Partly due to the the increased regulation, known in the Netherlands as the Money Laundering and Terrorist Financing Prevention Act (in the area of the Wwft), it is becoming increasingly complex (and expensive) for financial institutions and banks in particular, to comply with these regulations. The result: New customers are no longer accepted or many customers are no longer able to open an account. A big problem. But what exactly is the problem? And is there a solution?
André Nagelmaker (ex Executive of trust office TMF Nederland) calls it moving picket posts: “Every time you think you meet all the AML rules, they come up with rules upon the rules. Almost impossible to comply and above all it’s very expensive.” One of the consequences: it is often too expensive and too risky for banks to let customers open an account. Nagelmaker: “Why would you as a bank go into this process, if you can just as well get your income in other ways, and also: knowing that you are personally liable since AMLD 6?”
Peter Blom, the retiring CEO of Triodos Bank, also sees the inability to open a bank account by companies, foundations and individuals as a major problem. “Customers have also been refused at Triodos Bank since 2019,” he says in de Volkskrant (June 4, 2021). The checks on money laundering and terrorist financing were not in order. Since then, there have been many complaints from customers who say they can no longer open an account.” Before that, the problem didn’t exist, says Blom: “Most og what we did was based on trust. We knew our customers personally. In my opinion that is the best test. But of course you cannot show this to the supervisor. So now we have to go through and sort through each application piece by piece. ”Very time consuming, and moreover it leads to a rejection of a customer much more often, simply because the required transparency cannot be given.”
A big problem for customers
For banks it is difficult, for customers not being able to open accounts it’s a real problem. They have become unbankable, trust offices and their clients, SMEs, daughters of MNOs, entrepreneurs, and even private individuals are affected. For example, it means that they cannot establish a company, cannot deposit capital in that company, and therefore cannot apply for a license from the AFM.
In addition, customers cannot indicate on their invoices where they want to be paid, so they are forced to work with alternative providers such as payment providers, other informal payment channels, or even through internal account arrangements with shareholders or sister companies.
“We know our customers.” Isn’t that terribly naive? Nagelmaker: “Trust is a good starting point and fits in with the human dimension that has been rather lost. The assumption of mistrust has a self-reinforcing effect and leads to an accumulation of procedures within, between and about all chain participants (for example, all gatekeepers). This in turn leads to an enormous administrative burden increase for those gatekeepers, but especially for the customer who has to fill in multiple forms, is confronted with different interpretations of laws and documents provided.
“There is a difference between knowing your customers and formally identifying and investigating your customers. We are now in the second situation. The naivity lies in the belief that more paper and more administrative (endlessly) repeated procedures will lead to a higher integrity of wealth and payment transactions. Read the book ‘Nederland Drugsland’ and you will see the current AML approach has little or no effect. It would be better to duplicate all administrative procedures in and between gatekeepers and to focus the released energy and funds on expanding the FIU and its analysis and investigative capabilities. From quantity to quality and enforcement.”
Moving picket posts
You may wonder whether banks have let it slip for too long, because they may have found the costs to comply too high. But faced with this question, many banks argue that it is more a matter of moving picket posts. Due to the increasing administrative requirements that KYC/AML impose on an organization, the chance of errors and imperfections increases. The legislation requires implementation at an academic level, where implementation is designed for routine mass work. This increase in errors is another reason to tighten up the law and apply more open standards. This often requires even more academic work (research) and that is simply not the core capability of most gatekeepers. KYC/AML and the way it is set up is the first working perpetuum mobile. It never stops. A spokesperson for a bank: “As soon as we as an organization think we are doing enough, more is asked. It is a continuous cycle of remediation of all files. It costs a lot of manpower and that money is no longer available for the quality of the systems and processes.”
However, the continuous tightening of Anti Money Laundering rules is not just a coincidence. Nagelmaker: “The undermining of Dutch society continues to increase. With the acceptance of the use of drugs and the criminalization of their production, enormous opportunities have been created for criminals. The vulnerability of large groups in rural and urban areas, the increasing pressure on people to be self-sufficient, the lack of enforcement and the ineffective AML/KYC system simply makes it more attractive to criminals.”
The response to this is stricter rules, stricter supervision, more intensive investigations on the gatekeepers, and therefore higher charges, becoming unbankable of large groups, and more room for failure, which in turn leads to tightening of the rules. Nagelmaker: “It is always putting the cart before the horse. It is all very intelligently conceived and semantically everything makes sense, but little really works.”
What needs to change?
Due to the enormous increase in the cost of compliance, complying with the rules, a different revenue model is created: opening an account has no added value, only leads to an increased risk, and because you are also personally liable, the choice is not to open that account. made to open quickly. But how do we get out of this impasse? Nagelmaker: “Due to a system change and a change in mentality. The system change should focus on calling the gatekeepers to account for their expertise and sharing the results with all other gatekeepers. The change in mentality means that an organization is not called to account for its administrative shortcomings, but is pointed out how and where it can be improved and that legislation is supplemented more with guidance at implementation level (no academic glossary) so that everyone can understand what needs to be done and why. No naming and shaping but joint efforts/shares interests.”
We then look at possible tools to be able to perform certain tasks in the field of KYC and AML more easily and at the same time more thoroughly. Tools that replace manpower for smart software, for Artificial Intelligence and Machine Learning. There is a broad search for a step change. And the good thing is: CW360 with Transaction Monitoring and KYC could be that step change for many banks, breaking the negative vicious circle, making meeting AML / KYC guidelines easier at much less cost, bringing confidence back, and people can eventually ‘just’ open an account again.