September 29, 2016 | Memo
Designing a New Anti-Money Laundering System
FDD Research Memo
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Over the past 15 years, concerns over the dangerous and corrosive impact of illicit financing have shaped core national security strategies and underscored the importance of defending the integrity of the financial system. The United States government and other authorities have used the tools of financial pressure, sanctions, and regulation to address every major international security concern – from terrorism and nuclear proliferation to kleptocracy and human rights abuses – with a growing demand on the financial community to prevent rogue actors and illicit capital from entering the financial system.
Given the attention, importance, and resources concentrated on the issues of financial integrity and security, this is a critical moment to clarify the purpose of the anti-money laundering/combating the financing of terrorism (AML/CFT) system and ask whether it is working as intended. This question takes on more importance as organizations invest ever-increasing resources into compliance with financial regulations and as greater policy demands are placed on the tools and strategies of financial pressure.
The AML rules and regulations developed over the past four decades were built to facilitate transparency, traceability, and accountability. The modern AML/CFT system is intended to be systemically effective to deter, detect, and disrupt illicit financing, but it cannot stop all illicit activity. The risk-based model upon which the AML/CFT regime relies assumes that not all dirty money will be stopped, nor will every dollar be detected, traced, and seized. No institution or country, however much it spends, can thwart all illicit actors.
Billions of dollars of fines have been levied against banks for failure to comply with AML/CFT requirements, and billions more have been invested by the private sector in compliance systems, personnel, and remediation to meet increasing global standards.
There have been herculean efforts to make the system work. Even with such dedication, the current AML/CFT system is not working effectively or systemically. It is inefficient in how it attempts to prevent financial crimes and ineffective in protecting the financial system from the flow of illicit financing. But this is not the time to abandon the principles embodied in this system. Quite the opposite – this is a moment of opportunity to design a new system that does more to protect the international financial system and reduce the costs and inefficiencies of the current model.
This article explains why the current AML/CFT regime as designed and implemented is outdated and lays out a vision for a new AML/CFT approach – driven by new technologies and structural innovations – that is better designed to protect the integrity of the financial system.