Friday, February 05, 2010

Anti-money laundering or discrimination?

Anti-money laundering - touted to prevent the funding of terrorist organizations, can also affect ordinary individuals if the policies and controls at the time of account opening are not carefully applied. This recent circular from the Hong Kong Monetary Authority (HKMA) to 'authorized institutions' (AIs - in this case banks licensed by the HKMA), shows that sometimes the people applying the rules can get a little overzealous:
There have been reports in the last few days that there were cases in which some persons from certain ethnic minorities had encountered difficulties in opening bank accounts with certain AIs in Hong Kong. According to the reports, this has been linked to the anti-money laundering and countering financing of terrorism (AML/CFT) requirements of the HKMA.
As the HKMA goes on to say:
"AIs should adopt a balanced and common-sense approach with regard to customers connected with jurisdictions which do not or insufficiently apply the FATF recommendations. While extra care may well be justified in such cases, it is not a requirement that AIs should refuse to do any business with such customers or automatically classify them as high risk and subject them to enhanced CDD process. Rather, AIs should weigh all the circumstances of the particular situation and assess whether there is a higher than normal risk of money laundering."
This is all very well, but how does a bank instruct its account opening agents in applying a balanced and common-sense approach? It certainly does not mean that an automatic trigger should be applied to anyone not from Hong Kong or mainland China (and Hong Kong banking is used to international clients), but how do you help an agent faced with a client from Burma (for example) decide what a balanced approach is, or when to insist on enhanced customer due diligence (CDD)?

It is hard to provide guidance based on common sense. The question becomes whether it is the responsibility of the banks to provide automated decision management software based on business rules software, as James Taylor commonly discusses. Or are there other simpler systems that they can use to make a decision on whether to follow an enhanced due diligence process?

I certainly can't claim to be an expert in the legal issues related to what demonstrates that an institution is following best practices in the AML portions of account opening, though I would suggest that any of the following may be better than offering 'common-sense' as the proposed solution:
  • Checklists providing a simple CDD risk rating, with an outcome driven by a numeric result
  • Decision tree, allowing a series of answers to questions to drive an agent down a specific path to a decision to accept or review further
  • Refer to an expert - a central expert that can be called to make a judgement under certain trigger events
Any of these approaches could be quickly implemented as purely paper / manual solutions, or built into a portion of an existing (or new) automated business process to truly enforce its use. I'm guessing that Hong Kong is not alone with this type of issue where common-sense is being recommended for decisions that are hard to assess by non-experts. Significantly better solutions are not hard to imagine, and may actually save institutions money (and regulatory pressure) in the short term.

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James Taylor said...

One of the interesting challenges in AML, of course, is that banks are not generally interested in catching money launderers so much a showing that they are compliant with AML regulations. There are many effective techniques, including some advanced analytics, that will catch money launderers but most remain unimplemented in favor of simple rules-based checks that demonstrate compliance with the rules. Remember, it's always important to know what the motivation of an organization really is :-)

Phil Ayres said...

James, I hadn't thought about it from that perspective, though what you say makes a lot of sense. It is reinforced by the testimony to the Senate Committee on Homeland Security by Wiecher Mandemaker of HSBC (found here). There is no evidence that the industry is doing anything particularly advanced, just picking out its occasional successes.