How a hybrid approach could help tackle the rise of money laundering in private banking
As regulators begin to hone in on the private banking sector, Charmian Simmons, Financial Crime and Compliance Expert investigates how industry players can better manage financial and reputational risk without impacting their value proposition to high-net-worth clients
The total value of global assets under management is expected to rise from $110 trillion in 2020 to $145 trillion by 2025. That makes it an increasingly attractive target for money launderers. At the same time, our Private Banking and Wealth Management Report reveals budget cuts in most private banks, which could hurt their ability to spot covert criminality. As regulators begin to hone in on this sector, how can industry players better manage financial and reputational risk without impacting their value proposition to high-net-worth clients?
The answer may not lie solely in technology, rather in a blend of unsupervised machine learning with the human expertise and deep client knowledge of relationship managers. Private bankers want closer collaboration with their tech providers to make this a reality. Charmian Simmons, Financial Crime and Compliance Expert at SymphonyAI NetReveal Digital Intelligence investigates.
A perfect fit
The global wealth management sector has a scale and opacity that makes it a natural fit for money laundering, if the right solutions are not in place to detect and prevent it. High value transactions across borders are not unusual, making it easier to sneak illegal transactions past AML compliance officials. Many clients have multiple accounts in multiple business names and in more than one country, and can be reluctant to provide adequate documents and explanations for them, furthering compounding transparency challenges for private banks. A culture of secrecy in the sector, supported by local laws in many jurisdictions, also attracts criminality.
Such is the success with which it has been hidden from view, that it’s almost impossible to put an accurate figure on the scale of global money laundering. All we know is that regulators are beginning to take notice. The European Banking Authority (EBA) warned in March 2021: “wealth management firms’ services may be particularly vulnerable to abuse by clients who wish to conceal the origins of their funds or, for example, evade tax in their home jurisdiction.” Credit Suisse, for example, was recently convicted by a local criminal court for failing to stop money laundering by a Bulgarian crime syndicate, amounting to over 146 million Swiss francs (£126m).
According to our research, the sector is increasingly aware of its responsibilities under laws such as the European Commission’s Sixth Anti Money Laundering Directive (6AMDL). Private banks are particularly concerned about avoiding the kind of reputational damage and fines Credit Suisse is facing. Of the many predicate offences linked to money laundering identified in 6AMDL, fraud is singled out as the one resulting in the biggest financial losses, followed by organised crime and corruption.
How well are they doing?
So how are the world’s private banks managing these risks? Relationship managers play a critical role. They are the ones who know their client businesses best. They work hard to understand sources of wealth and the sometimes dizzying number of personal asset managers, accountants, friends and business associates that surround high net worth individuals. Yet their know your customer (KYC) efforts are frequently stymied by the difficulties of mapping what “normal” behaviour looks like for individuals who often behave in highly idiosyncratic ways. That’s why a great deal of due diligence is required during onboarding, even extending to in-person visits to client premises. And it’s why relationship managers closely scrutinise any transactions flagged as suspicious.
Technology is here to help them. In fact, 77% of private banks have automated products in place to help detect and prevent money laundering. The problem is that these solutions are usually designed for use in other sectors, like retail banking, and therefore may be a poor fit for the specialised world of wealth management. Many others are outdated. The result? Nearly two-fifths (38%) of private banks we spoke to said it’s extremely hard to measure how often money laundering is happening, and 63% claimed money laundering techniques have become harder to spot in the past 12 months. They estimate an average of just 38% of activity is uncovered, lower than that of the global banking industry as a whole.
A more nuanced approach
Aware of the challenges and opportunities here, private banks are getting more vocal with their providers. A fifth (20%) said they want closer engagement with tech vendors on money laundering issues, so they’re better able to understand the tactics and techniques used by criminals. It’s a relatively small number at present but may represent the start of a new era characterised by more proactive management of reputational risk.
However, the devil will be in the detail. To drive true advantage, private banks need AML technology that can leverage the latest in machine learning to improve detection based on sector-specific learnings. Most importantly, these tools should be user-friendly enough so that non-technical relationship managers can use them. That’s how we can really begin to extract value from a hybrid approach to AML, fit for the private banking sector. When done effectively, it will work to optimise client-specific knowledge and combine it with technology-driven insight that is intuitive, relevant and supports close cooperation with compliance teams.