Automation And Money Laundering

Aziz Rahman explains how automation can bring its own risks
of money laundering – and how they can be reduced.

Money laundering in an automated world throws up new
challenges that have to be met. Failure to meet them will bring traditional and
heavy penalties.

Australia’s Commonwealth Bank is a case in point.
Commonwealth is accused of 53,700 breaches of anti-money laundering laws for
failing to act on suspicions that its intelligent deposit machines were used by
drug syndicates.

The Australian Transaction Reports and Analysis Centre
(Austrac), the country’s financial intelligence agency, is suing the bank over
the breaches, which it believes enabled criminals to launder tens of millions
of dollars.

The case relates to the use of intelligent deposit machines,
a type of ATM launched in 2012, which allows customers to anonymously deposit
and transfer cash.

Commonwealth Bank is accused of failing to report properly
to Austrac on Aus $77m worth of suspicious transactions. Austrac claims that
even when Commonwealth became aware its machines were being used for suspected
money laundering, it failed to deal with the risk.

Consequences

The consequences of Commonwealth’s alleged failure to
prevent the automated money laundering are already apparent.

Since the accusations were brought against the bank, its
under-pressure chief executive has announced he will stand down next year. Shares
in the bank have dropped. This has prompted lawyers to announce that they may
bring a class action against the bank on behalf of shareholders, who say they have
lost millions due to the drop in share value.

The bank now faces the difficult task of either disproving
that its machines were used by money launderers or explaining why its reaction
to the problem was so inadequate. If it cannot do either, it will be in a
difficult position.

Commonwealth may not face criminal prosecution. But the
regulatory sanctions it faces could prove very damaging, both in terms of
financial penalties and to its reputation. As an example, HSBC narrowly escaped
prosecution in 2012 for allowing drug dealers and terrorists to use it to
launder millions – but it did have to pay a record £1.4 billion fine.

It would have been far easier to have had sound money laundering
identification and reporting procedures in place and working properly.

Obligations

Automated machines do, arguably, pose different challenges
when it comes to looking out for the signs of money laundering. But regardless
of how money passes into or out of an organisation, procedures must be in place
to ensure there is always the ability to identify suspicious transactions and
act accordingly. Legal obligations have to be met.

It may be the case that automated processing of money makes
it more difficult to identify money laundering. But that is no excuse for not
doing all that can be done to prevent it. And the argument that automated money
laundering will not be identified by the authorities because it is harder to
spot is a weak one. The case of Commonwealth indicates this.

As we write this, there is more cooperation than ever before
between countries’ money laundering investigating agencies. It is a crime that
is under more scrutiny than ever before: not just in the UK but worldwide.

In Europe, the Fourth EU Money Laundering Directive (4MLD) has
come into force and places greater obligations on banks and financial
institutions. The Directive demands more due diligence checks – including
checks on customers who may previously have been exempt from them – requires
greater transparency regarding the ownership of assets and lays down tougher
requirements regarding how risk assessments and monitoring are conducted on
customers. Financial institutions also have to carry out greater due diligence
on people or organisations from high-risk countries and on politically exposed
persons (PEP’s), their relatives and close associates.

In the light of such requirements, a financial institution’s
arguments that it was unaware of money laundering because of its automated
processes will be dismissed out of hand.

Prevention

Money laundering is the disguising of the origins of money
that is the proceeds of crime. A person can launder their own criminal proceeds
or have it done for them by another person. In the UK, both of these are
offences under the Proceeds of Crime Act 2002 (POCA).

If you review your working practices and use what you learn
to introduce adequate procedures that remove the opportunity for a person to
launder money, you will benefit in one of two ways. You will either not have
problems of money laundering or, if you do, you can show the investigating
authorities that you did everything possible to prevent it.

Adequate procedures may vary from organisation to
organisation. But, putting it simply, anti-money laundering procedures have to
involve close, detailed assessment of any potential investor, client or trading
partner.

Such assessment needs to look at such a person’s proof of
identity, their background and the people they have financial ties to. Once this
has been completed, there is a need for ongoing checks on the nature of their
financial transactions: the amounts, the people or organisations involved, the
relationships between those parties and who the genuine beneficiary is.

Difficulties

It may be the case that Commonwealth – or anyone else who
finds themselves in a similar position – reveals difficulties when it comes to
automated payments. But such difficulties cannot form the basis of a valid
defence against money laundering.

Anyone who argues that they did not know what was happening
in their organisation because of automation is likely to be told that due
diligence on clients would have prevented the problem in the first place. Setting
limits on the amounts that can be moved around automatically without any human
assistance would also go a long way to preventing money laundering problems
with automation. As would making sure a system is in place for regular, through
staff scrutiny of any automated processes.

Our experience in the field of money laundering has seen us
advise many organisations on how to design out the risk of laundering. Whether
there is no use of automation in a business or a large amount, the principle
remains the same: assess the risk of money laundering, introduce steps to
remove (or at least) reduce that risk and make sure those steps are closely
adhered to.