The State of Anti Money Laundering

THE STATE OF ANTI MONEY LAUNDERING

MARCH 2017

2-4% PERCENTAGE OF GLOBAL GROSS DOMESTIC PRODUCT (GDP) AT RISK OF BEING LAUNDERED1 <1% PERCENTAGE OF MONEY-LAUNDERED FUNDS THAT ARE SEIZED AND FROZEN2 $14B PENALTY THAT DEUTSCHE BANK MAY PAY IN FINE AFTER COMPLETION OF ITS ONGOING MONEY-LAUNDERING INVESTIGATION — THE HIGHEST FINE IN HISTORY3 $554M DATA RECORDS STOLEN IN FIRST HALF 20164 — A 31 PERCENT INCREASE OVER THE PREVIOUS SIX MONTHS 70% PERCENTAGE OF AMERICANS WHO OWN A SMARTPHONE. ALMOST 50 PERCENT OWN A TABLET.5 79% PERCENTAGE OF WORLD’S POPULATION THAT HAS OFFICIAL GOVERNMENT IDENTITY DOCUMENTATION6

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EXECUTIVE SUMMARY

Money laundering has a long and ancient history. From the age of gold coinage to today’s technologically advanced banking system, it has continually evolved to survive and thrive in the changing times.

For years, it had predominantly been the fail-safe domain of drug cartels. Since 9/11, however, laundering money has become a lot harder than it used to be. In an effort to tighten the noose around terrorists using laundered funds to launch an attack, the American government has made each iteration of anti-money laundering (AML) legislation more complex: Standards are higher, and penalties for failure to comply are harsher. However, even today, many of the details remain vague, making it difficult for banks to effectively comply with AML rules.

Banks are also now responsible for “know your customer” (KYC) compliance and need to find technological solutions to do this, especially since several vulnerabilities still exist within the banking system.

In addition, as AML legislation has become more complex, fines for failure to comply have increased significantly. Between 2009 and 2015, the US government fined banks a total of $5.2 billion.

To avoid steep fines and remain compliant, banks are expected to know who is opening an account and the level of risk that each person presents. And in order to proactively combat fraudsters, banks have to invest in identity verification while still offering customers the seamless digital banking experience that they demand.

Mobile phones offer a variety of solutions for identifying customers and assessing their risk. Remote ID verification, combined with mobile devices offers an

elegant solution for complying KYC regulations without inconveniencing customers.

Ultimately there are a variety of tools banks can use for identity verification on the market; however, not all of them are created equal. It is up to banks to determine which tools best serve their compliance needs without disrupting the lives of their customers. After all, with growth of terrorism, AML regulations will only continue to get stricter.

Cover Citations: 1 United Nations Office on Drugs and Crime. Estimating Illicit Financial Flows

Resulting from Drug Trafficking and Other Transnational Organized Crimes. 2011. http://www.unodc.org/documents/data-and-analysis/Studies/Illicit_financial_ flows_2011_web.pdf.

2 United Nations Office on Drugs and Crime, Estimating Illicit Financial Flows

Resulting from Drug Trafficking and Other Transnational Organized Crimes. 2011. http://www.unodc.org/documents/data-and-analysis/Studies/Illicit_financial_ flows_2011_web.pdf.

3 Coppola F. “Deutsche Bank: A Sinking Ship?” Forbes. September 27, 2016. http:// www.forbes.com/sites/francescoppola/2016/09/27/deutsche-bank-a-sinking- ship/#5e5fb2c3b9bc.

4 Gemalto. Gemalto releases findings of first half 2016 Breach Level Index.

September 20, 2016. http://www.gemalto.com/press/Pages/Gemalto-releases- findings-of-first-half-2016-Breach-Level-Index.aspx.

5 Statista. United States; Statista Market Analytics; 2010 to 2015; Individuals of any age who own at least one smartphone and use the smartphone(s) at least once per month. https://www.statista.com/statistics/201183/forecast-of-smartphone- penetration-in-the-us/.

6 The World Bank. Identification for Development. December 5, 2016. http://www.

worldbank.org/en/programs/id4d.

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INTRODUCTION THE HISTORY OF MONEY LAUNDERING

The first records of money laundering date back to ancient China, when merchants hid their economic activities from the government since many forms of commercial trade were banned.7 The term itself dates back to the 1920s during the American Prohibition, when gangsters such as Al Capone opened laundromats to mix the profits of their illegal business from selling alcohol with legitimate profits from laundry.8

Today, the proliferation of new and easy payment technologies means it’s even easier for individuals to transfer sums of money across borders. A plethora of payment methods also means an excess of creative ways to transfer money illegally.

During the past 50 years, there’s been a flurry of AML activity. Modern legal enforcement of money laundering in the United States started with the Bank Secrecy Act (BSA) of October 26, 1970.9 The BSA initially required financial institutions (FIs) to help the American government prevent and detect money laundering. At first, one of the main focuses of AML laws was the War on Drugs. The BSA mandated FIs to keep a registry of customers’ transactions and report transactions over a certain threshold as well as any suspicious transactions. These requirements meant that banks had to have a better knowledge of their clients, and the requirements became known as KYC procedures.10

7 Morris-Cotterill N. Money Laundering Risk Management and Compliance.

http://www.countermoneylaundering.com/public/content/brief-history-money- laundering.

8 What Is Money Laundering? About Business Crime Solutions Inc. https://www.

moneylaundering.ca/public/law/what_is_ML.php.

9 Public Law 91-507 (Oct. 26, 1970). U.S. Government Publishing Office. https://

www.gpo.gov/fdsys/pkg/STATUTE-84/pdf/STATUTE-84-Pg1114-2.pdf.

However, after 9/11, AML programs shifted their focus to terrorists — who could wreak more havoc using fewer dollars — making it even more critical for banks and non- bank financial entities to understand who their customers are. The USA PATRIOT Act of 2001 expanded the scope of AML programs11 and made regulations on suspicious activity reports, customer identification programs and customer due diligence (CDD) more stringent.

That was just the beginning of a worldwide movement to crack down on the illegal movement of money between parties. For example, the European Union (EU) enacted the fourth iteration of its Anti-Money Laundering Directive (the AMLD IV), which updated the EU regulations to be more in line with those of the U.S..12 All EU member states must be compliant with the new mandates by June 26, 2017. The new regulation requires banks and FIs to assess each

10 Roth J, Greenburg D, Wille S. Monograph on Terrorist Financing, Staff Report to

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