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Central Bank of the Future Conference Panel 4: Anti-Money Laundering & Financial Inclusion (Day 2)

October 3, 2019 1:16:26
Kaltura Video

Aaron Klein, Jennifer Shasky Calvery, and moderator Jo Ann Barefoot participate in the fourth panel for the Central Bank of the Future Conference. Learn more here.


We have one more panel before
our closing conversation.

And this will be our panel I am
Ellen financial inclusion and

I'm going to go ahead and
introduce our moderator Jo Ann

Barefoot you good afternoon.

I am paraffin but I know it's
getting to be late in the day but

we are going to give
you a lively panel and

I'm excited about the fact that I think
our topic is going to weave together many

of the things that we've been talking
about over the last day and a half so

maybe we'll be able to bring some
general perspective to it I am c.e.o.

of air of the Alliance for innovative
regulation and a co-founder of hummingbird

bag tech and
I am thrilled to introduce my panel and

1st to thank the University of
Michigan again Michael and Adrian and

their amazing team I
myself am an undergraduate

a law of the University of Michigan it's
just been a joy to be back on campus.

And I also want to thank
the Gates Foundation for

the incredible visionary work that you
do in this area and everything else.

I'm going to start by introducing our
panelists we are each going to make some

opening comments and then we're going to
have a conversation and my 1st guest far

to the right is Jennifer calvery my guests
have long titles and when you read them

she is the global head of financial
crime threat mitigation at h.s.b.c.

and also group general manager based
in London she runs a unified global

capabilities that leverages analytics and
technology to identify analyze and

investigate financial crime
risk to their h.s.b.c.

group in 60 countries she and

Aaron both have an amazing background in
both the public and private sectors and

Jennifer was previously the director of
the financial crimes and Foresman network.

So she was the senior person in the United
States running the anti money laundering.

Organization in the Treasury Department
prior to that she sort spent 15 years as

a prosecutor at the Department of Justice
dealing with money laundering corruption

fraud and
organized crime my other guest is

Aaron Klein Aaron is
the economic studies fellow and

policy director of the Center
on regulations and

markets at the Brookings Institution
prior to that he

ran the Bipartisan Policy Center
is work in this field and

before that he was deputy assistant
secretary of the Treasury for economic

policy in addition to having served on
the Senate Banking Committee staff.

Much earlier than you did so I'm going to
ask them in a few moments to as I said

give some opening comments but 1st I'm
going to set the stage a little bit and

talk with a wide lens about
the money laundering.

And as an issue in general and
specifically for financial inclusion.

Bill Gates famously said.

We tend to overestimate the change
that will happen in a year or

2 and underestimate the change
that will happen in 10 and

here we are looking at
this 50 year timeframe and

I think it's important
to as we ponder this

to think about the fact that as change
occurs over that long Sure Jack 3

it's not going to be a gradual
linear slope it's much more

likely that we're going to go through
a series of sort of hockey stick.

Changes that are going to catch us by
surprise there's a character in a novel by

Ernest Hemingway who was asked
how he went bankrupt and

he says at 1st gradually and
then suddenly.

So that's what we're dealing
with a big shift to a new world

that we know we're all working and
because finances digitising and

financial regulation is
going to do the same.

The m.l.

system that we have today I'll be
interested to see if my panelists agree is

broken and it's important that
we fix it and we can fix.

It there's a tendency sometimes especially
in the financial world to think about

financial crime and money laundering as
white collar crime or victimless crime and

it's really among the most terrible types
of crime on earth it funds terrorism and

it funds illegal trafficking and
weapons and drugs and

looted and tech with the youth and
endangered wildlife and

in human beings and the human
trafficking issue just to pick out one

facet of this to focus on the u.k.

Financial Conduct Authority uses
the numbers that there are 40000000 people

today in slave as human captives more

than all of the older history of the world
combined 10000000 are children and

a 1000000 children are enslaved for
sexual exploitation this is a crime

that's been growing and
that we need to figure out how to stop and

we work very hard to stop
it the industry the u.n.

estimates is that there is about 1.6
trillion dollars laundered every year and

that we catch less than one percent of
that with the tools that we use today and

that's despite spending tens of billions
of dollars a year to try to catch it and

despite all the efforts of
the kinds of people in this room

who are working from a regulatory and
Foresman standpoint to fix it.

If you'll get my presentation it's got
some more statistics on it but this effort

is not working we have a you know you can
and you can debate it at the margin but

we've got basically a 99
percent failure rate and

then beyond that and well it's not
just failing but it's also doing harm

it does cause financial exclusion and
makes it difficult for people to come into

the financial system which is the main
focus of the gates work in this space.

As it has been discussed all day many
people can't qualify they can't prove who

they are easily enough or can easily
get into the financial system and

have access to it and so there's been
a lot of work looking at the impact

of the de risking process
particularly what we've seen

in part from the United States and
fueling cutting off of whole

sectors whole countries and even
humanitarian crises and I've got a few

quotes here from some of the people
who have looked at these problems so

we ask ourself why aren't we doing
better if we're spending so much and

I think there's 3 answers to that the 1st
is that the forces of the financial world.

And of law enforcement and
regulation are using old technology and

the criminals are using great new
technology more and more and more.

Secondly we are using old
analog era identity systems

that have just created a terrible terrible
challenge with the Know Your Customer

rules it is important that people be
identified to come into the system but

whether you're in a developing country or
a developed country both models are broken

in terms of people being able to easily
to prove who they are and begin to think

about moving to a digital identity
system that could be both effective and

efficient and the 3rd thing that
causes great difficulty in this system

is that the forces for good need to
protect the privacy of the individuals in

the system and the criminals don't they
share information freely they buy and

sell data without any
restriction on it and

we on the other hand cannot easily
share data with each other and

watch where that has developed
to capture this point is

the slogan that it takes a network
to defeat the network and

we are not well networked in
fighting financial crime so

the thing I'm going to going to stay
focused on for a moment before I turn it

over to John and I'm looking forward
to a great discussion of this with.

When we get into the panel is that
there are a lot of people working on

all 3 of those problems and
the in particular people

are working on the 3rd one by trying to
evaluate the potential of privacy and

Hansing technologies to enable
safe widespread sharing of

information between banks and
each other banks and

governments a cross country borders and
so on and

this issue was the focus
of the hackathon this

year in July run by the Financial
Conduct Authority in the u.k.

to study the potential of privacy
enhancing technology is John was there she

and I were both at there similar about
a year earlier to study new types of

ways of limiting the knowledge that's
being shared if you think about.

If you think about wanting to buy liquor.

And having to hand your driver's
license to a clerk in a store

there's a reason that that clerk needs
even to know what your birthday is not to

mention all the other information
on your driver's license.

All he and or she needs to know is
that you're old enough to buy it and

so there's a lot of emergence of thinking
about can we just give smaller amounts of

information that solve the problem at
hand and not share everything the f.c.a.

invented this technique called
Tex Prince they are hack a thons.

They will tell you we are regulators so
we don't like the word hack and so

we call them tax prints and when they ran
the one this year they asked air our new

nonprofit to run a Washington
satellite site for it and

we had a very productive week
running the 1st ever u.s.

tax print focusing on an l.

issues we had a great turnout of large and

small banks and and
a great turnout of government agencies.

We had $65.00 regulators
participate in the u.s.

over the week in addition to a much
bigger event that happened in.

In London and
we had it Q noted by the f.d.a.

I see Chairman Yelena MacWilliams
who has been a real driver for

regulatory modernization in
the United States and she also was

a judge in the the program and
we are excited to say

that on Monday we are going to fin
send to meet with the director and

his direct reports with the teams
that were in the hackathon and

present their solutions to within certain
and model a new way of thinking about how

to accelerate change by not just having
working groups and conversations but

actually getting people together cross
discipline and writing some computer code.

And back to the point that these issues
are coming fast this is a quote from our

friends in the u.k.

who said they realize that if they don't
move forward given the pace of change in

today's technology world in effect
they'll be accelerating backwards and

that they need we need to move forward
even when we're not totally sure exactly

what it is that we think we should do so
many regulators throughout

the world central banks and other
regulators are working on these issues so

are ones in the United States and I just
offer this as something to think about and

then turn to Jan who can tell
me whose picture that is.

Barney Frank are former Congressman Barney
Frank of Dodd Frank co-sponsorship him

brilliant man I will say and this of
course as a picture of Steve Jobs and

we've been trying to ask the question what
would happen if you gave the same problem

if you had been able to give
the same problem to Barney Frank and

Steve Jobs they would approach
it completely differently

can we begin to create regulatory
innovation models that are getting

the best of both of these kinds of
thinking combined at the same table

working on the same problems at the same
time I'll just mention very quickly I am

a senior fellow at Harvard I have a series
of papers coming out on these topics and

I have a podcast show called Barefoot
innovation on these topics which I

commend to you I had wanted to
show you a video from the f.c.c.

and we weren't able to
do it technically but

this is one slide from it I
urge you to go to the f.c.c.

its website and watch the video of their
7th text print the one that they just held

to talk about what they think they can
do with technology to do better for

anti money laundering and the fairness and

efficiency both of the system so
with that I want to turn it over to Jan.

And she is going to talk to us for
a little bit and

then Aaron I think you
have some slides as well.

Gente Thank you Joe And good afternoon
everyone I'd like to thank Adrian and

Michael as well and your team for
the kind of a patient to be here today

I did not go to the University
of Michigan but

I did grow up about a half hour away
from yours so it's nice to be home and

I'll see if I can even get a little
bit of my prior Michigan accent to

come out during the course of this
discussion is mostly lost but we'll see.

So as Joanne mentioned I started
my career my professional life

as a prosecutor at the u.s.

Department of Justice and
towards the end after 15 years there

became an executive leading prosecutors my
last job at the department was heading up

the organization that was in
charge of money laundering

prosecutions recovering funds from
things like kleptocracy abroad but

also prosecuting financial So institutions
that failed to have affective anti

money laundering programs in place or
engaged in sanctions stripping So

from that position I moved over to
sent to be a regulator and to be.

Part of an organization that collects all
the data that banks file all those reports

that banks file those go to fins and
they're the financial intelligence unit

who did that and
then moved over to h.s.b.c.

or where I work on the same
issues I moved to a just b.c.

and tell people that after
20 years in the u.s.

government someone who cared a lot about.

Keeping community safe that I thought I
could make a bigger impact on the world

for good at h.s.b.c.

if I could help them to
be effective at that

at that aspect of their responsibility
than I could even in the u.s.

government and I have to say that hasn't
changed now after 3 years at h.s.b.c.

although it does occur to me that
there is now one position left

in the anti money laundering financial
crime space that I have not done.

And that would be to actually launder the
money or help criminals to launder money

so I can keep that out there as a possible
future job opportunity but if for

now focus and I'm still trying not to say
on the right side of the of the law so

you know listening to the discussions
throughout the last couple days it occurs

to me that as we talked about
the financial crime agenda

in the context of financial
inclusion it was so

much of the conversation has been
about how it is a hurdle to or

obstruction to that and that and
again that goal of financial inclusion

and I can't help but wonder and have given
quite a bit of thought to doesn't need to

be that way is that is
that right is that a fair.

Assessment 1st of all and if so
does it really need to be that way and

so I thought I'd just spend a few
minutes talking about that that question

before we go into the over to Erin and
into the broader panel.

So is it an impediment.

I think it's probably fair
to say that it is and

maybe I can spend just a moment explaining
why these from the perspective of

a large global financial institution were
in more than 60 countries we have more

than 30000000 customers we
are expected to and want to.

Make sure that we don't have criminals
exploiting our financial services to

harm our customers in our communities so
that can be everything from fraud to money

laundering to sanctions to tax
evasion corruption human rights

abuse human trafficking all the kind of
ills we don't want to be exploited for

those ends but
we need to try to do that by monitoring

transactions and understanding the
individuals with whom we are who are by.

Banking and with whom they are transacting
our customers are transacting So

let me try to put a little bit of a color
around that on a monthly basis we

screen 658000000 transactions
through 200000000 accounts.

When we get a list of 10 names and

asked you know do you these are 10
names of individuals Do you bank any of

these folks will tend to come back
with thousands of hits on those

10 names most of which of course
are are not the actual 10 people and

that's if we get 10 names and
not hundreds or thousands and so

the stale of trying to do
under the best of intentions.

A good job at this is just daunting and
the way that institutions

have done it today is not
particularly effective and

this is across the board it's the system
across the board the way we try to perform

these responsibilities today is we
look at transactions individually and

we try to understand if they
are suspicious of financial crimes so

when you have that many transactions to
start a transaction and screen that using

rules based systems means that the alerts

to actual real suspicious
activity ratio is very low so

in the single digits most
of what we do is clear

noise out of the false
positive rate systems and

that's just in the am L.-Space we have
separate systems where we look at

sanctions and clear out all the the false
positives around name screening

that we're doing we have separate
systems that focus on fraud and

try to do the real time transactions and
on screening of transactions to

understand if there is fraud and so
we go through all these different.

Systems generate large amounts of
false positives ultimately get to

reports that we do provide to government
to help keep communities safe

in Europe I've seen some studies saying
that only about 10 percent of those

are actually used by law enforcement in
Europe and we've all seen the statistics

that only about one percent of criminal
assets are actually confiscated each year

that's not to minimize some very good
work that does come out of that and

there is some really important and
great work that comes.

In that in the financial crime space but
it's I don't think it's

we feel it's terribly effective at
achieving the goals we wanted to achieve

so there is a large conversation
a wide recognition I think globally

amongst regulators amongst industry
that we need to do something to

achieve the ends that that
that the financial crime

mandate is seeking to achieve and then
when you put that next to what about the.

Negative impacts it has on financial
inclusion how do you think about that so

the reason that we see
the negative impacts

on financial inclusion is because Let
with a blunt system like the one I just

described rules based very blunt tried.

Suspicion we're not very good at finding
it which means that if we're operating

in a high risk jurisdiction and
high risk products high risk clients

we have run a very high potential of
missing the real financial crime and

we face the very real possibility
of having a Forstmann actions that

levy fines over a $1000000000.00
on institutions and so

trying to understand the risk
of their end up with

financial institutions all making and
assessing the risk in the same way you see

financial institutions all things the same
jurisdictions the same products the same.

Classes of customers are risk and
we're not sure how to manage it and so

when everyone leaves that
jersey fiction at the same time

we end up with the the risk in debates
with the financial inclusion issues.

And so
that's that's where we see the impacts so

then we turn to the question but
does it have to be that way.

His and I don't think so for
many of the reasons and the things we've

been talking about today the opportunities
that technology provide for

us I think we can go a long
ways in being more effective

at identifying financial crime and
thus being far more.

Targeted in our actions.

Which number one means we don't have to do
you risk entire categories of of clients

and secondly can give us the confidence
to go into jurisdictions or

take on clients that we haven't
had the confidence in the past

because we weren't sure we could actually
identify risk when it occurred there.

We're doing a lot of thinking certainly
at my institution but others as well how

exactly do we get from here to there and
we're focused on looking at.

Taking all the data essential at
our disposal that we already have

looking at financial crime holistically So
instead of doing it in silos

fraud versus sanctions versus money
laundering look at a customer or

their counter party and try to understand
the probability that this customer

poses a significant financial
crime risk to us today updating

that view dynamically as we
get in new data each day and

being able to understand down
to a very high definition view

what is the probability that someone
poses a financial crime risk and

you could imagine if we're able to do that
really zoom in almost like a hammer and

a high definition camera in and understand
where there is risk and pin point that

risk and take the appropriate actions it
means that we could also zoom out and

understand what a risk is of a product
of the jurisdiction of a sub sub

sub jurisdiction and
be much more able to go

into places that we haven't had
the confidence to go into in the past for

a big bank like ours where our business
model is not mass retail at the at the.

At the lowest social and
social economic and it doesn't mean that

we're all of a sudden going to move into a
different business model in that sense but

what it does mean is that several
of the whether it's been tax or

traditional financial institutions
who do operate in that space and

eventually need access to
the international finance system or

products that were willing
to go into those Institute.

At least have the confidence that we would
be able to do that so I do think there in

that there is an ability both to improve
our financial crime outcomes make our

community safer keep them safe
while at the same time making it so

that financial inclusion and financial
crime are mutually supportive and

not at odds with one another and fact it's
fascinating to hear some of the ideas

the policy ideas around financial
inclusion are some of the same ones that

are needed to implement the vision
that I just outlined so

things like a digital identity
are absolutely at the core of being

able to do some of the things that
I'm talking about as is information

sharing in the issue of data and
sharing of data across border

within an institution between
institutions with government but

that issue of information sharing and
data is absolutely at the core of this.

The only one of it we usually
typically at ages b.c.

we say there's 3 things we need it to
really go in this direction digital

identity information sharing and
then the only one I didn't hear come up

as part of a financial inclusion
discussion is central registries for

beneficial ownership that one is more
aligned to the peer financial crime

discussion that I think
the financial inclusion but

the fact that we cross over on 2
out of the 3 major kind of policy

solutions I thinks is is just indicative
of the fact that where there's more in

common between these 2 policy goals
than there is in tension between them

I guess the last thing I'll say before
before turning over a year Aaron is.

Also trying to think I guess as I
was listening to the discussion

over the last couple days what
the significance to central banks

might be to the extent that
the central bank of the future

offers financial services
such as a stable coin or.

In that we're really working
more on the payment rooms and

I wonder how much of the risks
that I have to manage every

day all of a sudden become your
reality as well trying to deal with

all of the cyber enabled the fraud
looking at things like the swift

attacks on the bank of Bangladesh does
that become your daily reality if you're

now running the payment systems what about
you keeping the financial cry criminals

from exploiting the products and
services that you're offering so I I

think I would leave you with be careful
what you wish for on that front and

maybe it's a new career opportunity as I
don't want to have to become a criminal I

can come help central banks and protect on
that end but I'll leave it there and turn.

The light to.

Us so.

Let me just start by thinking Adrian and
and Michel for

having me and for
putting this great event together and

think the Gates Foundation an echo
a comment Michael made last night about

the fantastic diversity of thought
background experience geography and

gender that's been represented at this
conference it's really something that's

quite impressive and
I'm pleased to be a part of it.

I also let me let me start

by saying one thing that I'm excited
about about a central bank of the future

is that central banks tend to be if not
dominated by economists have a strong

voice from economists economists
hate an index numbers.

The current $10000.00 threshold level for
currency transaction

reports is hardwired into law and is on
the index and I think it's very useful

I mean I mean this graphic when I was
at the Bipartisan Policy Center and

sort of delving into this to really think
back about what this system was designed

to do when it was enacted
in the late sixty's and

why the system is broken per joins
question I'll answer it yes the system is

broken one of the reasons the system is
broken is because a system designed to do

everything kind of does nothing when this
system was designed in the seventy's it

was designed to catch tax cheats and
organized crime moving a large

sums of money through the financial
services system $10000.00 I usually like

to focus that you could buy a fully loaded
Cadillac in cash and not trigger c.t.r.

today there's not a single car but

since we're here you could have walked in
the University of Michigan in 1902 and

paid your entire annual
tuitions at the average.

Public University today if
you're out of state you can't

at Harvard you could have walked in and

paid your entire annual tuitions any
of the average private university.

In cash no c.t.r.

in part of this is because over
time this is Tim has been bootstrap

to catch other types of criminals in the
eighty's it was moved to catch drugs and

drug money it was then again
changed after 911 to catch and

focus on terrorists who use
the financial system for

radically different purposes it radically
different dollar amounts and so you

know part of this question then becomes
who commits I think Jen put it right

the real financial crime so let's look at
it financial criminals who went to jail.


The 1st one is Denny Hastert who's in jail
for anti money laundering particularly for

structuring the actual crime I
think he's made to go to jail for

was molestation of a child while
he was a wrestling coach but

the statute of limitations for
that was a long time ago and

the crime that he was easily proven of was
a mound structuring since I'm in a college

audience I'm trying to to to relate to the
current generational element more and for

those of you that knew the Jersey Shore
Mike The Situation was the smartest

member of the Jersey Shore so he knew that
there was a $10000.00 reporting limit

he was also part of the Jersey Shore's so

we thought if he continually put
$1999.00 into his count from d.j.

gigs that he wouldn't have
to report taxes on that.

Now they are financial criminals
Al Capone was a huge criminal the gravity

of what Al Capone did is stunning He
came along before and now but obviously

was brought in for tax evasion which kind
of animal was essentially a tool to catch.

And so but are these the people
are these the high priority out of

the hundreds of millions of transactions
agenda organization is looking and

the scarce amount of resources we can
dedicate Are these the people that we want

to use the ammo regime and
task the central bank to commit

to prioritize because there are criminals.

So here's a somebody else
who's been snared in am out.

One I thought in the afternoon we
wouldn't mind looking at at Leo But

beyond that he'd gotten some money from
a Malaysian film financier whose assets

were eventually sees and
you can kind of go through the story and

realize he had nothing to do with this but

ironically enough the Wolf of
Wall Street may have been financed.

By criminally launder funds which
then when you go into asset and

part of the reason I pull this up here
is because I think there's a thesis

that often goes unstated in m.l.

reform that conflicts with
the modern reality of what it is and

how it actually works on the ground it
gives some deference to Gen On this to

agree or disagree with me and

you have more experience in it but
the thesis kind of goes as follows

criminals are operating in the bottom
of the ocean which is super dark and

hard to find criminals generate financial
profits particularly a lot of the heinous

crimes that Jo Ann was talking about human
trafficking cetera that profit like money

kind of bubbles up to the surface and
when if you could find the bubbles

because it has to go through the financial
system to be transmitted particularly for

international crime which began
with the mafia returning money or

drug cartels expropriating money
out of the United States but

either way the money needs to move around
borders that then you could find the crime

bubbles the money would be easy to find
then you could trace it down the water and

catch the bad guys what I think
instead we've actually ended up with

is more of a system where law enforcement
kind of finds bad guys on their own.

And then often kind of queries this
our database to look at the bubbles up

because at the end of the day that's
an easier case to prove Joanne and

one of our papers had a nice quote from a
former law enforcement official that said

you know one of the things is you
tend to prosecute easier cases.

As the statement comes.

And it helps kind of pause this other
question why are we only catching one

percent of the money right the money isn't
isn't necessarily where we're looking but

I mean these are quote unquote
real financial criminals

here is a graphical thing of just
the amount of suspicious activity

reports filed by depository institutions
after Sarbanes of the patriot act of

$911.00 we expanded the categories of
filers but so this tries to hold for

that constant you can see this radical
increase particularly recently from

2015 to 2800 even if you say that's a when
you're transitory it's going up about

3040 percent there are a couple theses
one there's that much more crime going on

too there's a ton of
overreporting 3 there's a lot

we were never reporting the right amount
to begin with and there's some tension

between these theses But let me offer an
alternative and this gets back to my 1st

point if you do everything you do nothing
well if you're looking for a needle in

a haystack we've really succeeded in
throwing a lot of hay on the stack and

the question again becomes this
prioritization of quote unquote the real

financial crime I like the way
the that you set it and

ask yourselves what is the central bank or
somebody else

who's in charge of monitoring am now
what crime should they prioritize

using their limited resources
in terms of going after folks.

And I want to go in zoom in on one type
of financial crime that's exploded

since 2015 that is so
prevalent I think there are 4 operations.

Within walking distance of this
building the state of Michigan like.

Many other states the point where one out
of 5 Americans live in a state that have

created state licensed cannabis notice I
choose my words carefully here it is not

legal cannabis the sale cannabis
is illegal under federal law and

a distinguished law professors far beyond
me have pointed out that the theory of

state notification is not as true in
cannabis today as it was when James

the Calhoun put forward in the United
States it is a federal crime and

the financial institutions
are processing the sale of cannabis

that is federally illegal it is
a crime are these the real financial

criminals are SARS the most effective way
to catch them I knew the number of stores

around here because there's a really easy
way to find them it's called Google Maps.

You if you really want to go to
the state capital you can go and

get a registry of all of the ownership
you mentioned beneficial ownership

which is a critical issue we had
an event on that and Brookings.

Carolyn Maloney has a bill that just has
a lot of bipartisan support and I think

it's important but this is actually an
industry where the beneficial owners have

licensed themselves at the state level and
you can walk in any state capital and

get the beneficial ownership registry for
these activities easier than for

anybody else are filing SARS
really the most effective and

efficient way and by the way here's an
interesting fact the state of Michigan is

driving significant revenue from this
which they're deposited often in cash

is a state of Michigan
committing a financial crime.

Colorado's deposited a $1000000000.00 in
revenue since 2012 from their taxation and

licensing fees etc from cannabis
ironically state local governments

are exempt from currency transaction
reports or you would find a lot of these

but on a broader level if you replace
the state of Michigan with a large

private person deriving
revenue from contributions

of the sale candidates when they be
a financial group what does it mean for

a state government to get a Sar filed by
their bank because their bank by someone.

And so I kind of flagged this because
it also to me illustrates this question

of we're using our am out to
go after the wrong folk and

when you preclude cannabis from banking
which happens a lot what do you end

up with you end up with cash on businesses
which attract large amounts of crime by

excluding them from the financial system
you have created the a lot of crime

that the voters are attempting to
mitigate through decriminalization

this is just as true for cannabis as it
is for other people who seek to access

the financial system and it gets to
the final tension in my in my talk which.

Revolves between this goal of
using the financial system to

catch bad guys which is an inclusive
concept in which you actually want

the criminals in the financial system so
that the financial system can report.

Right that is a more effective way than
having the cash carried physically on

airplanes and having t.s.a.

try to find the physical money versus
the idea of excluding the criminal systems

because you don't want the criminals to
ride the rails of our financial system and

be able to benefit and conduct crime
more easily because of banking and

there's an inclusion exclusion tension in
a paper I wrote with with Michael Barr and

Karen Gifford we kind of take the I
think belief that there is a win win

outcome for enhancing financial
inclusion through a m.l.

reform that has to kind of
core elements behind it

one is more fully leaning into
the idea of an inclusive financial

services sector which then provides
information to allow more efficient and

effective law enforcement to catch
the real financial criminals

at the same time by enhancing
financial inclusion reduces

the real crime that occurs
due to financial exclusion

right because in a muzzles hierarchy of
crime it's not clear to me that financial

crime is better or worse than robbery
assault other types of effect.

In this situation.

You can have tremendous savings of
the amount of money spent tracking

other types of financial crime or trying
to exclude people from the system and

Clouseau of that cost savings
into more effectively and

efficiently serving lower cost consumers
one of the earlier panelist talked about

the radical decrease of cost of onboarding
customers due to technology from

a m l And the final point and I'll close
my presentation with this which is that

most of the national financial
regularly will not regulate but

organizations fat if I
as global coronations

have a huge role to play in this
because they can set standards

that allow individual
countries to harmonize and

prioritize crimes in criminal activity
to to to move Central Bank so

as I think of what the central banks
of the future will be plural I

hope they will be working together with
a common set of objective standards and

goals in both financial inclusion and
am now and

have those divisions and
core objectives more intertwined

because a financial system that ng clued
more people is a more effective way

to reduce total some crime which is
I think the policy purpose of all of

this thank you thank you
thank you thank you Alan.

So I'm going to put you both on the spot
I mean throw the script that we had

out the window.

And let's just talk because we already
answered the 1st couple of questions we

have had thought about outlining.

So the bad news says the system we
have now is not scalable there's

no possibility that you could spend
enough money to scale it up and

make a dent in the problem the good
news though as the engineer said it so

well is that more data
can be a solution to this

if we can figure out how to manage
it safely and accurately so

what I want to ask you both is for
starters if you.

Could do one thing on the policy side

thinking of yourself as a central bank of
the future that had the ability to reform

the system and that would impact
financial inclusion as well

as the crime what would be the most
high impact thing we could do.

Well I think I mentioned 2 already but

if I had to pick one of them
it's information sharing.

And having an able lean those in
the system who need it regulated

institutions government to have the data
at their disposal to understand the risk.

And sharing that information shared
cross border as we look at the world

becoming more and more fractious
more disputes between trade and

other issues we see it playing out in the
data realm as well and we see a rise in

data nationalism I think that undercuts
both the financial inclusion and.

Financial Crime agenda.

So to do that what is how would we go
about that how can we share data more

widely and safely so
Aaron referenced the f.a.


already and international standard setting
body is a natural action task force.

And so I should have been talking an
acronym for you Don tried until right all

right and I'm I will define all accidents
for now so it's the international

standards body for anti money laundering
and countering the financing of terrorism.

And pretty much every nation in Acts
into law the standards that they set

they have put some things out in
guidance around information sharing but

probably need to strengthen and I think
central banks play a role in acting

as that are included in that guidance and
hopefully recommendations

to an information Aaron so that I mean.

This is tricky because
there's some kind of

lowing fruit solutions like
beneficial ownership in the u.s.

which is generally but
I'm not trying to think think big

I was motivated by the morning to you know
to think think big I would try to solve.

The identity issue I would try
to have a globally excepted

easily accessible form of identification.

For this which I think would
simultaneously do wonders for

financial inclusion in terms of lowering
cost to operate in reducing that long

list of barriers and simultaneously
reduce the cost of amyl compliance.

Systems as well and I think that's
a really deadly dish difficult

problem I mean I'm reminded
you know taking a provincial

view of the United States your research
has no federal benefits patient system

beyond a social security number which I
think is somewhat easily accessible for

all of us in terms of hacked and
leaked information and for

the 38 percent of Americans who've chosen
to get a passport your passport i.d.

for the other 62 percent of
Americans who don't have a passport

that's it we have an identification
system at the state level

which is just a world of
problems if you talk to.

Those the physic a that fin tax that and
to the in the sophisticated banks

to they will tell you that
the the rules that we have for

identifying people also name
address social security or

other government issued numbered and
so on that doesn't tell you anything

you have you have to comply with that but
then you have to go and

actually gather the data to figure out who
whether people really are who they say

they are and where they I mean it's
just it's a relic and it's it's.

Putting together someone's identity so
again for a bank in more than 60 countries

and we often will bank someone in more
than one country we often don't realize

that we're banking the same person in more
than one country once you put together

the difficulties of identification and
the elements that we

piece together to to understand
identification in data privacy laws we can

even understand our own customers in more
than than one jurisdiction you can imagine

the frustration when you bank with us in
the us and then you come to London and

want to talk to us and
we don't know who you are because

we don't even understand you bank with us
it's getting better I think it's you know.

We and
other institutions are doing more and

more to piece together but
it's nowhere near where it needs to be and

then when you try to put in the ability
to differential crime in that

order or
the ability to have a ball inclusion and

bring costs down it's not
what you would invent

I think that it has digital
id on their agenda this year.

And China is chairing it this year so

I know there's a lot of focus on whether
there can be some progress on that front.

Where the.

Use of Vishy in learning and
artificial intelligence come in to solving

this problem we have
all this data we can't

we don't know what it's telling us there's
too much of that it's an accurate nominal.

How do you how are we going to use machine
learning so we are thinking about it and

we do use different elements
of machine learning now.

Amongst the different branches
of artificial intelligence

machine off look at the machine learning.

All the natural language processing that
is probably pretty important as well but

in that space when we're trying to
understand if a customer poses a financial

crime risk we centrally want to know
do you have any indicators red flag

indicators that we know and governments
have told us are indicators of you being

a criminal so we want to look at that
we want to know how is your activity

changed over time and are there any
anomalies that would suggest you're

married geisha financial crime we want to
know how you compare to your peers and

if you're an outlier if you're a flower
shop do you have a lot more money

moving into your flower shop than any
other flower shop kind of question and

then we want to understand everyone you
transact with and whether that tells us

anything about your risk to put all
of that information together and

under with an overlay of what's the
probability that you pose financial crime

risk to us today we start needing to bring
in machine learning to be able to do that

it's skill to do it dynamically update
number one to process the pure volumes but

you don't have to have a machine
learning to solve the volume problem but

you do start doing those volumes
around unsupervised techniques

where you're looking for anomalies and
outliers and so we use and

are increasingly looking to use
machine learning in those contexts

which means that a big issue for
us these days is that ethics.

And watching what regulators and central
banks and other governments are putting

out there on the topic of data ethics I
think Singapore's put out some interesting

guidance in that respect and
developing our own internal principles and

practices to make sure that we're
comfortable doing the things we do and

I want to do with data.


All of a little fun and
kind of raised my concerns and flags on.

An m.

issues in part because the I think there

are 2 core issues one is what
is the machine the machine

what is the machine trying to
accomplishing goals right and m.l.

are fantastic at finding new ways to
accomplish a mission that wouldn't have

occurred to you or I or a person right
go was going to fix the movement go.

Famous ai the game.

Moves many things right on the other
hand the machine beat him and.

On the other hand we don't know what
we want to accomplish out of a out of

balance right when you said the flower
shop the 1st thought that came to my mind

was the slide behind me which is I
know exactly who's selling flowers and

generating an inordinate amount of money
so one selling the cannabis flower.

Everywhere I go you know that we don't
have a system they could detect and find

a lot of things that maybe you know maybe
they could find a lot of Denny Hastert but

they could potentially target those
areas human resources to that question

well perhaps we're a different way you
could generate a tremendous number of

false positives actually right and so that
would improve the false positive front and

but I take your point on the priorities so
if you if you start to have

an ability to find more financial crime
faster and to understand in more detail

what types of financial crime you're
fine now you have an ability to take.

Direction and

pointing from governments that say you
know what we only care this year we're

going to focus on these types of financial
crime give us anything that you bet.

But let me let me for football
a little bit in terms of proxying and

discrimination in inclusion issues right

you know if you take as a given
people from a certain background or

national origin or
last name except for our higher risk.

Right but you at a financial institution
would never purposefully discriminate or

have a process by which you say well we
don't really want that kind of person

because that's clearly an ethical getting
back to your data ethics point now the air

I am out says no no it's not that kind
of person it's a person who subscribes

to this you know totally weird thing or
eats at this restaurant right so

like Suppose you're really concerned
about Somali people in Minneapolis and

you know you're trying to figure it out
and it comes to shop at this kind of

grocery store and the ai flags is
being correlated with being Somali and

maybe the person sitting behind
the desk on the other side of the world

recognize that or maybe they don't and the
institution starts to say Well look our

customer base it's causing us a lot of
cost as this can think from a male so

was shy away from us not target our
ads for services to people who shop

at these stores so that's I think
you're right does come really

back to ensuring that we're thinking
about the ethics in this both in terms

of bias on the front I think
you're speaking about this so

what elements do you know be used to make
a decision can you explain the decision

was that was made you have explain
ability around your models and

then the outcomes regardless of whether
you could do that are the outcomes still

in some way by Mr discriminatory which can
you can have that test the independent

backtesting to look at in our discussion
questions in the preconference

yesterday one of them was would
we support having central

banks acting as the k y c You
know your customer utility.

And the central repository of
data that could be adjusted.

So here's where due to weather
we have central banks came.

Up so that there's no question.

Whether we could do it.

Should we should really I think there's
a lot of positives actually so.

The danger for central banks
is the one of the many is the.

Question of having to manage
some of those risks of taking

that service responsibility working
through the conflicts of offering

a service while also being for central
banks that also are supervisors and

regulators but those can be dealt with and

thinking about I go back to one of
our speakers earlier today saying

how many tasks do you want central banks
to take on should they be more narrow and

focus should they take on several tasks
I think those are some of the policy

risks and challenges to think through but
could a central bank do it would it be

helpful to have a centralized utility in
this sense a government backed central

bank take on that responsibility I
think you could show some promise so.

I would I would tend to agree with all of
those points I think there's a lot to be

gained from it particularly as
it as it would lower costs for

industry as a stressed and central
repository I do get a little concerned

about the tension that Jennifer
mentioned about the size of mandate but

I also get concerned with another
tension which is independence

the central bank of the future to me
needs to be an independent entity.

In this conduct of monetary policy and

if you're independent in one sense then
you tend to be independent in others and

if I'm a registry of all of my
customers and I won't use the u.s.

although I think one could easily see the
a portability but suppose I'm in England

and suppose this is a dystopian future
like that show yours by yours and.

You know they're trying to find all
the people who illegally stayed

after breakfast.

And they want to go to
the Know Your Customer or positive or

even most the people who legally state are
probably engaged in international money

transmission because they stay because
that's where their job was in their family

and so do you know what happens
when the Immigration Department

calls up the central bank and
says Give me your list

How independent is the central bank
how independent Do we want them to be

from an m l national security
government perspective and you know

communities are smart if they know they're
getting a bank account leads to potential

threatens they'll leave the financial
system and that's a tension.

I would love for and I'm going to open
this up to questions and secondly.

I think that's a lot of interest and set
of using an essential that a utility for

k y c to adopt what people
are calling the traveling algorithm

leave the data decentralized and
and create an algorithm that can go

analyze it with in an encryption
format keep it anonymized so

that the machine doesn't
need to see the words.

That we need to see to look at information
so you could potentially encrypted

in a way that it doesn't create a central
honeypot but there is a bill a day to go

look for patterns of financial crime top
type ologies machines often if they have

enough data can recognize human
trafficking looks different from jugs and

so on so I want to ask you about
blotches But I want to open it to the.

To the group 1st and

if we don't get questions I will
ask you about the auction Chris.

Christie going to get Foundation So

before you enter philanthropy I was on
the front lines writing enforcement

actions against institutions that
had failed to comply with u.s.

laws and regulations and into my new
laundry and often it wasn't necessarily

that they had actually laundered money
it was that they had fallen afoul of

the standards that were specked it and
those standards are quite high and

demanding if we know that things
are not working that well

what in your minds are the biggest blocks
to reforming them is it that there's

a small group of people who think that
actually the system works well and

we need to push it harder or is it their
fear of doing something different or

are we afraid to think about new ways
using using technology and so on but

what do you think are the biggest blocks
and that we should be focusing on.

I think at the moment a lot of
the energy is focused around

optimizing the current way of
stating regulatory compliance.

Which is not focused on an outcome
of identifying financial crime but

is focused on an outcome of doing
what my regulator expects sheep.

So I think we need to
really change collectively

our mindsets around
focusing on outcomes and

using the technology and
opportunities it provides to

improve our outcomes all
together on the kind of

across edges across the whole system
there's the fear of the change fear of

the unknown What do you mean data has
to be put in a cloud to give you the.

Processing power to enable this kind
of compute with sure how we feel about

cloud yet what do you mean you need cross
border information sharing we're not sure

how we feel about that what is this Ai of
which you speak I'm not sure I understand

how it works and I've heard really
scary terms like black box and

unsupervised learning and

that doesn't sound like anything
that a regulator should be behind so

there's a bit of a fear of the unknown I
think there's a need to continue to to

educate and to focus on what is
the outcome we're truly trying to achieve.

So I had this weird.

Experience I was discussing this issue
is somebody from law enforcement I was

going on and on about the rise in SARS and

he said well you know what your promise is
so each of these is costly and there comes

a point where the marginal cost exceeds
the marginal benefit right I mean you know

that's all an economist says repeatedly
when posed with any question Norm or

is it the marginal cost
there's no cost to this and

I said you you know and all of us again
where do you think you came from is a lie

doesn't cost you know it's in the database
it's sitting there I can use it whenever I

want it said no cost to me the more
things in the database the better and

that to me was the fundamental
mindset problem which was from his

perspective there was no marginal
cost to additional SARS and

from my perspective there's somebody out
there who wasn't included in the financial

system because the cost of on boarding him
was greater than the expected economic

return that that person's
account would generate and

I would add to I think you're
exactly right in speaking with.

Regulators and

all regulators former colleagues now
as a banker right on the other side.

Hey there's just a lack
of trust when banks say.

The amount of money we're we're
spending to produce this are isn't

getting the outcomes yes we'd
like to spend less money but

let's not even start there let's just talk
about putting money toward something that

would have produced a better outcome
more effective outcome there's so

much suspicion as to the motivation
of the financial industry

that there's a fundamental mental
failure in trust between 2

major players in a system that are meant
to be working towards the same goal so

there's certainly a challenge there to
overcome one of the things I covered in my

Harvard papers as this is the single
most expensive compliance area and

the most dangerous for
the industry so it's a huge deterrent

if that be the industry is not
willing to take risk in this space and

they're not willing to cut money even
if it might be more effective for

fear that the because that's having said
that I'm I think it is going to change

I think there's a sea change
sweeping over us with people

realizing that there's better tech
we had questions questions over here

to so.

Your point about what kind
of crime are we trying to.

Solve for.

I actually want to hear you
to answer that question.

I recognize this isn't necessarily
a central bank question.

But I want to posit the idea that if
what we want out of this is not just to.

Reduce the amount of or
solve the amount of financial crimes but

we want to figure out how to do it across
border fashion because it's going to be

more efficient and it cetera it
seems to me that stopping terrorism.

Is kind of a good.

One to think about and it's part of
the it's I would say the big reason why

by at least in the us we've ended
up where we've ended up right but

terrorism is not it's clearly not a u.s.

only problem and so I'd like to hear
your perspective on that but also if you

Jennifer just from your perspective you've
also been saying that different kinds of

crimes financial crimes have
different kinds of patterns and

I'm wondering whether you think that
the way that SARS work today in

the $10000.00 limit and all the rest of it
if that's actually effective if we said

we want to we want to focus
on reducing terrorism and

what we need to do if that were indeed
the target what does that look like in

terms of a trauma transactions perspective
and behind the scenes perspective

care terrorism fundamentally
looks different it's changed.


We had it time period where you had.

Financing and.

Big finances of terrorism that
came external to the group

then you had groups that
took over territory and

earned their own money from
the populace and took money from

by breaking banks etc breaking in
actually taking cash out of banks

which is a fundamentally different funding
model and then you have the problem of

of terrorist fighters people who
travel all around the world to engage.

In terrorism and so

each of those has a different kind
of financial footprint to them.

Generally speaking if I was going
to talk about what's the best

how should we change the c.t.r.

to help with with terrorist finance
I would say go to a 0 threshold and

vote and give international
transfers at a 0 threshold

provide that data it's something that
already happens in Australia Canada

has a 1000 does the same thing but
has a $1000.00 threshold but

I want to say a bacteria initial question
is is that in fact the top crime we should

be focused on it's it's scary it takes
lives it has political impacts but

it's pretty low incident what about fraud
fraud hits almost everyone about elder

abuse and people who lose their money
through fraud that's high volumes of folks

who experience that should we focus
there instead what about corruption and

grand corruption in where you have
nation states that fail because

high level political officials loot
the country dry and move that money abroad

should we focus our efforts there I
think there's a number of good places.

But I agree you can't be
everything to everyone so

if we really want to make an impact for
good I do think it would be helpful to

have governments prioritize I
think central banks can play and

stimulating that conversation because
you need to bring together policy me.

Enforcement Security Services
regulators into

a conversation to be willing
to set forth a combined view

of what the priorities are which is
you know never an easy thing so.

Corruption is valid I debate
I think the next person and

to my slide show is palm in a fort.

Hood I think 9 shell companies in
Delaware without beneficial ownership and

also among the other crimes that again one
of the reasons is such a powerful tool for

law enforcement is whatever
you think about what manna for

did the easiest crimes to commit convict
him of were the ones where it was just

very very clear illegal use of money is
what we have disease money laundering

has become a tool for almost all
generic forms of law enforcement for

all wide set of potential crimes
because it is far more cut and

blank than things about tendon and
other areas elder abuse is a big deal

I think I had a star filed on me for elder
abuse this year which was a in the last

sort of point in a totally separate
story but I'm glad they filed frankly.

Kind of waiting for somebody to call me
and investigate the situation they tipped

you off yeah yeah you know that and
tell you I can't be positive but

I bet if you go where the database
will show up in it and

that's actually the proper one of the
promises that fit my category of crimes

that have been occurring but nobody been
reporting I don't think I think the rate

of elder abuse was constant through that
time horizon yes demographically we've

had an increase the number of elders but
there's been a hockey stick of fire.

Ling's on it that being said.

It's unfair to ask me to answer my own
question but I will which is that number

one is terrorism but I think Jennifer's
point is right terrorism isn't

necessarily 911 I think the same
Bernardino shooter could have

been found in a traveling if the traveling
outer of them were running around here you

know each of it here's a person maxing
out all these weird sources of credit and

then wiring all this money
$1.00 way to Saudi Arabia and

then you know a while going to
a gun store and all these different

from the financial thing that came out
of that from the limited amount I saw

in real time because the other question
is do you want to use amyl to prevent.

The crime which is akin in terrorism I
think we're trying to prevent this kind of

Minority Report style very different than
the other ones we're trying to somewhat

catch rightest of as currently said and
Alan terrorism space it is

an after the fact reporting system it is
not live fraud fraud payment screening

like you when you get the text is that
really you buy a sweater at the store

that's that's live screen
sanctions screen is live but

I am Alan's So I would also posit
that the incidence of San Bernardino

type terrorists may be higher in
the future than the other I could be wrong

number to be sex trafficking I just that's
a model's hierarchy personal choice

you know in terms of you know
crime number 3 would be high net

worth tax of age I say that as a public
finance economist who you know you want to

raise revenues efficiently as possible and
then spend revenue for valuable purposes

there's a lot of high net worth tax
evasion the a mail system I think

the audit rate is is no equal for the
bottom 10 percent of income as it is for

the top one right at the barge
no benefit to society to catch

a billionaire cheating taxes versus
you know somebody earning minimum wage

I think you generate a tremendous amount
of revenue that could be used for

other social good and purposes.

But that that would be my 3 but that's a
policy choice and I'm not sure the central

bank is the entity that we should have
in our political system to break those

3 over a plethora of other
positions organized crime for

example I'm going to say I think we're
going to take one more hour that Ok

go ahead I don't know
the history of this field so

I'm just curious how we came here I was
grappling with the 1st principles question

in the field of privacy if you have
a very important concept that.

Liberal democracies do not run mass
surveillance systems the United States

government would not be able
to screen every e-mail or

every text message or run searches
incited or stored copies of it

you would need a law enforcement agent
would need a warrant to go into Palm and

afford e-mail and that would be based on
some other information that you'd have to

show a judge and you've got that whole
machinery of privacy why do we not

see any of that around finance Why are we
running a massive billing system on fine.

I think it's a great question and
it's definitely.

Policy makers choice on where they wanted
the set a balance on the spectrum between

data privacy at one end of a spectrum and
security at the other

and we've seen that we're different
countries and communities come out on that

issue change over time in a come across
different ends of that spectrum and

certainly in response to 2 different
problems when something really

bad happens on the security front we
move towards greater security and

more surveillance requirements
on financial institutions

when we have significant data privacy
concerns of Post Snowden Something

like to that effect then it
moves the other direction but

those are policy choices made by
governments that financial institutions.

Are required to implement So
one reason I support

raising the currency transaction threshold
to it's indexed amount which is somewhere

between $50.00 to $60000.00 depending
on what you want to index it for.

Is exactly that which is this question
about what level of information

should be allowed to be found what
level right because ultimately

this is an incredibly powerful tool for
conviction purposes

I mean people can do structuring
of financial situations and

somewhat unknowingly one of the one of the
examples of somebody didn't make all fame

is Bob Dole Bob Dole got caught for
structuring at Briggs bank those of

you who know Washington this was like
the preeminent Abraham Lincoln's bank and

Bob Dole for whatever reason Sarah don't
like cash and bank ultimately went

down over an a m l violation essentially
they got bought by by competitor but

I think it was Saudi Arabia or something
some middle east country they were doing

some really bad stuff like
there's some really bad stuff but

in this deep dive they came out it turned
out the Bob Dole like to have cash

in every Friday you withdrew like
a 1000 bucks every other Friday.

And if you go to the bank it would draw
$8000.00 consistently over 10 years

you were supposed to be filed on but
the bank looked at the Senate majority and

minority leader as if we're
not going to file us are on

this powerful senator who you know I think
we can all realize just happen to pay for

things in cash right and so
this kind of history of it in

the judgment of it is gets to be very
tricky and I don't think there's enough

of your voice in that position being
heard in the general debate and

instead there's a tremendous amount of
the the Sardou base is free for me but

as much as you can there because I you
know could use it to stop the next 911 or

stop catch some really bad guy or
girl from law enforcement

tells us that the average price to buy
a human being in the United States

is $7000.00 that's under the sea to I so

this has been a fantastic discussion I
think we're going to have to figure out

how to use this data it's going to
get used mission is how are we going

to regulate that make it safe have
due process around the use of

that but I think these are just
the urgent questions of our time and

I cannot thank you both so much for
all your comments so please join and

thank you thank you.