The State of Anti Money Laundering

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the Commission. National Commission on Terrorist Attacks Upon the United States. http://govinfo.library.unt.edu/911/staff_statements/911_TerrFin_ Monograph.pdf.

11 U.S. Commodity Futures Trading Commission. Anti-Money Laundering. http://

www.cftc.gov/IndustryOversight/AntiMoneyLaundering/index.htm.

12 PwC. “ML global alignment: Two steps forward, one step back. 2015. http://www.

pwc.com/us/en/financial-services/regulatory-services/publications/assets/aml- global-alignment.pdf.

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INTRODUCTION: THE HISTORY OF MONEY LAUNDERING

customer’s risk profile, shifting the burden of compliance on FIs to be proactive about identifying risky customer behavior.

Given the rapidly evolving pace of digital payments, this is likely only a harbinger of things to come. FIs can expect regulators to clamp down further as governments are forced to cope with the creative ways in which new technologies can be used and abused. FIs in the U.S. will be no exception, given the gaps now present in the existing regulations.13 For example, a December 2015 study by LexisNexis found that while most banks already ask for the identity of account owners, only half verify their actual identity.14

PYMNTS, in conjunction with Mitek, has produced this special report, which examines the evolution of money laundering, the state of play in the regulatory arena, and how these existing vulnerabilities and application of new technologies may influence the actions of innovators to help ensure compliance.

13 Financial Action Task Force. Anti-money laundering and counter-terrorist

financing measures - United States. 2016. http://www.fatf-gafi.org/media/fatf/ documents/reports/mer4/MER-United-States-2016.pdf.

14 Rubenfeld S. Critics Find Flaws in U.S. Financial Transparency Rule. The Wall

Street Journal. May 9, 2016. http://blogs.wsj.com/riskandcompliance/2016/05/09/ critics-find-flaws-in-u-s-financial-transparency-rule/.

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VULNERABILITIES WITHIN THE BANKING SYSTEM

Estimating the amount of money that is laundered globally is difficult. The last estimate was done by the United Nations (UN) in 2011, updating 1998 statistics. According to the UN, between 2.1 and 4 percent of the GDP is at risk of being laundered, roughly the same statistics from 1998. However, less than 1 percent of these funds are seized and frozen.15

The U.S. Treasury Department has identified the following money laundering vulnerabilities in the U.S.’ banking sector16:

• Structuring: Structuring involves dividing large transactions into several smaller ones to avoid the BSA’s threshold. Some of these techniques are used by Mexican drug cartels to funnel drug proceeds to the Southwest border region as a first step for smuggling cash into Mexico.

• Misuse of correspondent banking services: Frequently, when transactions cross international borders, banks keep limited records, which means some accounts and transactions can fly under the radar and be used to launder money.

• Misusing prepaid debit cards: These cards can function as an alternative to cash. They can easily be purchased and

15 United Nations Office on Drugs and Crime. Estimating Illicit Financial Flows

Resulting from Drug Trafficking and Other Transnational Organized Crimes. 2011. http://www.unodc.org/documents/data-and-analysis/Studies/Illicit_financial_ flows_2011_web.pdf.

16 Department of the Treasury. National Money Laundering Risk Assessment

2015. Washington, D.C. https://www.treasury.gov/resource-center/terrorist- illicit-finance/Documents/National%20Money%20Laundering%20Risk%20 Assessment%20%E2%80%93%2006-12-2015.pdf.

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then cashed, similar to money orders and travelers’ checks.

• Nominees and misuse of legal entities: This refers to using a bank account under someone else’s name or a business’ name to transfer or keep illegal funds. However, this can be prevented using basic and advanced KYC methods.

• Money brokers: In April 2006, the U.S. Treasury alerted financial institutions that U.S. currency smuggled into Mexico often made its way back into the U.S. through U.S. correspondent accounts held by Mexican banks and currency exchangers.

• Trade-based money laundering: Restrictions on money brokers led some cartels to mix their legal and illegal businesses in order to disguise the origin of their illegal income.

• Misuse of third-party payment processors: Since 2005, the U.S. Treasury has issued warnings about unscrupulous third-party payment processors, which have been associated with not only money laundering, but also identity theft and fraud.

However, these are just the vulnerabilities in the banking sector. Other sectors such as money services, casinos and securities markets all have their own vulnerabilities, which are frequently exploited. It is very likely that the U.S. will be drafting more regulation in the future to address these gaps.

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PAYING THE PRICE WHAT HAPPENS WHEN BANKS FAIL TO COMPLY

Fines for non-compliant banks have been increasing significantly — and in all probability fines will continue to increase in the future as AML restrictions tighten. According to the U.S. GAO, the U.S. government fined banks $5.2 billion in total between 2009 and 2015.17 Between 2016 and January 2017, more than $15 billion in fines were announced.

Failure to comply with AML regulations has not only affected banks, but also other