–> This is a pre-event interview in the run-up to the Leaders in Finance AML NL Event on 5 October 2023.
Jeroen: Nicholas Lord, thanks for taking the time to speak with Leaders in Finance in the run-up to the Leaders in Finance anti-money laundering event on the 5th of October this year in the Netherlands. I am really glad that you are taking the time to speak to me now, as well as that you are participating actively at the event. First of all, could you introduce yourself?
Nicholas: My name is Nicholas Lord, I am a professor of criminology at the University of Manchester in the UK. I am also the director of the Centre for Digital Trust and Society and the University of Manchester’s Research Theme Lead for Digital Trust and Security. In terms of my background, my research generally focuses on three core areas. First, in terms of substantive topics, I primarily research international frauds, financial crimes, and corruption, and their regulations and control. Secondly, I analyse empirically and conceptually the organisation of serious crimes again, so phenomena that we would commonly refer to as white-collar crimes, corporate crimes or organised crimes. Exploring how these behaviours are organised is key to explaining them and key to determining how we can intervene with them. Finally, a third key part of my work revolves around the transfer of social scientific, criminological knowledge and insights, or modes of analysis, into the thinking and operational responses of fraud enforcement authorities.
Jeroen: That is quite a lot. Is there one of these three things that you are most excited about, or is there an equal weight between them?
Nicholas: Probably an equal weight, but I spend much of my time undertaking empirical research. I am a social scientist by trade, so I enjoy getting out into the field, speaking with people, analysing data, generating new theories, ideas, concepts, that kind of thing.
Jeroen: Right. If you look at all the things that have changed over the last few years, or maybe decades, pick a timeframe you find suitable here, what would you see are the most important changes we have seen related to the AML-field?
Nicholas: In recent decades, but also in recent years as well, what we have seen is an ever expanding legal and regulatory environment in the context of AML. For instance, in recent years, looking at the European level and beyond, a greater number of entities now fall within the scope of the regulated sector, which again creates an increased obligation and response from the private sector. I think we have also seen a more widespread regulatory response as well, in terms of how state authorities and governments are dealing with, or penalising, corporations and organisations that have inadequate compliance systems, even when a crime may not have been facilitated or committed. Together with this, the criminalisation of failures to prevent money-laundering has emerged as a new tool in the enforcement response. Alongside the enforcement response, undoubtedly we have seen quite a significant change in relation to new technologies. So FinTech, RegTech, SupTech, and so on, as well as new advancements with ‘deep tech’, have emerged within the area of financial crime and anti-money laundering, and these have really changed the nature and dynamics of AML and created opportunities and challenges for AML actors. On the one hand, criminal actors and money launderers, where necessary, adapt and innovate their behaviours to circumvent these legal and regulatory changes, or new technological developments. But of course, on the other hand, technological innovation has also enhanced how regulators can respond and deal with money laundering and other financial crimes as well. So innovation in technology has been a big game changer, both for criminals and controllers.
Jeroen: Would you say the tech piece that you are describing is also going to be the most important change, at least from the private sector, public sector?
Nicholas: I guess that relates to the next question as well, in terms of the changes in the future. None of us can avoid the massive step change that is taking place with regards generative AI and machine learning. We have seen substantial and significant technological innovation and the move beyond assistive AI towards generative AI will enable a whole host of new mechanisms to emerge for both criminals and regulators as well. I think we can expect some kind of arms race in the coming years between controllers and regulators on the one hand, seeking to reduce and prevent, and deal with financial crime and money laundering. On the other hand, the organisers of money laundering and financial crimes will circumvent those new AI-techniques that are being developed and will innovate further. So it is going to be a very interesting interaction between different actors in terms of how the anti-money laundering sphere plays out in the coming years. But obviously, AI and deep tech offer lots of new opportunities in terms of how we screen individuals as part of the AML process, how we can enhance or automate KYC, due diligence, that kind of thing. Furthermore, the role of AI might also assist in generating digital twins of our compliance spaces and allowing us to think or interact with AI-generated criminals in these digital spaces, to see how compliance mechanisms that we implement might in turn change behaviours of criminals or employees within an organisation. I think that is going to be very interesting in the coming years. But algorithms, AI, and machine learning are only as good as the data that we can make available to generate these new tools as well. So I think we need to be very cautious and careful in terms of the explainability, ethics, transparency and security of AI tools, especially as key stakeholders such as compliance actors and senior managers will remain accountable for the outputs of these AI tools in the workplace. So it is going to be a very interesting time in the coming years.
Jeroen: Do you have a view on the criminalisation of the boardroom? And also the enormous quantities of data that is generated, but we do not always know if that is effective in terms of actually catching the real criminals – there are obviously white-collar criminals – in terms of people that do money laundering?
Nicholas: I think it is a really good point, and a similar issue is encountered in the UK as well in terms of the number of Suspicious Activity Reports (SAR’s). I think we were close to a million last year, which is an incredibly substantial number of reports being submitted. Clearly, the enforcement authorities currently do not have the resources or capacity to deal with that number of SAR’s coming into their system. So maybe things like AI and machine learning can help with that process in sifting through those large data sets to identify which transactions might be best suited to invest time and resources into investigating. I think a major issue again in the UK context is that the submitters of SAR’s often do not receive feedback about the outcome or the impact of the SAR submitted. So they do not really know whether or not they are providing sufficient information or details or data about a particular case because they do not get that feedback from the authorities. So it is very challenging, and I think there is a wider issue about the impact of SAR’s on actual predicate offending. There is now emerging evidence and data on that topic, that the AML-regime more broadly is not very effective, firstly, in reducing underlying predicate offending, the crimes that generate these proceeds and profits in the first place. And secondly, not very effective at reducing the flows of the proceeds of crime as well. Academic data seems to suggest that less than 0.1% of the proceeds of the crime are actually identified and dealt with. This is incredibly miniscule, compared to what we know about the scale of illicit financial flows, and suggests a significant gap between enforcement policy objectives and outcomes. So maybe then we need to think about what the regime should be like going forward. We need to rethink it, in other words.
Jeroen: Relating to the criminalisation of the boardroom, there is obviously a lot of fear there, right? To me – and this statement may be wrong – it feels like we just keep submitting everything potentially wrong, just to tick the box.
Nicholas: Exactly the same is happening in the UK as well. As you say, it is not possible to take the risk of not submitting a SAR and then something coming back to the organisation later on, as compliance teams will be held accountable for that. So in the UK, in terms of the boardroom, we have the senior managers and certification regime (SMCR) now as well, where senior executives can be held to account for organisational noncompliance, including relating to compliance and money laundering requirements. We are also seeing shifts now in the UK away from the identification principle when it comes to holding corporations to account for criminal violations, partly towards a failure to prevent model, but also in terms of broadening the scope of what the controlling mind of a corporation is. So it is not only about those top few in the corporation, it is now about senior managers as well.
Jeroen: Do you have a tip for one of the institutions within the whole ecosystem of AML?
Nicholas: I think from my side as an academic, a researcher and someone who collects and analyses data, we need to generate much better and more data. First of all, data on the organisation of financial crimes and money laundering in order to better understand how these behaviours are being organised across jurisdictions or domestically, and which conditions shape this. Including an understanding of which conditions or structures need to be in place for those crimes to occur in the way that they do. Then we can better intervene with those key critical points of vulnerability that can be identified. I think, secondly, we also need much better and more data on what works and under which conditions. So better evaluation of the interventions and mechanisms that we currently have as part of the AML regime. One example of that would be the recent introduction of beneficial ownership registries, be it public or private, but the point being: to what extent do we really know that these have an effect on reducing money laundering or financial crimes? Or do they just displace money laundering elsewhere into other criminal mechanisms? We do not have very good evaluative before and after data on what works and under which conditions.
Jeroen: The last question from my side. You will be speaking at the event, you will be joining the event. Is there something that you, generally speaking, look for in these kinds of events?
Nicholas: Again, being an academic and a researcher, we are all to an extent distanced from practice. So what I really like about these events is the ability to engage with people, working in state of the art of complaint practice within the private sector, working at the cutting edge of the field on a day-to-day basis. So from my side, I am really looking forward to hearing more about the state of the art, practices that compliance officers or people who are responsible for AML are currently implementing and finding out about what they think works quite well. And of course, just discussing with like-minded individuals from the private sector, from enforcement, from academia what the challenges and opportunities are for AML in the coming years.
Jeroen: Great. Anything else that should be said that I have not asked for this short pre-event interview?
Nicholas: An interesting hypothetical question that I always think is good to think about, based on what we said about the AML regime perhaps not doing what it intended in the first place in terms of reducing crimes: if we were to start from scratch now and entirely scrap the current AML regime, what would it look like going forward if we rebuilt it? Would it look what it looks like now? Or would it look quite different? That is something we can all think about.
Jeroen: Yes, that’s great. Wonderful. Nicholas Lord, professor at Manchester, thanks a lot for taking the time to speak with us, and we are very much looking forward to hosting you and to also listening and learning from you on the 5th of October for the Leaders in Finance anti-money laundering event in the Netherlands. Thank you so much!
Nicholas: I’m looking forward to it, thank you!
–> This is a pre-event interview in the run-up to the Leaders in Finance AML NL Event on 5 October 2023.