on many fronts. One where victory is especially critical is the battle to prevent leaders of poor countries from robbing their citizens blind, and nowhere will a victory be more welcome or more hard-fought than in Africa.   Seventy percent of the world’s poor live on the continent while, thanks first to colonialism and then to Cold War machinations, Africans are saddled with governments ill-equipped to keep greedy leaders in check.  Courts, legislatures, and other accountability institutions are weak; the media and civil society hobbled by repressive, non-democratic measures.

Not that in recent years there have not been promising developments. South Africa’s once powerful leader Jacob Zuma was forced to resign the presidency over corruption allegations for which he is now on trial.  Former Guinea Minister of Mines Mahmoud Thiam forfeited $8.5 million and was sentenced to seven years in prison for corruptly granting virtually the whole of his nation’s mineral sector to a Chinese conglomerate.  The son of former Mozambique President Armando Guebuza is one of over a dozen members of the country’s ruling circle facing trial for his role in the “hidden debt” scandal.

What will be required to continue this progress is the theme of John Hatchard’s latest book,  Combating Money Laundering in Africa: Dealing with the Problem of PEPs. Like his earlier ones on African anticorruption laws and institutions (here, here, and here), it’s a must have for African corruption fighters.

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FACTI Background Paper: Analysis of the Different Peer Review Mechanisms for Ensuring Compliance with Anticorruption and Financial Integrity Norms

For two decades governments have been signing agreements where they promise to curb corruption and halt the international flow of illicit funds. A promise, however, is only as good as the method for enforcing it, and in the case of international conventions and treaties the only method available is the peer review.  Experts from neighboring or similarly situated nations review how well the government is keeping its promises, recommending ways it can do better and sometimes chastising it for breaking its promises. The theory is that threat of a bad review will put pressure on a government to live up to its commitments.

Peer reviews come in various shapes and sizes, and experience with ones has shown that some are more effective than others.  At the request of High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda Financing for Sustainable Development (FACTI), Valentina Carraro, Lecturer in International Relations at the University of Groningen, and Hortense Jongen, Assistant Professor in International Relations at the Vrije Universiteit Amsterdam, reviewed the effectiveness of the peer review mechanisms of six of the most important anticorruption and financial integrity agreements:

  • the Implementation Review Mechanism of the United Nations Convention against Corruption,
  • the Follow-Up Mechanism for the Implementation of the Inter-American Convention against Corruption (MESICIC),
  • the Organization for Economic Co-Operation and Development Working Group on Bribery (OECD Antibribery Convention),
  • the Global Forum on Transparency and Exchange of Information for Tax Purposes,
  • the Inclusive Framework on Base Erosion and Profit Shifting,
  • the Financial Action Task Force and the Financial Action Task Force-Style Regional Bodies.

Their summary of their findings and recommendations is below. and their paper here.  (Background on the FACTI and a link to its interim report recommending changes in international and domestic laws to combat corruption and stem  illicit financial flows is here.)

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