Voice of the Industry

The Wirecard scandal - how digitalisation can be marshalled to tackle money launderers

Thursday 23 July 2020 09:19 CET | Editor: Editor The Paypers | Voice of the industry

In the future, banks that are not as internationally networked in money laundering prevention as the perpetrators will remain easy to outsmart

In its latest report, the International Financial Action Task Force (FATF) confirmed that Germany has made ‘sufficient progress’ in the prevention of money laundering and the financing of terrorism (AML/CFT). Sufficient perhaps, but probably not good enough, because after the Wirecard scandal, the money laundering experts from the FATF are likely to have new questions in the upcoming audits and investigations. In addition to the accusations of fraud, including the missing 1.9 billion euros, and the suspicion of market manipulation, the Aschheim headquartered company is currently being bombarded with charges of ‘money laundering’. Among other things, the charges concern financial transactions of fraudulent trading sites and shady online gambling providers.

As a financial institution, Wirecard Bank, at a minimum, was obligated to prevent money laundering as stipulated by the Money Laundering Act and the German Banking Act. This means that every acceptance of a customer must be subjected to an audit, as well as their financial transactions. Now, the suspicion that Wirecard processed payment transactions on behalf of customers who may have been engaged in criminal business has entered the picture. Consequently, by serving this group of customers, Wirecard may have violated the laws on money laundering prevention.

At the same time, according to ‘Der Spiegel’, until the day of the insolvency it was apparently unclear whether, how, and by whom Wirecard (as a corporate group) would be audited and monitored to ascertain as to whether it was complying with the regulations for the prevention of money laundering. ‘The question of the obligatory status of Wirecard AG within the meaning of the German Money Laundering Act was discussed between the government of Lower Bavaria and Bafin from February 25, 2020, up to June 25, 2020, the date of the filing for insolvency’, according to a response of the Bavarian Ministry of the Interior to a question in the state parliament.

Even if fraud was the focus of the criminal energy of Wirecard's management and money laundering was not the main issue, the legislator will have to deal with the question of how the financial services supervisory authority can keep an overview, particularly in the case of complex, international service offerings and group structures such as those of Wirecard. After all, the Wirecard scandal is also tarnishing the image of Germany as a financial hub. Federal Finance Minister Scholz has already announced that the debacle with incur consequences: financial supervision must be comprehensively reformed and given additional competencies.

In addition to addressing identified deficits in Germany and the need for clarification of responsibilities that has now become evident, digitalisation measures in particular will make a decisive difference: in the intelligent, cross-institutional monitoring of transactions, in the cooperation between financial institutions and public authorities, and in the significantly improved, high-frequency networking of executive authorities worldwide.

The problem is global - and rarely one of simply one country or one bank alone

The Wirecard scandal impressively demonstrates that one country alone will not be able to achieve a great deal. With branch offices (and consequently accounts with other banks) in the UK, the US, Singapore and Dubai, Turkey, New Zealand, Australia, and South Africa, and operations in Malaysia and the Philippines, the company was globally positioned. The money laundering case at Danske Bank was also an impressively international undertaking: the Estonian branch handled a total of 15,000 foreign clients from 90 countries, including many British limited liability partnerships and special purpose vehicles from offshore regions. The list of banks involved reads almost like a who's who of the sector: in addition to several Northern European banks such as Svedbank, Nordea or SEB, Deutsche Bank, JP Morgan, and Bank of America are also said to be involved in the scandal.

Regulatory and executive authorities that are not as internationally networked as the perpetrators will continue to be easy to outsmart, now and in future. The lack of networking is a critical factor here. In its proposal for stepping up the fight against money laundering of May, 2020, the EU concedes: ‘Although the EU's rules and regulations are far-reaching and frequently extend beyond the usual international standards, they are not coherently anchored throughout the EU. This leads to fragmentation between the individual member states’. Outside of Europe, cooperation between money laundering sleuths is even on more shaky footing.

No success in sight without digitalisation

International cooperation approaches are already in place: the Egmont Group, for example, is an association of 164 national, so-called Financial Intelligence Units or FIUs that concern themselves with suspicious transaction reports on money laundering and terrorist financing - and the German FIU is located at customs authorities.

Naturally, technology is the essential means to boost the effectiveness of international cooperation; only digitalisation, artificial intelligence and machine learning can help to render payment flows so transparent that it will also be more quickly noticeable in Germany when dubious transactions take place in Asia that impact on a Dax-listed corporation.

Marcus Pleyer is working on these issues. He has been active as the German President of the Financial Action Task Force since July 1, 2020. As the first agenda item of his thesis paper on the priorities of his two-year office term, Pleyer cites the ‘Digital Transformation of AML/CFT’. In other words, the authorities are well aware of the need for money laundering sleuths to be digitally enabled.

The approach in Germany could serve as a model here: Together with the FIU at customs, the Federal Criminal Police Office, and a total of 14 banks, an Anti Financial Crime Alliance or AFCA was launched in September 2019. Under the auspices of the FIU, this public-private partnership aims to strengthen and coordinate the fight against money laundering and terrorist financing.  

An initiative in the Netherlands aims to achieve a similar goal. Here, five banks - ABN AMRO, ING, Rabobank, Triodos Bank, and Volksbank - recently responded by establishing the Transaction Monitoring Netherlands (TMNL) initiative to support each other in the joint fight against money laundering and terrorist financing.

As Bafin comments: ‘The permanent strategic exchange of information is the prerequisite for success’. Technology is certainly a central component of the solution. In concrete terms, what is needed is a jointly implemented, securely encrypted digital platform that networks financial service providers and enables them to identify dubious payment flows more quickly. However, some 14 German banks or five Dutch banks will not suffice to meet the challenges; ideally, these platforms would have to become internationally accessible to financial institutions.

Technology can help, but it is not a panacea

At Wirecard, Management Board members had developed and deployed criminal energy. The company’s management saw no significant top tier changes for some 20 years (as is usually the case in DAX companies), meaning that there was never really a successor stepping in with a mandate to monitor the predecessor’s dealings. Moreover, the same auditors were tasked, year in, year out. And what is more, Bafin regarded Wirecard as a technology group and not as a financial services provider. Given such a complex situation, technology will not be able to work miracles.

Nevertheless, software for the prevention of money laundering, like the HAWK:AI software platform, is playing a central role in the detection of suspicious cases, typically as a component of the necessary control mechanisms in an institution. These solutions help banks in monitoring customers and focus on the detection of risks and anomalies.

The urgently needed innovation will run under the headlines of ‘digitisation and information exchange’: while today, every company tries to identify suspicious cases on its own with the help of very rudimentary, modestly intelligent systems and then report them to the competent authority, in tomorrow’s world, fully digital, self-learning systems will have to be relied on to ensure the analysis and information flow not only between the institutes, but also between the reporting authorities. In addition, it would even be conceivable to monitor intra-group payment flows (e.g. in connection with participations and shareholding, as in the case of Wirecard) - provided, however, that corporate management assents to this.

As a software platform for the detection and processing of suspicious cases, since 2017 HAWK:AI has been working on the overarching, comprehensive monitoring of financial transactions - in compliance with all necessary statutory data protection and outsourcing requirements. Wirecard is simply another reason for us and our partners to vigorously push ahead with product developments in this area. The goal of effectively - and efficiently!) fighting crime is our top priority.

By the way, we are not alone in these deliberations, because, in addition to FATF, Bafin, and AFCA, responsible officers in the compliance departments of banks are also searching for solutions that will ensure that the warning lights flash up more quickly when transactions with dubious partners occur - and above all, that they light up everywhere.

About Tobias Schweiger

Tobias Schweiger is the co-founder and CEO of HAWK:AI, a Munich-based software company that supports financial service providers worldwide in preventing money laundering and terrorist financing.

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Keywords: hawk:AI, AML, CFT, FIU, financial crime, money laundering, Tobias Schweiger, AI, machine learning, digitalisation, fraud prevention, Wirecard scandal, FATF, BaFin, Germany, Wirecard Bank
Categories: Fraud & Financial Crime
Countries: Germany
This article is part of category

Fraud & Financial Crime