Financial institutions, regulators and authorities have long struggled with preventing the illicit practice of money laundering. Criminals adopt various sophisticated methods to both collect ill-gotten funds and mask their illegal activities, working diligently to conceal any paper trails that could lead to apprehension while at the same time using these funds to facilitate other destabilizing activities. The misuse of shell companies and complex beneficial ownership structures to maintain anonymity while effectively laundering money across international borders has been at the forefront of this discussion in recent years. Yet despite the growing trend towards stricter regulations and increased oversight, the truth is that often times banks and other financial service providers are only used for a very small portion of a much grander scheme to ultimately “clean” funds derived from criminal operations. This can make it all the more difficult for the individual compliance departments of banks to identify much larger patterns of suspicious activity when they themselves cannot see the full picture. That is why a new technology trend is emerging in the financial sector, one that will allow for improved information sharing between institutions both domestically and abroad.
A United Kingdom think-tank known as the Royal United Services Institute recently identified at least 15 information-sharing initiatives (platforms and messaging tools) currently active around the world, each with the intent of improving fraud and money laundering detection and the recovery of funds in successful operations.2 Many have wondered why such initiatives have not come about sooner, given that the move towards bolstering anti-money laundering (AML) and counter terrorism financing (CFT) defenses have been in the works for over two decades now. Aside from the logistical difficulties, unfortunately most developed countries around the world have not allowed information to be shared by or between banks, ironically for crime prevention purposes. However, in the countries that have been allowing experimentation with the establishment of information-sharing networks, these efforts are already seeing success in identifying crime. Countries including the U.S., U.K., the Netherlands, and Estonia all have information-sharing platforms in place that so far are being used in highly specific ways in order to tackle various forms of financial crime or help solve specific regional issues.2 Many have also begun the process of adopting regulatory technology (RegTech) and other innovative solutions to allow their banks to comply with growing AML responsibilities.
The United States in particular has truly bought into these new-age methods in recent months, with various governmental agencies currently utilizing data analytics to target suspicious activities. The Securities and Exchange Commission (SEC) for example has been able to detect accounting fraud in four separate cases brought forth through joint task forces within the Department of Justice (DOJ) in recent months. The agency also combined with the Department of Justice and Commodity Futures Trading Commission in “utilizing data analysis to revive precious metals spoofing charges against JPMorgan Chase culminating in a recent $920 million settlement.”Building off of these new initiatives, the SEC has also set its sights on using this technology to better identify insider-trading patterns that could lead to prosecution. There are currently three insider trading cases being brought to a head as announced by the Commission last week, including one involving a former chief information security officer, as well as another case involving an FBI trainee. The SEC is seeking to permanently enjoin the defendants from violating federal securities laws and disgorge any ill-gotten gains acquired through their respective transgressions.1
Across the pond, the Netherlands has quickly developed into one of the most innovative countries when it comes to financial intelligence and information sharing. Transactie Monitoring Nederland (TMNL), a joint venture launched by the five largest Dutch banks has allowed these firms to gather and share encrypted transactional data about their customers through one collective database. Through consultation with these banks as well as the Netherlands’ financial intelligence unit, TMNL has created models that let the group search shared data for suspicious or unusual transaction patterns that may indicate money laundering or terror financing activity, saving thousands of hours of manpower and countless other resources in the process.2 “We are basically an analytics factory, where we create [anti-money-laundering] models to find potential patterns, but the investigation of the alert is still done by the banks,” said TMNL CEO Norbert Siegers.2
Transaction monitoring is a key component of financial regulatory compliance. Financial institutions and the government bodies overseeing them are hoping that through participating in these information-sharing alliances, it will be easier to spot suspicious activity and avoid being used as pawns by criminals to launder money. There is more to gain financially via the avoidance of fines and increasing operational efficiency than in remaining uncooperative with other banks. The challenge going forward with this new trend however will be balancing access to information with the appropriate levels of protection. While analysts have speculated that more legal developments will come in the near future, until then government bodies have tasked covered financial institutions with maintaining comprehensive transaction monitoring safeguards that include trade surveillance and AML monitoring.
- Nicodemus, Aaron. “SEC Touts Data Analytics in Launching 3 Insider Trading Cases.” Compliance Week, Compliance Week, 29 July 2022.
- Tokar, Dylan. “Banks Start Using Information-Sharing Tools to Detect Financial Crime.” The Wall Street Journal, Dow Jones & Company, 25 July 2022.