The June announcement by Barclay’s that the financial institution intends to close some 250 accounts of money transfer businesses to “eliminate risk” signals an incredible loss of faith in the existing anti-money laundering (AML) and counter-terrorist financing (CTF) controls put in place in the wake of 9/11.
A blanket action of this magnitude by a major financial institution should be the last indicator the United States and international community need to recognize that the “system” is broken and in need of a reboot. The current and most commonly accepted approach to AML/CFT risk management is to push out account holders, banking products and technologies such as Bitcoin that fall outside the scope of the typical and predictable customer model. While this trend works in favor of the institutions and nations that strive to sustain the status quo regulatory and monitoring practices, it is no longer adequate for the world we live in today.
Closing accounts because they cause a “regulatory headache’ and trying to squeeze Bitcoin and other emerging technologies into an outdated way of thinking simply creates more problems than it solves. The formal financial system must adapt its way of thinking about AML and CFT controls to the diversity and the disparity of banking in the interconnected world. It must let go of the existing mindset, reframe the problems, adjust its course and evolve in order to keep pace with the rapidly changing environment in which individuals and businesses conduct transactions.
Three moves that can have a profound impact:
- Invest in human capital and make a concerted effort to bolster the analytic capacities of staff through structured analytic training.
- Form a partnership with an innovator. Embrace the opportunity to do something groundbreaking and flip the system on its head.
- Sponsor case study research that actually examines the institutional and systemic vulnerabilities that are and were exploited by criminals and terrorists. Move away from historical anecdotes and toward predictive analytics.
The recent announcement by Barclay’s as well as the HSBC deficiencies and violations exposed last summer are proof that even the largest and wealthiest players are ill equipped, internally, to deal with the diverse client base that is the international community. It is clear at this point that financial institutions would rather pay penalties and close accounts instead of leading the charge in reframing the formal financial mindset. Lessons learned from the post mortem analysis of intelligence failures within government have triggered massive restructuring; why should the financial sector be any different?