AML‐related technologies: a systemic risk
| Date | 01 April 2006 |
| DOI | https://doi.org/10.1108/13685200610660970 |
| Pages | 157-172 |
| Published date | 01 April 2006 |
| Author | Dionysios S. Demetis,Ian O. Angell |
| Subject Matter | Accounting & finance |
AML-related technologies:
a systemic risk
Dionysios S. Demetis and Ian O. Angell
Department of Information Systems, London School of Economics, London, UK
Abstract
Purpose – The paper seeks to analyse the systemic effects of AML-technologies and regulations, at
both national and organizational levels.
Design/methodology/approach – It focuses the power of systems theory, particularly the insights
about self-referential systems, to describe the organizational and bureaucratic phenomena that have
emerged from the introduction of technology in the AML domain.
Findings – The paper confronts the technological instrumentalism both prevalent in the AML
community and implied by the actions of regulators. It demonstrates the many false assumptions
being made, and calls on the whole AML community to re-think and clarify its position.
Research limitations/implications – This is the second paper describing an ongoing research
project that focuses theory on the phenomena occurring when information and computer technologies
are applied in the AML arena. The project is experimental and in its early stages, and so is necessarily
limited in scale, but not in scope. The objective is to invite the AML community into a hermeneutic
debate of the ideas, thereby informing AML policy decisions.
Practical implications – The paper calls for a reconsideration of the underlying assumptions
within which AML-related technology is appropriated by financial institutions. It demonstrates how
this technology creates multiple complex systemic phenomena that often act contrary to initial
intentions. This complexity is generated not only by data mining and/or profiling technologies, but
also by peripheral technologies as they interact with human activity systems in the AML domain.
Originality/value – The paper is one of the relatively few that moves away from narrative
description of AML phenomena, to present an academically legitimate theoretical foundation for
analysis.
Keywords Money laundering,Bureaucracy, Systems theory,Risk analysis
Paper type Viewpoint
Introduction
In a previous article we demonstrated the benefits of approaching the question of
anti-money laundering (AML) from a systems perspective (Angell and Demetis, 2005).
We went further and used the approach to analyse the situation in Greece. In the
current paper we continue the argument, expanding on some systems-theoretical
concepts that relate specifically to information processing within the AML domain, and
illustrate our points with insights concerning the technology-related effects (mos tly) in
Britain.
We claim that the introduction of technology to the AML domain is inherently
problematic: a systemic risk. That risk is not with the functioning (or otherwise) of the
tools of the technology, rather it is with the disruptive systemic phenomena that
emerge from attempts to integrate that technology into the surrounding human
activity systems. Functionalistic thinking, which applies (say) Fourier transformations
in furtherance of automated money laundering detection, has its place (Young, 2004),
but we argue that it hardly solves any of the emergent phenomena, and indeed it may
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AML-related
technologies
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Journal of Money Laundering Control
Vol. 9 No. 2, 2006
pp. 157-172
qEmerald Group Publishing Limited
1368-5201
DOI 10.1108/13685200610660970
cause new ones. Like Young (2004), we insist that – at the very least – the process of
implementing computer technology into the AML arena must be recognised as
non-trivial.
Unquestionably, information and communication technologies (ICTs) are playing
an important and ever-increasing role, both nationally and internationally, in the battle
against money laundering (Angell, 20 00). We state with confidence that as
electronic-processing and -transacting become even more prevalent in the banking
sector (conditional on customers continuing to trust that their transactions are secure),
so will electronic AML systems, and in particular the computerized compilation and
transmission of what are variously called suspicious transaction reports (STRs) and
suspicious activity reports (SARs).
That having been said, the UK-experience has shown that the effects of introducing
AML-related technologies into the banking sector are often problematic, and for this
reason alone they are worthy of study. In this present paper, we will expand on the
previous work (Angell and Demetis, 2005) to focus systems theory on such problems.
As the penetration of the internet increases across society, it is likely that an
ever-growing percentage of the population will exploit the financial opportunities both
those presently available (for example, online banking), but also who knows what else
appearing over the horizon. Clearly, the empowerment of the “smart consumer”
(Rourke, 2002), and the potential for disintermediation (Litan et al., 2001), both made
possible by ICTs, are gradually eroding the need for the customer to be physically
present at the financial institution when undertaking transactions. The high street
bank may even become an anachronism; e-Banks, which are today the exception, could
soon become the rule.
However, as e-banking becomes the standard for carrying out many client-based
transactions, the problem of how to handle STRs will be intensified. Face-to-face
interaction with customers, which is now considered to be the most effective avenue for
Know-Your-Customer (KYC) checks, and an essential part of filing STRs, will be much
more difficult when all communication is at a distance. With transactions taking place
electronically, the predominant way to target money laundering will inevitably shift
from personal contact to behavioural modelling and computerised profiling.
The systemic phenomenon of fear-driven compliance
In systems terminology, the increasing reliance on algorithms and technology,
whatever their form, will trigger a positive feedback that will tend to destabilize a
system’s original form and status. The outcome can be hazardous, it may even threaten
the very viability of the system itself, although contrariwise it can lead to novel
opportunities: such is the uncertainty implicit in the aforementioned systemic risk.
Consequently, the approaches to AML will be transformed into something tota lly
different from what was intended, as will money laundering. Technology has already
re-defined, in many ways, our conceptualization of what AML is, and that
conceptualization will change even more so in future. Whether, in any particular case,
the outcome will be beneficial or not, remains to be seen – there are no certainties with
systemic risk in a future imperfect.
It is appropriate that, before proceeding, we give some examples of this
phenomenon in the AML arena. Despite being identified as launderers by STRs , there
is often little hard evidence that will lead to their conviction in a court of law. Hence, to
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