The next proposition in tackling financial crime?
Speech by Philip Robinson, Financial Crime & Intelligence Division Director
SIFMA AML conference
5 March 2008
I'd like to thank Alan Sorcher, and his colleagues at Securities Industry and Financial Markets Association, for inviting me to speak before you today. We are all part of a global fight against crime and terrorism, it is always illuminating to hear how other countries and organisations are dealing with our common issues.
The UK's approach to anti-money laundering aims to be risk-based and proportionate, making effective use of limited resources by directing them to where the risk is greatest. Ours is not a universal approach, but nonetheless I believe it is gaining recognition amongst our international partners in regulation and industry as a valid alternative to more structured regimes. Today I'd like to reflect on how the risk-based approach has developed in recent years, and to contemplate where we might go from here, as an international community, in using our skills to have an increasing impact on financial crime.
A risk-based approach starts from the reality that we all – supervisors, law enforcement, legislators and businesses – have limited resources. These resources should be directed to where they will have the greatest effect. This direction is determined by the impact and probability of the risks we face. A risk-based approach acknowledges that it is hard to find one-size-fits-all solutions. It accepts that firms' practices will vary, and that there are certain advantages to this, given differences in business model, customers, products and delivery channels. What's most valuable is the common outcome for anti-money laundering and counter terrorist finance regimes – that we can reduce the social harm suffered as a result of financial crime.
None of this is meant to imply that being risk-based is an easy approach to take. It means accepting that we don't act to tackle all money laundering risks and weaknesses, and that money laundering cannot be eliminated instantaneously. There are several key ingredients which need to be in place for the system to bring about results. Two of these are information sharing and the availability of appropriate guidance. The Financial Action Task Force (FATF) plays a crucial role in both these areas, facilitating sharing of expertise and technical assistance at an international level. It's a source of great encouragement and support that FATF has stated that a risk based approach enables a more effective and efficient use of resources, and has prioritised more work on it during its current presidential session. FATF's approval of guidance on applying a risk-based approach last June was a great step forward, in gaining international recognition for this alternate way of doing things, and in helping other countries understand the rationale and methods by which it can be implemented, and in the case of the UK, has been implemented.
FATF's guidance paper puts five principles at the heart of an effective risk-based approach to anti-money laundering. Firstly, the regime requires a national risk assessment looking at a jurisdiction's threats and vulnerabilities. Secondly, the legal and regulatory framework must be able to support a risk-based approach. Thirdly, the regulatory regime should be designed with a risk-based approach in mind, and its bodies given the necessary authority to fulfil its responsibilities. Fourth, tackling money laundering is never the responsibility of a single institution, so it's important that all the main actors are identified and included in a consistent manner. Finally, the regime should facilitate information exchange between all relevant parties.
One of the ways in which FATF and its regionally focussed sister bodies facilitate sharing of expertise is through the mutual evaluation process. Evaluations, quite rightly, look at the effectiveness of regimes in practice. It is fitting, therefore, that FATF's guidance looks at how a risk-based regime will operation, as well as the theory behind it. For such a system to be implemented successfully, supervisors must exercise well-informed judgement. This, in turn, relies on supervisors understanding the risks. Achieving this comprehension is our greatest challenge – both for regulators and the industry. We also need to make the outputs from the Evaluation process more useable by the private sector, perhaps by being clearer about what the residual risks remaining in a jurisdiction are assessed to be, rather than by simply looking at their compliance with the recommendations. The evaluations should demonstrate the outcomes achieved not the compliance level, and do so in a way that allows a firm to use them meaningfully in its own risk assessment.
Understanding the risks is also the area where working together will lead to the most significant leaps in progress. FATF continues to develop its collaboration on both of these in the international arena. I'm pleased to see that that Sir James Sassoon is seeking to enhance this further as part of his priorities for the FATF during the UK presidency; by increasing the Task Force's capability to conduct strategic surveillance of emerging trends and threats, and through developing its engagement with the private sector.
The private sector has, historically, played second fiddle to the public sector in the strategic direction of the fight against money laundering. However, its contribution and engagement will bring important an important new aspect to our understanding of risk. This year, their input has contributed to the FATF typologies exercise for the first time. FATF hosted two further meetings with the private sector in December, exchanging information on money laundering and terrorist financing techniques, and committing to produce guidance on the risk-based approach to AML/CFT for non-financial services institutions. As the FATF chair for the risk based guidance work I am delighted to see the progress that has been made in this area, and would like to thank the private sector for its early contributions and willingness to engage with the philosophy of the risk-based approach.
The FSA's responsibilities for AML/CFT supervision continue to grow. The EU's new money laundering directive, implemented last December, has widened the FSA's supervisory scope. We now monitor the money laundering controls of financial leasing companies, safe custody providers and money brokers, to name a few of the new types of business that have come within our sphere. Our first actions are to understand more about these new businesses, the threats and vulnerabilities that they're facing, and how money laundering affects them. Such understanding underpins a risk based approach to supervision – understand the "gross risk", understand the current mitigations, assess whether the level of residual risk is within your risk appetite; if not seek further mitigation.
And finally, we continue to work closely with the industry in the UK to develop guidance on anti-money laundering and counter terrorist financing which works well for them. The Joint Money Laundering Steering Group consists of trade associations representing their members' interests, and continues to work hard to produce guidance which is approved by government and can be used as a point of reference by courts and supervisors. The FSA has recently visited a range of firms to see how the industry has responded to the Guidance. The results are due out later this month, but I can say that our findings are broadly positive.
While the JMLSG Guidance has played an invaluable role in making sense of the risk-based approach for firms, the EU's Third Money Laundering Directive has now embedded the risk-based approach in European and UK law. In the UK, this has made existing good practice mandatory in many cases. For example, customer due diligence requirements are now implemented through laws and regulations. The number of sectors regulated for money laundering has also grown, as I mentioned earlier. The UK wide AML supervisors' forum, which I chair, has provided another opportunity for domestic supervisors for all sectors, financial and non-financial, to share information and experiences while the new Regulations were being implemented.
All systems develop over time, and the risk-based approach is no exception. In the UK, we've spent a lot of time and energy building relationships with our international and domestic partners. I believe it has brought benefits to both sides, in terms of improved understanding of the approach, its limitations, benefits and challenges, as well as building a coherent and detailed picture of the risks which make up our common backdrop. We will always have more to learn, but the important thing is being ready to do so, and having the channels and opportunities in place to make the most of each others' knowledge, and I welcome the open discussions we have enjoyed with FinCen in the last few months, at the request of Jim Freis.
So, where do we go from here to develop our knowledge and make further progress to our outcome: reducing the harm that crime and terrorism impose on our society?
Over the past few years, anti-money laundering and counter terrorism have come very much hand in hand. When FATF published its Special Recommendations in 2001, it echoed a wider global movement to do more at all levels of society to tackle terrorism. Both financial services supervisors and institutions have contributed to this cause by moving to comply with the FATF's Special Recommendations.
Both here, in the United States, and in Europe, the threat posed by terrorism remains a grave concern; for parliaments, the public and all parties active in the economy. It affects the confidence we have in all aspects of society – markets, transport, homes and businesses. Terrorism, by its nature, aims to create as much panic and disorder in as short a time, and with as little resources, as possible. Terror attacks can be carried out by small groups, and sometimes with only limited contact with the financial system. Therefore, its finances may be much harder to track, with the greatest gains to be had from looking at underlying infrastructures, rather than specific cells.
The threat posed by organised crime is different in many ways. Organised crime aims to make a profit, rather than to deliver a message. Its nature is not to manifest itself by headlines on the front pages. Its world exists out of the sight, and, more importantly, the mind, of most members of society. Yet it pervades society to a much greater extent than terrorist cells. Drugs are bought, sold and experimented with on the streets of ordinary towns and cities across our nations, while our borders are permeated by smugglers, illegal migrants and people traffickers.
Organised criminal gangs are criminal businesses. They employ thousands of people across the world. They aim to derive significant profits at the expense of honest citizens, making their criminal profits, like a normal business, by using a range of specialist services, including by outsourcing non-core functions. It is a profitable business - the size of the UK's illicit drugs market has been estimated at $10 billion a year.
Yet despite these huge structures and costs posed by organised crime, it's an area which, today, attracts relatively little research and political attention. It may be much harder to make the case for tackling this area than it is for tackling terrorism, given the latter's dramatic headline effect. But you might argue that terrorism may pose much less cumulative social harm. While the UK's security services have increased the number of individuals being monitored in connection with their support for terrorism rose from 1,600 to 2,000 during 2007, an estimated 776,000 UK citizens are cocaine users. The UK's Serious Organised Crime Agency estimates that organised crime costs over $100 million each day.
It is these sort of assessments which guide the risk-based approach, and make it so useful in enabling us to respond to changing priorities. As Richard Barrett, the UN's co-ordinator of anti-terrorist efforts, said in a recent interview: "The financial outcomes of terrorism are not necessarily always evident and certain negative consequences could follow from the application of strict regulations against terrorist financing that are fairly hidden".
We cannot judge the effectiveness of a global counter terrorism strategy based only on the results in the terrorist financing arena. The full scope of counter terrorism interventions go well beyond the requirements of FATF, OFAC and FinCEN, but it is clear that there has been a much greater focus on the use of anti-money laundering tools in the fight against terrorism since 9/11. This emphasis has had benefits in other areas of anti-money laundering practice. For example, the greater focus on anti-money laundering tools, driven by counter terrorism concerns, has raised the general level of anti-money laundering compliance globally, and especially in the leading financial centres, such as New York and London. But we could, all of us together, with the benefit of hindsight, ask ourselves two questions:
- Are we using the right tools and techniques, in a properly coordinated and effective fashion, to tackle Money Laundering and Terrorist Finance?
- Has our recent focus on terrorism, although essential, left society more exposed than we might like to the menace of organised crime?
My personal answer to question one, which echoes what William Fox said this morning about information sharing, is that the person who knows most about the risk needs to provide the detailed risk assessment. If the public sector has intelligence about terrorism, then let it be used to target the efforts of the private sector more fully; we shouldn’t expect the private sector to try and identify specific terrorism risks that we already know about, that is wasteful. We should provide the information, perhaps by public designation. This doesn't exempt the private sector from reporting self generated suspicions but it is neither efficient nor effective to make them look for things we already know. But private sector, note, when the risks are indicated, make sure your risk based systems are informed by them, otherwise I am sure there will be a regulatory response.
My personal answer to question two is yes, we have left ourselves more exposed. It is not a question of either counter terrorist finance or organised crime, but rather both counter terrorism and organised crime. And organised crime has grown and changed as a global threat. The has perhaps been enabled by global political changes, increased ease of travel and communications, and increased boldness of organised crime in the face of reduced disincentives. It is not so much that we have intentionally allowed it, it is rather like a distraction theft, while out attention has been elsewhere.
We do have the capacity to respond, our recent experience in working together on money laundering and counter terrorism measures has left us well placed to strengthen our collaborative approach to addressing organised crime. No single jurisdiction can tackle the problem of organised criminality alone. This is an international phenomenon, where understanding and practical results can only be achieved with the help of many different parties – law enforcement, academia, governments, industry and regulators.
The UN's Palermo Convention has already established a framework for international cooperation. In Europe, the EU's European Border Agency helps EU member states in implementing effective border controls. The European Suspicious Transaction Reporting Project promotes Europol's analytic work on money laundering in the EU. Also, the European Arrest Warrant has resulted in a significant reduction in the time taken to execute a warrant within the EU. A fascinating conference, exploring some potential shifts in thinking and resource in dealing with organised crime, was hosted by the Ditchley Foundation earlier this year. This is a UK think tank which aims to improve US/EU understanding. Institutions like this are beginning to signal that there is much more still to do, and the Ditchley conclusions, arising from a broad international consensus in the discussions, showed that these experts believe we need to do more to combat a growing threat from OC.
Globally, we are well placed to rise to the challenge, through the many forums and opportunities for dialogue that have brought us success in countering terrorist finance over recent years. You won't be surprised to hear me say that the financial services community, are well placed to make a valuable contribution, because the common theme underlying the myriad of organisations, locations and techniques present in organised criminality is money. Keeping money away from organised criminals, and making it harder for them to gain the benefit of their proceeds, will draw away the life blood of their businesses and the reason behind the associated crimes.
I hope I've given you something to contemplate today, and that you'll take away some new thoughts about whether this proposition rings true in your own environment. I very much look forward to continuing to work with you to tackle financial crime, and to achieve some real beneficial outcomes for society in the process.
Many thanks