The Fight Against Money Laundering Needs More Focus, Acknowledges DNB

September 12, 2022
A more risk-based approach will sharpen the focus of efforts to keep the financial sector free from financial crime, De Nederlandsche Bank (DNB) has said in a new report.

A more risk-based approach will sharpen the focus of efforts to keep the financial sector free from financial crime, De Nederlandsche Bank (DNB) has said in a new report.

Dutch oversight of money laundering looks set for an overhaul as the DNB makes fresh commitments in its report, From recovery to balance.

The DNB is responsible for ensuring financial sector compliance with anti-money laundering legislation.

In recent years, it says it has identified serious compliance shortcomings related to the issue.

“We are looking carefully at our own role and at how we can improve,” said Loes Wenink, a supervisor at the DNB, in an interview alongside the report. “Our supervision is always squarely based on the purpose of the law: ensuring a sound and ethical financial sector.”

To achieve this, Wenink said that the central bank is in need of a risk-based approach. “Innovations can certainly contribute to achieving this goal. We are interested in developments that help banks move forward, and that can make processes more effective and efficient.”

Various institutions have been hit with compliance orders, which the DNB has acknowledged entailed substantial costs for the banking sector.

The most recent and high profile of these was the retail bank, Rabobank, which received a compliance order from the DNB in November last year informing it that it must improve on its AML deficiencies.

However, the level of enforcement measures has raised questions about the effectiveness of the approach taken.

For example, if enforcement has left financial institutions running scared of the regulator, then the measures in place could restrict access to financial services for certain high-risk customers or groups of customers, according to the regulator.

In order to achieve a more risk-based approach, banks must improve their customer risk classification processes, the DNB has said, arguing that limited scrutiny in the case of low-risk customers will allow for greater capacity and attention to be focused on higher-risk customers.

The DNB says in the meantime it will assist institutions in various ways, including by providing additional guidance on levels of scrutiny that are appropriate for low-risk customers.

"We argue that scrutiny can be limited for low-risk customers. All those people who receive their wages or benefits every month, pay for their rent and groceries and have nothing out of the ordinary going on in their account,” said Wenink.

“We believe for these customers checks can be limited.”

She notes that the central bank observes that financial institutions are sometimes checking these low-risk customers too much: “They do so to stay on the safe side and comply with all legal requirements. We are aware that our supervision sometimes contributes to this.”

The private and public sectors have to accept that a risk may go undetected due to limited scrutiny, she said.

“So we need a more risk-based approach by banks and supervisory authorities. We believe it is important to clarify, together with the financial sector, when good is good enough. We will be discussing this in roundtable meetings. The National Forum on the Payment System is closely involved in this.”

Focus on risky customers

The DNB has also noted which categories it deems to be more risky.

This includes sectors such as the transport sector, wholesale trade and real estate, which are more vulnerable to abuse by drug-related crime.

“This doesn't mean banks should refuse all customers from these sectors, but they must ask for more details so they are able to assess money flows properly. If they find the risks involved to be unacceptable, they may not accept a customer or must terminate the relationship.”

Cash-intensive sectors such as the hospitality industry, the scrap metals trade or the construction industry may also pose a higher risk of money laundering or terrorist financing, she suggested.

However, labelling the use of cash as a risk creates an area of tension. “Cash is legal tender, the legitimate use of which should not be hampered. Under certain circumstances, however, the excessive use of cash can point to money laundering or terrorist financing.”

The Cash Covenant, which was concluded earlier this year by, among others, the four Dutch major banks, consumer associations and DNB, provides guidance in navigating this area of tension.

It states, for example, what measures must be taken against money laundering and terrorist financing when cash is used.

Technology friendly

As well as improved customer risk assessment, the Dutch supervisor has also expressed enthusiasm for greater use of technology in banking and payments.

This includes innovative solutions that can also be used more broadly, if necessary in consultation with the legislature, to sharpen the focus in the fight against money laundering.

“A prime example is the digital identity. This makes it much easier for banks to establish a person's identity, which in turn reduces costs,” said Wenink.

“We must (sic) make sure that new technologies are used responsibly. For example, customer data must be protected and privacy must be guaranteed."

Machine learning could be used for customer risk classification and for transaction monitoring, according to the regulator, provided that adequate safeguards are in place with regard to privacy, bias and explainability.

Enabling customers to reuse data they must submit to multiple institutions, for instance by means of electronic identification, can also reduce the administrative burden they face, it suggested.

Better coordination

The DNB aims to strengthen the effectiveness of the parties involved in combating money laundering — with the central bank stating that more robust coordination and prioritisation between stakeholders is key.

This includes collaborative work to improve reporting to ensure the focus is on transactions that are in fact suspicious, rather than just unusual.

The DNB’s commitment to change has been greeted by market players.

The Dutch Banking Association said it is “happy that DNB recognises money laundering bottlenecks”.

“Banks have been pointing out bottlenecks in the service provision to their customers for some time when performing this role,” said the trade association in a statement.

“We are pleased that De Nederlandsche Bank (DNB), as supervisor of this role, also sees these bottlenecks and wants to do something about them, as well as to increase the effectiveness of combating money laundering, which is an important public-private task.”

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