How to combat money laundering in Europe

Good luck finding a major bank in Europe that hasn’t breached money laundering regulations. In Denmark, the two largest banks, Danske Bank and Nordea, are both currently subject to criminal investigations. BNP Paribas received the highest-ever fine in 2014, when it settled with US authorities and had to pay $9 billion for sanctions violations. Many others — from HSBC and Standard Chartered in the UK to Deutsche Bank and UBS and Credit
Suisse — have had to answer for offenses.
These cases show that living up to money laundering regulations is difficult, but not doing so is one of the biggest risks to a bank’s reputation. Banks and authorities share the same goal — to stop the bad guys — but both are struggling to find a way forward. While the European Union has proposed establishing a dedicated authority on the crime, company expenses to combat laundering are ballooning.
Research we conducted at the Danish Financial Supervisory Authority suggests a less expensive solution: Improve the technology for monitoring and reporting suspicious bank activity. Doing so could significantly cut down on money laundering, though it would also raise questions about privacy that would need to be addressed. Banks are generally required to do three things to combat laundering: Know their customers and their expected patterns of transactions; monitor transactions and examine those that seem atypical; and report suspect behavior to the government.
These steps may sound simple, but the quantity and complexity of transactions make them anything but. In a small country like Denmark, the central payments systems process the equivalent of 80 billion euros ($97 billion) a day. Such monitoring can also be a hassle for customers, who have little patience when trying to execute simple transactions.
This is where investment in tech can be useful, especially if it improves cooperation between regulators and banks. Create (or enhance) national electronic IDs to verify customer identity. This data could ease the onboarding of most customers, as banks would no longer need copies of passports and other documents to set up accounts. Reducing costs and hassle for the many would free up resources for monitoring transactions of higher-risk customers.
Build digital data registers to verify business identity. Registers should be able to provide high-quality information (eg certified by lawyers) that banks can use in onboarding uncomplicated businesses. This would make it easier for companies too, since they can then maintain most of their data in
one place. Again, this would free up bank resources to focus on higher-risk accounts.
Encourage banks to build shared Know Your Customers utilities. The banking sector would greatly benefit from a centralised database of customer information that can also be linked to public registers. There is no economic sense in banks gathering the same information separately, which is the current practice. Establishing such utilities may require supervisory guidance, however.
Allow banks to share data on risk flags. Money launderers often use multiple banks, making it difficult for any one company to identify problematic transactions. Being able to share data will give everyone a fuller picture of a customer’s banking activity. That would prevent those who get barred from one bank for suspicious activity from simply moving to another lender.

—Bloomberg