Combating money laundering and terrorist financing remains very much the focus of enforcement authorities worldwide. For example, the European Commission recently issued a draft package of measures that will completely overhaul EU anti-money laundering (AML) and counter-terrorist financing (CTF) legislation.
Considering the ever more complex methods criminals use to funnel proceeds of crime into the financial system, obliged entities under national AML frameworks, particularly banks, face multiple challenges in their efforts to meet their legal obligations.
In this blog post, we look at an initiative by a group of major Dutch banks to combat money laundering and outline some key legal considerations when rolling out similar initiatives in other jurisdictions.
The difficulties in identifying money laundering
Typically, money laundering involves three steps: placement, layering and integration.
After the proceeds of crime are introduced into the financial system (placement), the funds are moved around via several transactions in order to conceal their origin (layering). Once an asset can no longer have its illegal origin traced, it can be used to acquire other assets (integration).
One of the key challenges when trying to identify money laundering is that each bank can only monitor the transactions in accounts administered by itself.
If a bank is unable to see a series of transactions across institutions, a transaction on its own is unlikely to raise any suspicions. But if it can see the trail of transactions (known as the ‘follow the money’ principle), money launderers face a much higher chance of being caught.
What the Dutch banks are doing
Called Transaction Monitoring Netherlands (TMNL), five major Dutch banks have developed a first-of-its-kind mechanism to collectively monitor transactions and identify patterns that indicate money laundering or terrorist financing.
The affiliated banks, which govern and finance the initiative themselves, encrypt their transaction data and send it to TMNL. (To allay data privacy concerns, the banks only exchange data where necessary and legally permissible.) The TMNL can then monitor the transactions as whole. If it identifies an unusual series or pattern, it reports back to each bank involved for further assessment. The results are then reported to the Dutch financial intelligence unit.
As well as helping law enforcement authorities prosecute and convict more money launderers, the TMNL will enhance the banks’ corporate social responsibility credentials. And if TMNL proves a success, other banks may choose to join.
Legal considerations when designing network/platform solutions
The success of the initiative may also prompt other countries or the EU to consider introducing a similar system.
When planning a system for scanning financial data for AML purposes, the following legal issues should be considered:
- Which form of legal entity would be appropriate? In which jurisdiction should the entity be registered? To what extent will the entity be liable and to whom?
- What kind of data will the system collect? How can the data be collected in a way that ensures confidentiality and complies with data privacy law? TMNL tackles these issues by operating with encrypted data. This enables the agency to strike a balance between disclosing too much and violating privacy and disclosing too little and undermining the efficiency of the initiative.
- Does the transfer of scanning rights qualify as an outsourcing of critical functions under the European Banking Authority’s guidelines on outsourcing arrangements?
- What impact could such an initiative have on competition? Are there any conflicts with antitrust regulation? How can the process for on-boarding additional parties be organised and which criteria will be applied?
- How will the organisation be structured, managed and supervised? This includes decisions regarding composition of the board, matters reserved to the participating parties, handling of conflicts of interest and deadlock situations, as well as exit rights.
- Is state support or even funding available? The TMNL is financed by the participating banks themselves. However, given the huge public interest in the detection, prosecution and conviction of money laundering and terrorist financing, a state-sponsored arrangement might benefit both governments and banks.
The above issues require close co-ordination between all parties and could suit a public-private partnership (PPP). Indeed, the EU recently opened a public consultation concerning PPPs for preventing and combating money laundering and terrorist financing, which will close early November 2021.
With the first results of the Dutch initiative expected later in 2021, we might be well on our way towards a system that can keep money laundering and terrorist financing very much in check.