Episode 01: David Lewis – Executive Secretary, FATF

David Lewis - Executive Secretary, FATF

David Lewis sits at the helm of the Financial Action Task Force (FATF) the international AML standard setting body responsible for global AML standards and the evaluation of countries against them. In this exclusive interview he talks to KYC360 about AML successes and failures and the role of jurisdictions and businesses alike in the battle against AML and predicate criminality.

AML, Financial Crime

AML Talk Show Hosted by Martin Woods

In this series of monthly podcasts, our host Martin Woods will interview key figures in the world of financial crime prevention and examine successes and failures in the global fight against money laundering and related crimes including drug trafficking, bribery and corruption, sanctions evasion, human trafficking and tax evasion.

Transcript

Good morning, ladies and gentlemen. I have the great privilege of sat in front of me is David Lewis, executive secretary of the FATF. David, thank you so much for your time. It’s a real privilege to have you here. Let’s go straight into this David. Why are you in London and what’s your hectic schedule here today?

Well Martin, first of all thank you very much for giving me the opportunity to speak to you today. You and I have been in contact for a while now and, well I’m very happy to have this conversation.

I’m actually here to speak at two events: there’s Sibos, the big financial services event in ExCel and I’m also speaking at a Royal United Services Institute event on policy tensions, which is a real issue in data privacy versus AML, how does that work. So there are some big issues here and I’ve got a busy day in London.

How many years have you been in this space now? Your Treasury years and how did it all start for you?

Well Martin, first of all thank you very much for giving me the opportunity to speak to you today. You and I have been in contact for a while now and, well I’m very happy to have this conversation.

How many years have you been in this space now? Your Treasury years and how did it all start for you?

So, for me, and this is interesting, I still feel like a newby in this space, ‘cos there’s a lot of people who’ve been doing this for a long time. I’ve been doing FATF now it’ll be for four years next month. Before that I was in the UK Treasury leading AML policy for just over six years and then before that was in the, what was then, the Serious Organised Crime Agency for a few years.

What was interesting about that, that was my introduction to money laundering, but it was from the point of view of serious organised crime and looking at drug trafficking and people trafficking and fraud, not really looking at money laundering. I didn’t really have much to do with the UK FIU. In fact I tried to avoid them wherever possible, to try and have a different relationship with the banks.

So I got interested in money laundering when I was at what is now the National Crime Agency and when the opportunity came to move to the Treasury to lead AML policy then it seemed like an opportunity to really focus in on that area, which was an area that interested me.

So I’ve been doing it for a dozen years or so, but it still feels like a new thing for me.

And plenty more years left in front of you we hope.

I hope so.

Good, good. So tell me then, for that background, organised crime, drug trafficking and SOCA, National Crime Agency, what does money laundering mean to David Lewis?

So I, this could be controversial. For me, I find it irritating when money laundering is talked about as a financial crime. For me financial crimes are fraud, insider dealing, market manipulation. Money laundering in itself, look at the definition of money laundering: moving money around, hiding it. That’s not inherently bad. We created the offence of money laundering in order go after the money that was driving drugs trafficking, people trafficking, fraud, you know, serious crimes that were causing real harm on the streets and to our citizens.

So for me, money laundering has never been a white collar crime. It’s always been about a way of getting to the harm caused by serious organised crime, and now also the terrorist financing to terrorism.

So it’s not a financial crime, it’s about going after the real crimes that are causing harm on our streets and we’ll talk more about that later, but some of the issues that it leads to when it’s talked about is that financial crime is a compliance mindset. People lose the connection with the real crime

And we’re gonna talk about how we might make that connection, it’s a passion we both have. But, you know, in your travels, what do world leaders tell you about the harm money laundering causes to their countries and to their people?

If I’m brutally honest, not a lot. The FATF has had to work hard to get money laundering on the political agenda. One of the things I’m particularly pleased about is that since I started, the FATF president and myself have a seat at the table with G20 finance ministers and Central Bank governors.

Their interest in this is driven through financial stability concerns, and I suspect it wouldn’t be as great as it is if we hadn’t have had scandals like the Panama Papers which has led to a big focus on concealment of beneficial ownership, for example, and the big fines against the banks. So that’s really what’s driving governments. I think they understand that they have a responsibility to tackle money laundering because of the crime and harm it causes on the streets. But I think they also think about this, they think about it more so, as a financial integrity issue because they need to retain their access to the financial system and they know that if they don’t have good anti-money laundering measures in place, then that risk, that access to capital flows is at risk. So…

But on the other hand, you know, there’s some cynics would say the same governments are competing for the dirty money. ‘Cos nothing makes money like money. And this money is all coming into our financial services system. You know, the reports, all we see is 1% so is there a contradiction there, and actually is it also… does it frustrate you that they’re talking about fiscal policy and confidence in the monetary system, when we’re talking about the harm caused by drug trafficking, by human trafficking.

We, in the United Kingdom, and other countries around the world, are now suffering our highest level of poisonous drug-related deaths ever. That’s the real money laundering issue isn’t it?

That is the real money laundering issue. And I suspect if you talk to a Home Office Minister rather than a Finance Minister you would get more of an interest in that but clearly when you’re talking with Finance Ministers their priority is financial integrity, stability of the banking system and I think there is a genuine interest there now.

I mean anti-money laundering, terrorist financing has been one of the handful of agenda items on the G20 for the last three or four years, at every meeting.

And, if anything, it’s difficult to have a conversation because everyone agrees. It’s not one of things where you’ll have a country saying “no we don’t want to do this”. Everyone wants to do it. But they’re all in slightly different places and our reports to the G20 really highlight that. That despite the repeated commitments from governments to anti-money laundering measures, there is a huge variability in the quality of their response and the measures they’re taking.

So we see it as our responsibility to bring to the table what we see and the failings to be quite frank of many governments all over the world to address this.

So, with that in mind then in the Orlando Plenary and Steven Mnuchin’s comments about consequences, in the next presidency, a number of countries will have a follow up visit, four and five years on, for non-compliance, with major requirements, particularly around designated non-financial services businesses. Can you give us any sense of what would be the next step in the process, because countries continue to be non-compliant in that space. Big countries, you know, major G20 countries, non-compliant in that space. What would be the next consequence that Mnuchin references?

Well, we look at this from two perspectives: technical compliance, whether the laws and regulations are right and they’ve got an FIU and the rest of it. And then effectiveness. And the effectiveness of a system is considered as a whole. And if you look at, for example, a country like the US, yes famously they don’t have proper coverage of designated non-financial professionals in businesses, lawyers and accountants and so on. But beneficial ownership requirements are not what they should be.

But if you look at it as a whole system, the strength of their enforcement culture, makes up significantly for that and they would be the first to admit that they have those vulnerabilities and are working hard to address them to improve the system.

So, I don’t think we have an issue with governments like that who are not doing enough. I think the issues we have is where supervisors don’t fully understand or are unable to apply a risk based approach and we need to think long and hard about how we incentivise better supervision where some of the repeated bank failures we’ve seen, for anti-money laundering have to point in some way to failures of supervision.

All too often we find that these same old failures are not identified through supervisory activities, they’re identified through law enforcement investigations and then get passed to supervisors. And that has to change. The quality of supervision needs to increase.

So we do follow up visits and reports on technical compliance but for the first time ever we’re now doing it on effectiveness. So the FATF was the first international standards setter to start assessing not just whether the laws were in place but whether the countries are effectively using them to make a difference.

You’re looking at outcomes as well.

We’re looking at outcomes. Now that’s very, very difficult and one of the things I’m pleased about is that countries have stuck with it, because we’re making essentially what is subjective, you know, arguable judgements about their commitment to tackling money laundering and about where they have deficiencies and where they need to improve. This is not a black and white issue.

But they try to hide these deficiencies. I mean, I’m in the UK, and when there was an objective of to… I don’t know, maybe keep the attention away from certain areas or to paint it differently.

All of these major international money laundering scandals, most of them have UK limited liability partnerships in the back end of them and have done for the last 10 to 15 years and yet our risk assessment in the UK, will say “that’s not a high risk area”, because it probably isn’t in the UK, ‘cos the banks don’t tolerate those companies.

But, through Companies House, we’ve launched these avatars around the world to launder money and it’s not a high risk in the UK. When we do we get more joined up here?

So, I mean, we just recently done the evaluation of the UK as you’re aware. I wasn’t involved in it because I’m a UK national so I was recused from the process. But there’s no, there are no real hiding places in our evaluation. They take 12 to 14 months. They’re very, very in depth. We’re not investigators. We rely on the information that countries give us but we will question that information if we think that’s necessary. And we have seen a concerted effort by the UK and other governments to really focus down on areas like company formation.

I read recently a consultation from Companies House and how they can further improve it and one of the things in our report on the UK identified is “yes they now have a public register of beneficial ownership” but there’s no verification of the information that goes in there. And to be frank, I will be speaking at RUSE later on today, one of the things I will be talking about there is, you know, when you create bank account you need to show some proof of identity. Often with social media accounts you need to have some kind of identity check these days. But you can create a company which gives you limited liability, allows you to hire and fire people, and to create other companies, and you’re not required to provide any proof of identity at all. And that’s terrifying in a world where we’ve known for decades that companies and trusts are used and abused in every money laundering case. So I think it is time that we get serious on this. I think there are positive movements coming from the UK and others but there’s so much more we can do. And that includes FATF.

It’s very encouraging and actually, you know, the way you articulate this. You mean business here but do you have enough support, let’s say you, at UK government level. Stephen and I were talking before you arrived about this SARs chasm here in the UK where there are 400,000+ SARs in there and one of the reasons is there’s not enough public sector resource to action that SAR—–

Yes.

—–the SARs. And the same goes with Companies House. It’s alright saying we’ll have beneficial ownership information but if we don’t verify it, the value of it is massively diluted.

Well a lot of this does come down to political will. It’s relatively easy to pass laws and regulations: it’s another thing to make sure that the law enforcement agencies and FIUs have the adequate resources to do the job. And to handle and properly use the information that they’re getting like suspicious activity reports from the reporting sector and again our report with the UK highlighted concerns about the inadequate resources of the UK FIU, not just people but technology. And there are some real concerns that, you know, given the vast number of suspicious activity reports they do receive, that not sufficient use is being made of those.

On the other side that database of suspicious activity reports is available to all UK law enforcement agencies, but it does tend to mean that they look at it when they’re investigating something else. So instead of information being made use of for itself, if they’re investigating something else, they’ll check the SARs database and that might join up some dots.

So I think you’ve hit the nail on the head. Effectiveness is about the capability of countries to act. That often comes down to money, resources, and there are trade-offs. You know, governments have to make trade-offs, whether they put money into the FIU or into one or two other things. And it’s clearly a vulnerability in the UK, it’s a vulnerability in other countries as well.

Alright, let’s go back to where we started, some of the positives. In your time, as an AML professional, what do you think has been your best achievement?

The biggest thing would be the UK presidency of the G8 in 2013, before it became the G7 and David Cameron had a very strong interest in anti-corruption measures.

Mmm mmm.

And the call went out “what can we do in the AML sphere” and I knew that there’d been interest from a number of bodies, a number of countries over a number of years for action on beneficial ownership. There had been talk about whether we should have registries. The FATF standards at the time, as now actually, were not very forward leaning. They’re saying “you have to have accurate, up to date and timely information on beneficial owners available to competent authorities” but they say you can achieve that in any number of ways. You know, a production order from the police, companies holding information themselves, banks requiring that information from their customers and it’s not… the standard probably isn’t as strong as it could be as a result.

And through the G8 we managed to get all of those countries signed up to action on beneficial ownership. That led to the G20 principles on beneficial ownership and all the discussions there on beneficial ownership including the action in the EU, in the fifth money laundering directive on beneficial ownership, the public registry in the UK all came from those initial conversations in the UK presidency of G8. And it’s not perfect, you know. A public register is the icing on the cake and so I would say “if you don’t have the cake, then there’s not point in having the icing on top of it”.

Right.

So, it’s… these kind of measures always get simplified overly when you get to the political level, but I think it provided a much greater understanding of the challenges we face and some crucial political support for anti-money laundering measures. So that would be the top thing.

Then, when it comes to my work at the FATF, having that seat at the table at the G20, making sure that anti-money laundering, terrorist financing is top of the agenda alongside the biggest issues facing global leaders, I think that’s really, really important. The support for our regional bodies. You know the global system and our political effort to fight money laundering is only as strong as its weakest link.

There are some weak links within FATF members, but there are a lot more weak links when you get outside of FATF members. You look at countries around the world, in Africa and Asia, and there are some real vulnerabilities there and when you look at their results, they’re not good at all.

With beneficial ownership, is there a philosophy issue that we’re facing here. So you and I fly to different parts of the world regularly. So on a daily basis 102,000 flights will take 3 million people around the world. Since 9/11 no US flight’s been attacked successfully. The planes don’t come out the sky and germane to that bit is it KYC?

Mmm.

And the customer’s engaging it, they’re wanting it. If you leave your case unattended it might be blown up.

Yeah.

The fact of the matter is in the airline industry the airlines run KYC. You can’t turn up with a suitcase and say “it belongs to a BVI company”. They’re after the person behind that, doesn’t try to work out “well who owns the BVI company”.

Yeah.

You have to present and say “It’s my case, what’s in it”.

Mmm mmm.

Do we allow customers to run this when we shouldn’t do. We should be running this and it should be incumbent upon anybody, even with their BVI company, their Panamanian company, their UK LLP, present the documentation to me that validates the ownership of that company.

So I think we see opportunities for much better KYC and better KYC and for example, this year, we’re doing a project on digital ID. We’re going to issue guidance that supports the use of digital ID. However, digital ID can also be abused, so we need to make sure that if it’s used it’s being used effectively. So I think there is scope for significantly improving KYC. And you look things like virtual utilities, You know. Does it make any sense for every bank or every firm to be doing their own KYC to different standards. Can we have a more unified approach to this that is more effective and efficient.

So yes, but what I would say is, if you look at where banks find suspicious activity, it is rarely at the KYC stage. It’s when they’re monitoring account activity afterwards. And we all know that if you’re a teenager in your bedroom at home, you can create the documentation to get through most KYC checks relatively easily.

Well I hear you on that and there’s an interesting point you make there. I think as a community, financial services community, we fail ourselves by not measuring our success at the KYC level where we stop people actually laundering the money and what we’re told that is we only see 1%—–

Yeah.

—–and we can’t quantify the money we stop being laundered and maybe we should be smarter at that. We need some PR around what we’re doing well. But, I have to come back to something a more negative. What went wrong in Scandinavia or as some people currently call it “Scandalnavia”. (sic)

So we haven’t looked specifically at individual cases, we leave those cases for the authorities in the countries concerned to deal with, but it does strike me that there is a… it chimes with the results of our evaluations. If you … our initial evaluations were northern European and Scandinavian countries, and what we saw there in the last round was a relatively high level of technical compliance but when we went back this time and started to look at effectiveness, I think they were probably complacent about their risks when it comes to money laundering, terrorist financing. It wasn’t a high priority for them. They didn’t really focus on it. As a result their supervision, their quality of supervision was not what it should be and our reports highlighted that. And the understanding of the risks, from the banking sector, was also not what it should be.

So it’s not surprising to me that we come across these cases because supervisors who have (sic) their eye on the ball and the banks themselves didn’t have their eye on the ball. And this was picked up through a law enforcement investigation and so this is the problem. When you look at the countries we’ve evaluated so far, and also the countries that have been evaluated by the regional bodies, if you look at the results of supervision, 75% of those countries fail on effectiveness. They get the lowest two ratings, which means that they either need to make fundamental or substantial improvements to their supervision.

75% of countries that have been evaluated so far, fail on that.

When we look at the measures, the preventative measures that we expect banks to take, it’s 100%. There’s a 100% failure rate. In every one of those 80 evaluations, they’ve all failed to… they all get the lowest two ratings. And that has to point to not just failures in supervision and in preventative measures, but how do we go about promoting more effective preventative measures.

And also how do we promote a better understanding in the value of that, and I think that’s where you started.

Yeah.

Because we don’t understand the value of preventative measures and all too often it just becomes a tick box process. People do it because they think they have to, their supervisors say they have to. But as you say, it results in very little assets actually seized and frozen compared to the estimates, whatever they are, however fraught they may be, the proceeds of crime in circulation.

So I think there is a real issue there. I think one area which is ripe to be exploited is just finding out how many times banks turn customers away. Most of the banks don’t record that.

Interesting. Now I was going to ask you a question; one I had written down. Is the contrast between rules based ratings and principle based ratings. So I’m currently engaged in a project in Australia, rules based.

Mmm.

And actually one of their requirements… a couple of their requirements point directly to that. If somebody purports to be somebody that they’re not, that’s an SMR, that’s a sufficient matter report. So the Australians are collecting that and actually they’re saying they want to identify that person, he or she may be connected with somewhere else, and they want to stop that person opening the account somewhere else.

So it does happen but let’s get onto education and training and actually, you know, I know under this presidency, having read it, that’s an area. What do you envisage that training to be and have you got a wider focus around education as well. Because one of the things that I think is a great achievement of yours and the FATF is your collaboration agenda. You’re bringing a private sector to this and when you talk about the 100% failure rate with the banks I’m sure it’s on your mind that you have these meetings, law enforcement contribute, regulators contribute, so they can get better because law enforcement can tell them what to look for.

Well we can tie both those issues together. So we started off talking about banks needing, in Australia, to record the customers turned away and stop them from opening accounts somewhere else. And the need for better education and training and collaboration with the private sector.

So the last part of that is encouraging, promoting public/private partnerships. We’ve seen in the UK a good example of that, with the drug money laundering intelligence task force. There are real legal challenges to those kind of partnerships and we want to get them to operate across borders and that’s even more difficult especially when you look at data protection and privacy legislation which is different around the world and particularly hard in Europe.

So there’s an awful lot we can do through better public/private partnerships and that comes down, as you and I know, to trust with individuals. More often than not, that’s more important than advice from lawyers. If you can trust the individuals then you can establish a relationship between the public and private sector then it’s fruitful, however far it gets.

But as you say, it’s something that has been growing in importance for the FATF. Korea were kind enough to give us money to establish a training centre in Busan. And so for the last three years we’ve been providing standards training to countries around the world because they don’t actually… you know, the guys who are doing this on a <indistinct> basis, don’t often understand why, they don’t understand the FATF standards, and that’s the starting point for all of this.

We now have this clear disparity between the performance of FATF members and members of other bodies, and we’re addressing that through significantly investing in training. The size of my team has doubled in the last three years so that we can help these countries understand what their obligations are and why and so we can support public/private partnerships in different regions around the world where we bring banks together. Global banks, local banks, with the governments and so we create a better understanding of what needs to be done and why and the consequences of not doing it. And tying it back to the human tragedy at the bottom of this. So training is absolutely fundamental and as you said, it’s a priority also for the Chinese presidency of the FATF this year.

Well I can speak on behalf of Stephen and KYC360, we’d be delighted to help the FATF with the images of what money laundering looks like if it has some value and that’s not for profit. That’s just actually, we have the same passion to ensure that the people understand why we do what we do. Diversifying, you know, digress a little bit, the answers: taboo, like, curious. A bit of TLC for AML so your answer will be definitely taboo, you like the idea, you’re curious, and at the end of these questions if you want to explore any one individual question a little bit more, just say so.

Yeah.

So 10 more recommendations.

Curious.

Okay.

A narrow definition of PEPs.

Taboo.

Just ‘cos it’s part of what we’re about, legalising drugs.

Curious.

More use, wider use in other countries of tools such as unexplained wealth orders.

Like.

More professional enablers. People operating in the regulated sector who are facilitating and knowingly laundering money, going to prison.

Like.

Any of those you want expand upon?

Well, professional enablers, let’s start with that one shall we?

Yeah.

It’s been an overlooked area in our evaluations quite frankly and by most governments for a long time. Supervision has picked up recently here in the UK in that area but when we evaluate preventative measures we look at banks and others at the same time. Often that means that the focus gets mostly on banks and we don’t have sufficient focus on lawyers and accountants and estate agents and the role of those and in some countries they are significant industries and the risk associated with vulnerabilities and supervision of those industries is a big risk. So I think there’s a lot more we can do there.

Okay. And you are definitely against the narrow definition of PEP, that was quite firm from your point of view. Why is that?

So I don’t think there’s a problem with the definition of PEPs from our perspective. I think it’s often a distraction, PEPs, if I’m honest, this won’t be a popular thing to say. But wherever you have a high risk customer, you are required to do enhanced due diligence at the moment. So in a sense you shouldn’t need a PEP definition at all. If you’re asking the right questions, then you will be able to identify if that customer is high risk. So it’s somewhat artificial to have it as a separate recommendation, but I think it’s worth it given the additional corruption risks that PEPs are associated with and the abuse of that we see, particularly in areas like Africa.

I get that. If you look at Africa, it was Kenyatta, I think, President Kenyatta said when we were at the Corruption Summit for Baroness Patricia Scotland, and David Cameron’s <indistinct> the following day, he said “if a plane can’t land it won’t take off”, with reference to money laundering and the way it’s laundered out here and the Century Report has referenced multinationals. But you, on the Century Report, what you talked about, and actually against some of the positives. We have banks now who have academies to ensure that they train staff in their high risk respondent banks, know what money laundering looks like.

There’s more responsibility in the supply chain now isn’t there, and the banks are looking further down this. I mean we work with AML compliant professionals, that’s our community. But the high risks, our people we work for and on behalf, the bankers, they don’t want to see their clients as high risk. So it’s always to say “yes”. We should find that out. But sometimes we’re working against people who don’t want that to happen, not just the customer, but also the banker. Difficult. I mean so, how do we get the banker better educated. And one of the things I talk about, going back to image, many years ago drink driving was a real problem in this country. And the sentence was always mandatory, you know 12 months ban. It wasn’t working. What we did, we changed the image. We showed the young 9 year old going his dad’s funeral. We showed the consequences of a crash after drink driving and it had a profound impact. We’ve seen a reduction of drink driving.

What’s the potential for such a training or educational process under this presidency?

So I mean I think that’s part of the wider package of getting countries to understand the standards we have and why they happen and how we expect them to be implemented. However, I think you drew attention to the big investment made by the banks recently. And if you look at the big global banks that have been hit fines, and you look at the political attention on the following things like the Panama papers, they have completely changed their game in the last 10 years. And they’re investing heavily in this, they’re investing heavily in training and they are now allies and I hope that lasts.

I think, when it comes to PEPs, yes more could be done but there’s a lot that you see… that you don’t see being done that does get done if that makes sense. So for example we see supervisory action that doesn’t get publicised and if a bank has got weak measures in place for dealing with its PEPs, often the supervisor will stop that bank from having any more PEP relationships for a period of time. And so there is a focus on this by supervisors and action is being taken and that has a pretty good educational effect on the bank.

If those PEPs are high net worth individuals and they are no longer able to deal with those individuals for six, nine months, whatever it is, that’s, you know, that sends a strong message. So I think we could probably see more public action for banks that are not taking or not focusing sufficiently on the risks from PEPs. But I think there is action happening that is effective and is helping banks to understand that what they need to being doing on PEPs.

And so last week, a major bank said they weren’t aware or they weren’t sure as to how some of their rich clients came by their money.

Mmm.

Would you see a supervisor saying to them “don’t take on any more rich clients until you’ve fixed this”?

Yes. And that’s a fundamental part of the AML regime. You have to understand the source of funds, source of wealth and if you can’t do that you’d be ill advised to take on the customer. The banks and others will always say to us “well how far should we go, because you can keep looking forever”. But I think that over-complexifies (sic) the issue. If ultimately you don’t know and it smells fishy and there’s a complex ownership structure behind the customer that is stopping you from understanding source of wealth, source of funds, or it’s coming from a high risk country where there are, you know, very publicly known risks with, where some individuals may have got their money from, then, you know, banks have to make the right decision.

I see where you are on this. When you analyse all the information, whether or not they are a PEP, if the risk is high, the risk is high.

Yeah.

Or the risk is unacceptable. You know, that’s sometimes, I know it’s safe for people when writing policies always put that level of risk into your document. It’s a great—–

Yeah.

—–statement that your organisation doesn’t accept certain—–

Where to draw the line.

——types of risk. Yeah. A powerful thing for an organisation to say, otherwise it senses your door is open to everybody—–

Yeah.

—–providing they can scale the hurdles or the obstacles whatever they be.

Away from the training, new presidency. What’s on the horizon for the FATF, short, medium, long term. You know, what’s the next burning ambition of yours or achievement that you’re looking at. Marvelous things for G20, collaboration, co-operation, but what’s the next great thing that you’d like to achieve?

Well this year, we’re lucky to have a Chinese presidency, interesting off the back of a US presidency, but that shows actually very well how inclusive FATF is and the fact that we can have a productive conversation between countries as diverse as the US and China and Russia, which in other environments are not talking to each other at all, it shows great things for FATF. We can have, you know, technically based conversations that result in something.

Three things that the Chinese presidency are pushing which everyone has support for: firstly a strategic review. So I’ll be open about this. The way we evaluate countries at the moment promotes an unlevel playing field which is contrary to what we’re trying to achieve through global standards. And the reason it does that is we assess every country sequentially. It takes a year and there’s 10 years between one country and another country being assessed.

We know that countries only act on AML CFT in the two years before their assessment. If we know that, we have to start looking at other ways of assessing countries and maybe being more targeted. We might look at an example like I mean terrorist financing measures or beneficial ownership measures. Let’s look at all the countries at the same time.

Right.

And let’s publish the findings instead of looking at countries once, you know, once every 10 years. And so we’re going to be looking at how we change our evaluation processes to be more effective, and to build on the drivers of positive change that we know exist.

Secondly, we need to do more work on fintech and regtech, so there are some real emerging risks and <indistinct> there. We were the first body to introduce global standards on virtual assets and we’re going to be doing work on digital ID but there’s a lot more we can do there on the, you know, the risk and announcements by Facebook and banks’ consideration of stable (sic) coins. This space is rapidly moving—–

Mmm.

—–and we need to keep up with it. And then there are interesting areas like illegal wildlife trafficking. So some, with the crime there is not properly understood and it’s not being properly investigated. FIUs are not engaged. But the reason this is interesting is the criminal networks doing illegal wildlife trafficking are also doing drugs trafficking and people trafficking and arms trafficking. For them it’s just another commodity. If we go after something like illegal wildlife trafficking we’d also be hitting the same criminal networks who are doing this other activity.

And then there are opportunities for further… like illegal logging. You look at the money being made by criminal networks involved in illegal logging, what’s going on in Brazil at the moment. There’s a lot more we should be doing and the environment, the state of the environment is the biggest threat humanity faces. And criminal networks are benefiting and profiting from this situation. So FATF has to do something and I’m really pleased that we have got support from the Duke of Cambridge, from Lord Hague, the United for Wildlife initiative, 30 banks, the UN, RUSE, the Environmental Investigation Agency, the Wildlife Commission. Lot of support for work in this area and hopefully that would lead to other work further down the line.

And the reason I think this is important is sometimes FATF just talks about money laundering and it comes back to what we were talking about at the start. That’s too distant from the problem and yet people think about it as a financial crime, a white collar thing, at least tick box in compliance. When you bring it back to wildlife trafficking, the extinction of species, it’s a once in a lifetime opportunity to do something about it.

When you bring it back to people trafficking, slavery, then it makes it real for people and it means that efforts by banks and others can be targeted. You know, they can work with law enforcement agencies to identify red flags for that specific activity and put their huge resources into making a difference at that level. And it motivates people. You’re a banker. You want to be able to go home in the evening and say “I helped save the elephants today”. Or “I identified a drugs trafficking group somewhere”. You don’t want to go home and say “I successfully did KYC on 10 clients and I’ve got proper records, so don’t worry, I’m not going to be put in jail for failure to do my job as an MLRO”.

So I think we need to bring the conversation back to the predicative offences as we call them, because that makes it real and that’s why we’re doing it in the first place.

And you know, one of my areas on this, when we talk about the UK having its highest number of drug, poisonous drug related deaths in many, many years or forever. That’s an area where I want to see a banker and see a picture of Jasmine, a 22 year old girl who died from one of those drug overdoses. I want to see what was her ambition when she was seven years old. I want the banker to understand that could have been his niece, his son’s girlfriend.

Yeah.

It is the person next door. Because bluntly, I think too many people don’t really give a damn about 250,000 dead Mexicans, as horrible as that sounds. It’s not… it’s that nudge factor, isn’t it—–

Yeah.

—–we nudge them. But what you’ve wrapped up, what you’ve done very, very well, particularly at the government level and political level, is you’ve made this about the environment. You’ve made this about the future of the planet. You’ve made the money, the actual oxygen that feeds all of these crimes, and at the same time, when you talk about… it’s not about the money and that job you’ve put in there. But actually it is about the money and actually it is about the oxygen because it’s about the oxygen being taken away from our earth.

Yeah.

Right? And it’s about our lives here. But you’ve made the money an integral part of that which is really smart.

Well it’s about following the money and yes we have a big focus in that case by ensuring countries cross-investigate and cross-<indistinct> the money laundering. But if you follow the money, if you follow the money behind the purchase of Pangolin or Rhino horn between Africa and China, you’ll identify the criminal networks involved in it and then you can take all kinds of action against those criminal networks. That has as much value as ultimately seeking a conviction for money laundering.

So, it’s not just about money laundering, it’s about following the money and effective use of financial intelligence. And the last thing I want to say is the other big priority for us this year is bringing supervisors together. We’re going to have a supervisors’ forum in China in November. We’re going to have another one in Vienna in May. We need to understand the challenges supervisors are facing and why supervision is not working. They’re not applying a proper risk based approach. In many cases they’re encouraging a zero tolerance approach which just promotes tick box compliance. So we need to have a proper conversation with supervisors, get them to understand what we want them to achieve. So the message isn’t diluted through having to go through others and see if there’s things that we need to do or change about our standards or our guidance to help supervisors do a better job.

For the supervisor and KYC person, it’s for the supervisor to say “d’you know what I did today – I stopped some money launderers, I stopped some bad guys”. That’s gotta be the same job they do.

That’s what everyone needs to be able to go home and say.

I agree. But some supervisors may, the perception may be, that their job was today, they protected their member firm or they protected the reputation of their regulatory body. We talked about this double-edged sword earlier on.

If you find money laundering it means perhaps your supervisor’s failed. So did they actually want to find it?

Yeah.

You know, but we need to go to where you’ve gone with this which is “there’s a much bigger picture here folks”. It’s not just about this moment, this narrow piece of time, about it impacts you. It’s about how it impacts everybody on planet Earth.

We’re never gonna stop money laundering.

No.

As people say to me “so how’s the fight against money laundering going?” rather sarcastically, they just see the big figures.

Mmm.

While there’s crime there’s gonna be money laundering.

Sure.

You know, in the UK, if you do anything with the profit from any crime——

<indistinct>

——that’s money laundering.

Yeah.

So, money laundering is not going to go away and I think we just need to ensure that we remain focused on why we’re doing it and doing it for the right reasons and bringing it back, as you said, to make sure people understand that. It’s not… yes of course there’ll be considerations like protecting firms, protecting the brand and so on. But ultimately we promote a risk based approach the consequence of which means that we’re gonna miss stuff and it’s okay—–

Sure.

——to miss stuff. You know, there will be illicit transactions, there will be sanctions entities, there’ll be money launderers who use banks. We have to say, “that’s okay” as long as you’ve got reasonable procedures in place to catch it and when you do catch it, you’re open about it and you work with the authorities to stop it happening.

It is, we’re never gonna turn banks into airports. We’re never gonna be able to do the same kind of checks on every transaction that you have on someone getting on a plane.

Well, let me flip that. Thank God we’re not gonna turn airports into banks, because if you put some of the banks in charge of the airports they would wanna see inside every black Samsonite—–

Yeah, yeah.

—–and no plane’s gonna get off the ground. There’s something in the middle there that we need to look at. But you know, to your point about how you might change the evaluations—–

Mmm.

—–may I suggest, if it’s not already being done, so many money balls (sic), the Laundromat cases—–

Mmm.

—–and works out to meet somebody, I think I’m a bit of an academic in that space, time and time again it is the designated non-financial services business that is in the middle to all of that.

Well one of the things we’re looking at is whether we should split out our evaluation of those businesses from banks. Because at the moment they don’t get sufficient focus because the evaluation looks at them both together and—–

Well, let’s be straight. Let’s not kid ourselves. The money launderers work that out.

Yeah.

The money launderer has identified the weakness in the system, in the supply chain. And you know, I often talk to people about multiple supply chains, one being a money laundering supply chain, the legitimate economy supply chain, and in terms of regulation, the confidence supply chain. You know, and actually I fail to understand why some of these designated non-financial services businesses, company formation agents, are still in business.

Yeah, yeah.

It’s reputed there are 10 addresses in the United Kingdom, residential addresses, where there are 50,000 UK LLP or limited companies at each address. You can tell which ones they are because the postman’s got a really bad back. But why would I bank anything from there?

Yeah.

You know, and if I look at these Laundromat cases, Paul Radu of the OCCRP, they have all the data. It’s all available and to improve the screening for clients. Stop screening the numbers. That’s hard to work out, whether that’s an unusual or suspicious transaction.

Mmm.

If it came from that address there’s an increased likelihood, and that’s not to say that everything at that address is wrong. But if a legitimate business person unfortunately chose the wrong address, I’m not gonna accommodate the risk. And if it was an aeroplane, am I gonna let people come onto my plane presenting that level of risk to my fellow passengers? But we do in banking. But nobody. I don’t sense mega wrong. Please you tell me that I’m wrong. That you’ve seen the bank that said “we cut it all out, we find that address, no transactions go to that address, come from that address”. And this could even be a law firm. And this will happen eventually. You know, they need to understand that the KYC they apply to their business and their clients impacts—–

Mmm mmm.

—–their ability to stay in business because if a bank sees that you’re not doing it properly, you’re out. You’re presenting a risk and I don’t want it

I think you’re right. I think that there are a few different things there. There are the challenges that if you are a bank operating in multiple jurisdictions you might not be allowed to share the fact that you know there’s something wrong with that address, with one of your operations in a different country.

You can tell them to read the OCCRP report.

So getting a holistic view, just as one bank, of your customer can often be really challenging and that’s something we need to try and help with. It’s data protection, data privacy—–

Mmm mmm.

—–conflictions (sic), we need to address that. That’s a problem. And then looking beyond that, banks need to able to share information with each other for the same purpose. So, there is more that can be done there but also if you look at the approach that someone like HSBC has taken, and I don’t know if you know Jennifer Shasky. That’s quite interesting in that she’s established an investigation unit in HSBC which is separate to their financial crime compliance guys, and is proactively looking into their data as intelligently as possible to find these instances, to find the dodgy addresses, and then to ensure that the actions the compliance guys are taking are informed by that.

That’s quite a new approach and I think it will be interesting to see if other banks follow suit because then it’s not just about compliance, it’s about proactively investigating. And it’s, you know, the approach law enforcement takes to these things. You go to a country and look at who the dodgy people are and then you check your books against whether you’ve got any of those dodgy people.

Basic investigations—–

Binary isn’t it, really?

Basic investigation takes, these techniques are not being done by the banks largely—–

Yeah.

—–and their KYC, their compliance would be a lot better if they just employed some basic investigation techniques.

Now listen, let me wrap up because we’ve gone on for a long time.

Sure.

You are, whether you like it or not, de facto, the global leader of the AML community. So what would be your parting message to the soldiers out there who actually, you know, work for a guy whose mantra is, making a difference, here. You know, what would be your parting message?

This is not about technical compliance, this is not about financial crime, it’s about the harm being caused on the streets by people trafficking, drugs trafficking, fraud and it’s about dealing with these threats effectively and in a commonsense way. We talk about the risk based approach. Really what we mean is in a commonsense way.

You’ve got limited resources, make sure they’re targeted on where the risks are. This is not about ticking boxes. This is about focusing on where the risks are and stopping harm and going home at the end of the day and being able to hand on heart say “You made the right decision, and the reason you were doing the things you were doing today, is to stop a drug gang or to stop people trafficking”. And the way you were going about that is by following the money.

Well, David Lewis, I’m pleased to be one of your soldiers and I’ll take away an awful lot from this conversation we’ve had here today and I’m sure many of our listeners on KYC360 will do the same. Thank you so much and can I just wish you more success in the work you’re doing and for the passion you’ve put into that work, I hope you generate more reward.

Martin thank you very much, it’s been a pleasure and best of luck to KYC360.

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David Lewis - Executive Secretary, FATF

AML Talk Show Hosted by Martin Woods

Transcript

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