Fix money-laundering reporting requirements to stifle crime, boost trade
Improving the reporting system to deter money laundering and the financing of terrorism will make it easier to track down those using the global financial system for nefarious ends, while easing restraints on legitimate trade.
Authorities use the global financial system to seek out and deter criminals and terrorists because it is an important way to shed light on their operations. But efforts to bring money laundering and the financing of terrorism out of the shadows have also raised the costs and complexity of conducting due diligence on companies, especially smaller ones. This hampers trade, growth and jobs.
That’s why global efforts on anti-money-laundering and countering the financing of terrorism now have a dual focus – catch more crime in the net while limiting the collateral damage on legitimate financial activity.
The issue is particularly relevant to trade and the financial system that powers it.
The Addis Ababa Declaration on Development Financing by the United Nations identified access to trade finance as a key measure in meeting the Sustainable Development Goals. And yet a 2019 survey identified onerous anti-money-laundering regulations as a major contributor to a $1.5 trillion gap in global trade finance. More than three-quarters of the banks surveyed cited the regulations as the largest barrier to expanding their trade finance operations.
It isn’t hard to see why.
Those regulations have led to a range of reporting requirements that attempt to capture all financial activity, which can then be sifted for anything that looks suspicious. But just about every jurisdiction has its own data collection methods and trade-based financing has ended up in the same pot as data from the rest of the financial system.
The result is that key data on trade and trade finance, which could shed light on suspicious transactions, are lost in the noise of so much information. The reporting requirements have often left banks, especially in jurisdictions where financial systems are less mature, scrambling to be “compliant” rather than acting as useful allies of regulators in providing valuable information on financial crime intelligence.
International banks, which could be more supportive of trade in the developing world, often find it easier to ignore opportunities in jurisdictions where the costs of compliance and related risks are greater than the likely profits.
These issues are nothing new. Efforts to improve reporting while limiting damage to trade and growth go back to the 1990s. In 2012, the Asia-Pacific Group on Money Laundering recommended “common formatting of how (trade-based money laundering) statistics are to be recorded and maintained so that trends are more easily identifiable.”
More than three-quarters of the banks surveyed cited the regulations as the largest barrier to expanding their trade finance operations.
Today, those efforts have coalesced around two key areas – developing a trade-focused common reporting standard for suspicious transactions, and having a system whereby regulators and banks have a feedback loop to determine what works and what doesn’t.
The goal is to tweak the system to better target suspicious transactions related to trade-based money laundering so that regulators and law enforcement can spend more time investigating potential crimes and less time sifting through data. Better reporting methods should also lessen the pressure on the banks compiling the data.
ADB’s Trade and Supply Chain Finance Program is working with governments and the private sector to increase the effectiveness of regulation while lifting some of the burden of reporting requirements, including public-private sector cooperation. This includes a project that will see the financial intelligence units of five countries test updated reporting methods through a fully integrated software system developed by the United Nations Office on Drugs and Crimes.
This system, known as goAML, is already used in about 50 jurisdictions. The project will see details of suspicious trade-related transactions better captured in the newly added data fields in goAML’s web forms that banks submit to regulators. The new database structure will also allow suspected trade-based money laundering activities to be reported in the same way across jurisdictions in industry-standard suspicious transaction reports.
Financial intelligence units, the agencies responsible for overseeing anti-money-laundering efforts, in several countries around the region will work together to help define the reporting formats.
Standard formats allow more automation within the reporting environment and make it easier for jurisdictions to share information across borders.
A ‘feedback loop’ between financial intelligence units, the financial industry and law enforcement will focus on whether the correct data from financial institutions are being used for suspicious transaction reports. While the individual transactions within the reports are confidential, the feedback will help determine whether the data points themselves are useful in netting prosecutions, or if the data requested is not delivering results.
If the data is not useful, it should no longer be requested. This “feedback loop” will help drive more efficiency in the system and will help focus on what is material, enabling resources to be allocated accordingly.
Improving this reporting system will make it easier to track down those using the global financial system for nefarious ends, while lowering restraints on the trade and growth that is badly needed in the developing world.