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This month we took time out of our busy schedules to sit down with Maravi’s anti-money laundering (AML) expert, a member of the Association of Certified Anti-Money Laundering Specialists (ACAMS), for a question-and-answer session. We grilled him on aspects of AML, Countering Financing of Terrorism (CFT), and Public-Private Partnerships (PPPs) and asked him to do some horizon scanning for us. All views and opinions presented in this interview are that of our consultant and not necessarily that of Maravi or the wider AML/CFT community.
‘The value of PPPs is in the sharing of transactional data’
We have all heard of the Financial Action Task Force (FATF), its 40 recommendations, and its framework of global standards to combat money laundering (ML) and terrorism financing (TF). In November 2020, FATF issued guidance on information sharing by the private sector. What does the landscape look like now and what do you predict for the future?
OK. Firstly, for those that do not know, FATF is an intergovernmental agency watchdog, headquartered in Paris, which recommends policies and standards to combat ML and TF. It first raised the importance of PPPs as far back as 2012, suggesting that the private sector in each national jurisdiction should share information with its government regulatory and law enforcement bodies. At that time, the focus was predominately on the financial sector, also known as financial institutions or money value transfer services (MVTS). It should be noted that the financial sector is very broad and encompasses banks, credit unions, securities, money remitters, and e-commerce among others.
The real value in these types of partnerships is the sharing of information relating to the customer, the originator, and the beneficiary, as well as transactional data, meaning the amount of that transaction. This is the “intelligence” if you like. Participating nations were asked to adopt legislative frameworks, incorporating the FATF standards and following a risk-based approach, to detect financial crime, money laundering, and terrorism financing.
The global AML/CFT legislative landscape has expanded exponentially since, and now covers financial institutions, trust and company services providers, casinos, lawyers, accountants, real estate, and traders in high-value goods.
Can you suggest where things are going in the future?
It’s a complex answer, a bit like looking into the proverbial crystal ball. Financial institutions have generally stepped up to the plate, supplying and sharing good financial intelligence and that has brought about many prosecutions. However, banks have had their fair share of bad press. You just need to look at some of the big fines meted out by national regulators for allowing money laundering and sanctions evasion.
For example, there was the leak of files belonging to the Financial Crimes Agency of the US Treasury (FinCEN), which among other things has exposed how the London property market is saturated with questionable money from Russia. These documents, roughly 2000 of them, contain details of approximately 200,000 suspicious transactions or suspicious activity reports (SARs) with a value of USD 2 trillion. So, you could say this is negative publicity and has caused reputational damage not only to these financial institutions but various governments including the US and the UK, in that it exposed the size of the problem of illicit money sloshing around the world. However, whilst non-government organisations, media and journalistic sources will continue to expose this apparent complicity, we must recognise that it is the SARs that create the intelligence picture to allow the financial crimes to be investigated.
When it works properly, the media will pick up on the prosecutions for money laundering and financial crime, as well as the arrests and interdiction of many potential terrorists, and often before they act. This is in no small measure due to the financial institutions providing the vital intelligence pieces and sharing their information in a PPP.
So, in effect, the SAR super-charges an investigation towards laying the prosecution case?
Yes, you’re correct. Once a SAR has been submitted, the AML/CFT authorities use the transaction or the transfer of funds in the financial system as the intelligence tool to build the connections or nodes between all the players in the enterprise.
So, what is the end goal?
In my view, in the short- to mid-term future, I think we will see the PPP expanded. For example, banks and financial institutions have been historically wary of what is called “professional enablers”. These are the go-betweens or gatekeepers, the legal persons and organisations who facilitate the movement of funds that traverse the globe. A proportion of these funds is the proceeds of ill-gotten gains: drugs, corruption, organised crime etc.
Professional enablers include lawyers, accountants and company service providers, whose function is to create legitimate corporate structures, such as shell companies and trusts, which can send and receive funds. The complex nature of these structures and their transactions also serves to disguise or create distance from the beneficial owner of the funds, legitimately or not, as the case may be. We’ve all heard about the Panama Papers, haven’t we?
Yes, Africa got a fair share of publicity after that, not all of it favourable. It shed light on the various elites and political classes across the continent using shell companies to syphon off state funds. Can you elaborate on that?
I can. The law firm involved, Mossak Fonseca, discovered a lucrative market. Initially, it specialised in legally disguising beneficial ownership for its clients, but it realised there was also a market in acting for those with dubious sources of wealth. It helped these clients integrate their funds back into the legitimate financial system, using various structures to make them look legitimate and/or to disguise their ownership.
Just searching the internet for ‘Panama Papers Africa’ reveals a veritable who’s who, including current and former presidents, prime ministers, their family members, politicians, advisers, diplomats, business associates and sports stars, you name it, and across the length and breadth of the continent. It shed light on this tangled web of individuals, offshore shell companies, tax havens and the relationships between them. As you say, most of those named in these leaks claim to have used the structures legitimately, but the contradiction is the massive flows of cash involved and their source. It’s worthy of further scrutiny, especially when the countries associated with these individuals are often poor.
So, what has happened?
Essentially this scandal exposed the need for professional enablers to be brought under the AML/CFT umbrella, and they are now accountable in the same way financial institutions are. However, we are yet to see credible prosecution results from these PPPs. That might be due to teething and procedural problems.
There are anecdotal stories of lawyers submitting bundles of case notes as part of their SARs, presumably because they are used to assembling large briefs, and so they follow the same method when submitting SARs. This has the effect of swamping the investigator with vast amounts of potentially irrelevant detail. As these lawyers and accountants hone and improve their information-sharing with their partners on the investigation side, we should see these partnerships bear fruit.
Another outcome of the Panama Papers and other leaks was a demand for transparency. The outcry led to countries conducting beneficial ownership reforms. So, we are now seeing governments creating registers of entities that can transfer value, including trusts, companies, and other structures. Not all these registers allow full public access; many have restricted access for law enforcement or government only. Perhaps this might defeat the purpose to some extent, but it is a step in the right direction.
For example, in 2016, this move to transparency had the unintended consequence in the UK of exposing poor record-keeping and quality of data. That’s kind of ironic when the UK is on record demanding that other jurisdictions in its crown dependencies, such as tax havens, be more open and transparent. Having said that, it’s a good example of PPPs: The UK’s Joint Money Laundering Intelligence Taskforce (JMLIT) is a partnership with financial institutions which shares information to enhance investigations and other countries are now creating similar models.
What about cyber-enabled crime, cryptocurrency, and social media? What part do they play? The financial technology sector is growing rapidly. Is the lack of knowledge in this area a weak link in this PPP arrangement?
Yes, it is a new and dangerous frontier, where it seems governments cannot legislate fast enough to keep pace with the technology. In the news at any given moment, there is always a story on state-sponsored hacking, ransomware, malware, and all manner of fraudulent scams are increasing. The various regulatory authorities are unable to keep up with the rapidly evolving technology, gaps appear, and they are hard to shut.
Having said that, there is an ongoing discussion between the Financial, Technology and Payments sector (FINTECH), governments and law enforcement.
The FINTECH sector in the UK, for example, has informal discussions with government bodies and thinktanks where they come together to map out red flags that identify a convergence of cybercrime and the financial system. Things like monitoring social media fundraising by a terrorist organisation, or identifying money ‘muling’, which is essentially allowing your account to be co-opted (normally for a payment) to transfer funds on behalf of criminal organisations.
Another area where there is limited PPP is the online gaming industry. There is yet to be a defined global agreement requiring gaming companies to verify their customers and report criminal transactions. It is also not clear whether gaming currencies are covered by the AML/CFT framework or whether, according to FATF, the organisations should be regulated as Virtual Asset Service Providers (VASPs). For these reasons, I foresee online gaming being brought into sharper focus in terms of AML/CTF.
At present, it is an unregulated global frontier; a virtual ecosystem outside the traditional financial system where huge amounts of money change hands and fortunes are made by the best individual players. It is an electronic marketplace with a value assigned to virtual currencies, credits, tokens, but also objects and artefacts and even superpowers held by gaming avatars. It’s these things that have a virtual transferable value but also a real-world value. They are exchanged, transferred and stolen, and can be instantly cashed out in local fiat currency. Online gaming hubs provide an environment for virtual trade-based money laundering (TBML) with the same typologies as seen in the real financial system. For example, a criminal using a stolen credit card might purchase virtual currency from a well-known game store, which is then sold at a discount to other players and cashed out via social media in a different country.
What about Bitcoin and other cryptocurrencies? From my limited understanding Bitcoin is becoming more mainstream and respectable. Yet there still seem to be criminal elements involved with it?
In my opinion, Bitcoin does have a lot going for it. It has a lot of positives, it provides a form of financial inclusion outside the traditional banking system, it is increasingly being accepted as a viable investment despite its volatility, its price is currently reaching record levels. In simple terms, it has got the blockchain ledger that records every single transaction ever made so, essentially, every coin can be followed and accounted for. It now has an element of transparency in that the bitcoin exchanges, in their status as VASPs, are required to record the wallet IP addresses linked to an account, which in theory is traceable to the individual and therefore it is not an anonymous coin.
We see the likes of a large global payment provider investing in it now, and Elon Musk has just bought Bitcoin valued in the billions, presumably as an alternate payment method. Does this mean Bitcoin has become mainstream and respectable as a viable alternative to fiat currency? Is there enough confidence in the identity verification aspect? It is beginning to appear that way.
Why is there still a criminal element using Bitcoin then?
There is a shift by those who need to hide their identity to move away from Bitcoin to what are known as private coins, and to use cutting edge software to scramble the blockchain, effectively recreating the anonymous marketplace. As I said, in theory, the Bitcoin transaction, the buying, selling and sending and receiving wallets, can be traced using the blockchain and this is recorded at the exchange platforms. Now we see newer private coins and technology that removes the identification aspect using tumbler techniques to jumble the transactions.
What are these tumbler techniques? I have an image of a tumble dryer.
You’ve hit the nail on the head. A tumbler, such as a Bitcoin mixer, is a 3rd party service that, for a fee, offers a mixing solution that removes the traceability of the sending and receiving wallet addresses. In other words, you can potentially obscure authenticated coins or tokens with tainted ones. We must ask ourselves though: why do this if you’ve got nothing to hide? Who requires such a level of anonymity? What are you hiding? Invariably the answer will be illicit funds, the proceeds of ML, TF, corruption, kleptocracy, drugs, arms, human trafficking, etc. You name it. Where it gets dangerous is when those wanting to keep themselves anonymous are state-sponsored actors evading international sanctions for example.
Cryptocurrencies are still relatively decentralised, and regulations are lacking. It is the exchanges that are the weak links across all these crypto coins. To use the analogy of the old American wild west, where the outlaws robbed banks: in this context, the banks are the exchanges, and the modern-day outlaws are the hackers who can exploit the system by successfully targeting and stealing from these cryptocurrency exchanges. The North Korean regime, for example, in its desperation to circumvent crippling sanctions, is known to have hacked exchanges and converted the proceeds back to fiat currency. They have the computational capabilities to mine Bitcoin, but it is probably easier to steal it if you know how to and have the expertise to do it.
Are there any other types of partnerships that will fall under the spotlight or have we covered everything?
No, we haven’t covered all the areas currently in focus. For example, in June 2020 FATF released its report on the Illegal Wildlife Trade (IWT). The report drew on earlier studies completed by FATF-Style Regional Bodies (FSRB), other organisations and the private sector. It covered case studies, investigations, international cooperation and the role that PPP can play.
In terms of IWT, I think we will see more of a focus from the financial sector using traditional ML typologies to develop new red flags across all the stages of the supply chain. Unfortunately, the financial crime picture has largely been opaque up to this point because most of the focus, especially in Africa and other parts of the world, has been on the conservation and protection approach to wildlife and the environment, rather than the crimes associated with it.
So, in this space, we hope to see communication develop between current silos, both public and private. By that I mean the wildlife NGOs, the financial institutions, the government environmental agencies, and the FIUs working together to develop a joint intelligence picture that can be replicated on a global level. This is certainly an area with plenty of subject matter, which we can discuss in detail in future as things unfold.
OK let us wrap this up, what would you like to see in the future with PPP?
In the future, with robust technologically and enhanced privacy safeguards, we might see more private to private information sharing across a FATF framework. We could see banks sharing with other banks and other MVTS. This would increase the scope and scale of PPPs and shed further light on illicit flows of money in the financial system. So, instead of looking through the keyhole of one financial institution, we might be able to open the door and potentially shine the spotlight on all financial crime and illicit flows of money in real-time across the global financial system as a whole.
Will that make the world a safer place, by safeguarding and encouraging inclusiveness of the traditional financial system as we know it? Or will there be push back from those with power and influence to maintain the privacy and confidentiality of the darker corners of the global financial system? We shall see but let us hope it’s the former.
For more information on AML, get in touch with us at contact@maravigroup.com.