Moving compliance from blame-shifting to crime prevention

does financial compliance nurture financial crime?

by Jem Shaw

“Financial compliance was originally intended to stamp out malfeasance, but now it nurtures it.”

This inflammatory statement is typical of Bob Blower’s outspoken view of the world. The financial veteran is CEO of Clarency, whose platform for opening trade corridors, biz.Clarency,  went live  in January.

“We’re now in a position where nobody really cares about money-laundering or other financial crime, as long as it’s someone else’s fault. The banks inundate the regulators with Suspicious Activity Reports (SARs), producing nearly half a million of them a year, yet prosecutions are almost unknown.”

Blower sees current compliance processes as box-ticking exercises that are directed at the wrong targets.

“A typical SAR will show that the bank acted properly when an account moved outside set parameters. The regulations call for those reports to be submitted within 60 days. In my opinion, that's already too long, but few banks get anywhere near that requirement. Some take years to submit, but for now let’s assume that, a couple of months after the event, they enter the regulators’ backlog. It can be a year or more before any ruling is made, if at all. Defence Against Money Laundering Orders constitute less than 5 per cent of those SARs that are lodged. The bad guys are somewhere in the middle of this morass of largely false positives. If there are wrongdoers, they’re usually far out of reach of justice, and the best we can do is apportion blame.

“Pro forma fines have been shown to solve nothing. The latest call from FATF shows that even regulators are losing faith in their own system.  How can the UK regulators, for example, point the finger at property market transactions and fake companies when they themselves run the system that registers property and registers companies?  It does not make any sense.

“At best we push financial crime into opaque channels, at worst we integrate it into the financial system by de-risking.  Prevention is not diversion, it’s detection. It’s about making the incentives to criminal behaviour unattractive and treating the private sector as a partner not a perpetrator.

“We must stop financial crime before it happens, not do a botched post-mortem when it’s already too late. We have a ton of experience of working both with money services companies and with banks in Africa, China and elsewhere. That experience has created a platform that creates a transparent process for identifying potential malfeasants. Our dev team has spent nearly two years developing a practical business platform that can monitor and analyse every transaction, automatically hitting the pause button on any payment with questionable parameters. If a risk officer then decides to let the transaction continue, then that decision, and its supporting data, are captured immutably in a highly developed blockchain ledger. It’s a decision that’s unlikely to be taken lightly - the more manual process on which our solution is based has been proving that fact for sixteen years. As a result, the risk officer can block a transaction and submit an SAR before a crime has been committed.”

Bob Blower believes that a culture shift needs to happen in global trade, and particularly in commerce.  It must focus on an end-to-end, integrated understanding of the sources of funds, ownership structures and, critically. the reason why.

“Bank de-risking is a cop out. It’s a lazy way of simply shifting the decision somewhere else. Despite all the de-risking of recent years the volumes don’t drop, they just find different routes.  Data is locked in each bank’s stove pipe, is not mined and often focuses on the obvious.  Malfeasants know this, and they exploit this disjointed micro-level of regulation when a macro, joined-up approach would be far more successful.  Why on earth did the EU sanction GDPR without ANY exemption for banks to share data?  Post Brexit I hope the UK will put this right.

“But ultimately de-risking is a selfish commercial decision, not a response to regulatory requirements.  As good citizens, banks should be assisting in the fight against wrongdoing anyway; that there needs to special legislation shows how low it is in the priority list. But the victims - and victims they are - are the emerging economies that are deemed to be too expensive to support. The threat of non-compliance penalties is a factor, but many companies give up trying to open accounts simply because the process takes so long and is so immature.

“We have to re-focus on the essential purpose of compliance – to prevent crime. I’m realistic enough to know we’ll never stamp it out altogether, but we can make it difficult enough to make honest, transparent trade the more profitable option. We're proving almost daily that a financial institution can more than recoup its onboarding costs within the first transaction – and then continue to keep the account compliant for every new transaction that flows through. The system is wise to market values, shipping volumes, carrier routes and more, and it can implement a hold whenever something doesn’t look right.

“It’s a culture shift that moves us toward detection and eradication rather than just demonstrating no-fault. It not only squeezes out the bad guys, it opens up the world to the good. There’s no need to de-risk a region because corruption hides among its fair traders. Instead, we can cut off revenue from the wrongdoers and we can all profit from transparent world commerce.”

Clarency 'C'

Clarency Singapore PTE. LTD. Guoco Tower, 1 Wallich Street #14-01, 078881 Singapore   +65 6403 3956