Recognising that, as an anti-money-laundering (AML) industry, we have collectively failed the public in disrupting dirty money is both embarrassing and costly. Change requires persistence and this can be disruptive, while a “head down, keep quiet” culture is often conducive to personal career growth and financial stability. Consequently, cover-ups are occurring globally, riding on the technology hype eagerly marketed by RegTechs as the ultimate solution to the dirty money problem. There is a lot of money to be made from this very approach. Today, there are thousands of RegTech companies worldwide, with estimated market revenue growing from $8.7 billion in 2021 to $44.5 billion by 2030.

Investors keep pouring money in without asking for empirical and verifiable evidence that the RegTech claims have any merit.  It is said that “dirty money makes the world go round”, but what is never spoken about is that it happens at your expense, not at the expense of those who illegally earn it. The criminals win, the good people lose. And they lose badly. It is an unfair outcome that is set to get worse.

Behold the consequences

It would be naive to believe that the failed AML strategy, despite being in place for 35 years and backed by billions of dollars in investment, has no direct consequences on everyday citizens. While the focus is often on sensational stories of money-motivated killings, threats, and luxurious asset freezes, the impact on ordinary citizens seems too mundane to investigate.

The criminals win, the good people lose. And they lose badly. It is an unfair outcome that is set to get worse.

Yet, these failures have wide-reaching security, economic, and social consequences. Western banks, the trusted custodians, continue to serve as major conduits for money laundering, with innocent businesses and individuals unknowingly transacting with criminals and legitimizing their activities. AML practitioners face challenges in detecting money launderers, resulting in low job satisfaction.

Driven by high compliance costs, customers often face de-risking and de-banking, exacerbating financial exclusion and lowering the quality of reporting to law enforcement. Poorly informed policymakers misallocate public resources away from effective AML measures, believing the existing measures remain sufficient. The obvious knock-on effect is the worsening poverty, human suffering, and conflicts.

It can happen to your business

For some, it may be difficult to imagine the everyday scenarios this relates to. So, let’s examine a de-banking case involving a well-established UK small and medium enterprise (SME) with international operations, as highlighted by the All-Party Parliamentary Group (APPG) on Fair Business Banking in its 2024 De-Banking Report.

This company, which builds solar-powered water pumps in India and sells them to sub-Saharan Africa, received a letter from its bank notifying it that its accounts would be closed. The standard-format letter gave the company two months to find a new banking arrangement, without providing any explanation for the decision or a clear way to challenge it. This letter came despite the company having held accounts with the bank for nearly 10 years, with no borrowing or overdrafts, having attracted investment from organizations such as USAID and UK DfID.

Despite its impeccable financial history, the company’s finances were complex, involving ownership of a factory in India and partnerships with distributors in 30 countries across East, West, and Southern Africa, and Southeast Asia. This cross-border trading required reciprocal banking relationships in multiple jurisdictions, which the company had carefully built up over many years. Reconstructing this network in just two months seemed nearly impossible, and the closure of the bank accounts threatened the closure of the business. The company sought a reasonable approach from its bank but failed to receive one. It suspected the rejection was due to receiving funds from high-risk jurisdictions like Nigeria and remitting them to India, which could have been easily explained if the bank had asked.

The company’s chief executive described the situation as dealing with a “black hole,” where the bank seemed uninterested and unresponsive, making the process feel automated and devoid of human involvement. When approaching new banks, the company encountered positive responses until it explained that its current bank was exiting them for unspecified reasons, at which point the door was again gently closed.

In what is a rare case, the bank ultimately reversed its decision, but only after the company bypassed the usual customer complaints channels and, with the help of its local MP, wrote directly to the bank’s chief executive. The letter bluntly explained how the bank’s decision jeopardized a company supporting subsistence farmers in Africa. Even then, no explanation was given for the bank’s reversal of its decision.

The case highlights standard AML red flags that most automated RegTech systems would alert compliance teams to, and which would prove very costly to investigate and monitor:

• Cross-Border Transactions: The company engages in significant cross-border trading, involving funds transfers between different countries, which is often scrutinized for potential money laundering activities.
• High-Risk Jurisdictions: The company receives funds from and sends funds to high-risk jurisdictions, such as Nigeria, which are known for higher risks of money laundering and financial crime.
• Complex Financial Structures: The company has a complex financial structure with investments and operations spanning multiple countries and continents, which can make it difficult for the bank to fully understand and monitor the flow of funds.
• Third-Party Distributors: Working with numerous third-party distributors across various regions can complicate due diligence processes, making it harder for the bank to verify the legitimacy of all parties involved.
• High-Risk Industry: The company operates in the renewable energy industry, which is generally associated with poor human rights records in terms of worker health and safety and environmental impact.
• Potential Dual-Use Goods: The company builds solar-powered water pumps that may involve high-performance materials, electronic components, or advanced engineering techniques that could be deemed as dual-use capabilities.
• Lack of Borrowing or Overdrafts: While generally a positive sign, the complete lack of borrowing or overdrafts might have appeared unusual for a business of this size and complexity, potentially raising questions about the source of funds.

The de-banked SME not only benefited the UK economy but also served a noble cause by helping African farmers mitigate the risk of poor crop yields, which are highly susceptible to unpredictable and inconsistent weather patterns. Such weather-related uncertainty makes it difficult to plan for future food needs, exacerbating food insecurity in the community.

Without affordable irrigation solutions, poor crop yields would lead to unstable incomes, preventing farmers from investing in better seeds, tools, or technologies that could improve their yields and income. This financial instability would, in turn, affect the broader economy, as less money would circulate, prohibiting investment in essential services like education and healthcare and affecting overall development, well-being, and self-worth.

Are we to blame?

The blame sits with everyone. We are all to blame because whilst we choose not to hold policymakers accountable for the inadequate AML regime they promote – we indirectly allow thousands of similar case studies to unfold.

As many global industry reports keenly highlight, an estimated $2.9 trillion is laundered globally each year, with the UK and the US together accounting for 40% of all money laundering across the 36 OECD countries. UK policymakers often overlook economic crimes because they are not something that galvanizes the general public. This creates the illusion they do not have an impact on your wellbeing and security.

A lack of awareness by each one of us delivers a mere 0.6% of police officers in England and Wales to investigate fraud, money laundering, and other economic crimes. You might also be surprised to find that these crimes really do cost the UK taxpayer approximately £380 billion ($488 billion) per year – 23 times greater than the cost of more traditional crimes.

To maintain an illusion of control, policymakers have chosen to obscure the true scale of the problem behind the RegTech smoke screen they have created since 2015. Nearly a decade on, it is evident how the RegTech clever marketing approach has evolved into a highly problematic and risky investment.

So, while government-supported RegTech companies prosper, you, on the other hand, are increasingly vulnerable to de-risking or de-banking. Banks simply do not see you as ‘a valuable customer’ even though you likely bailed them out after the 2008 financial crisis and continue to fund their AML compliance failures. Still, we should remember that the banks are merely puppets to a much more greedy masters – the shareholders.

Looking forward

If history teaches us anything, it is the importance of being prepared for potential future challenges. However, in this case, many critical lessons have been overlooked. Just as government financial services regulators were unprepared to handle past crises, we should not assume they will be better equipped when the RegTech smoke screen eventually clears. A collapse could be imminent as the technology industry faces increasing pressure to demonstrate its value.

When it does, it would not be surprising if you, your children, your family, and friends will again be forced to foot the bill.

The views are the authors’ own and based on their own research. For a fully annotated version of the article see Vortex Risk website.