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.