The Clearing House, the nation's first and oldest banking association, recently issued a detailed paper, "A New Paradigm: Redesigning the U.S. AML/CFT Framework to Protect National Security and Aid Law Enforcement." The paper analyzes the effectiveness of the current anti-money laundering/countering the financing of terrorism (AML/CFT) regime, identifies problems with it, and proposes a series of reforms.

Ballard Spahr's Money Laundering Watch blog conducted an in-depth Q&A with Greg Baer, President of The Clearing House, addressing many of the significant issues posed by this paper.

Money Laundering Watch: Please summarize the main points of The New Paradigm.

Mr. Baer: In developing our report, we worked not just with banks but also closely with law enforcement and national security experts—what we call the "end users" of AML/CFT information—as well as global development experts who study the collateral damage imposed when banks "de-risk" customers. What these end users told us was that the current system wasn’t working for them—that it was not providing value to them that is in any way commensurate with the billions of dollars being spent by the industry for that purpose.

There were several reasons. The system is antiquated and ill-suited for a world where technology, specifically artificial intelligence and machine learning, can be the most effective tool to detect wrongdoing. The end users have no voice in how those billions of dollars are allocated, and the sort of priority-setting one would expect from any decent law enforcement or military service does not occur for the financial institutions who have been "deputized" by the government to provide actionable intelligence. Rather, banks' BSA (Bank Secrecy Act)/AML priorities are set implicitly by bank examiners, whose focus is on requiring banks to adopt clear, auditable policies and procedures and demonstrate compliance with them. Those examiners are divorced from the end users, and do not generally include in their evaluation of a bank’s program how effective its reporting has been, in part because they themselves are not privy to that information. Finally, the current system contains no consistent, comprehensive, or timely mechanism for providing feedback to banks on whether the SARs (Suspicious Activity Reports) they file are useful. It is a broken system that needs to be completely rethought.

Click here to read the rest of this Q&A. Please subscribe to the blog to receive regular updates.