Salv, an anti-money laundering (AML) startup founded by former TransferWise and Skype staff, hopes to address the incredible failure rate to prevent money laundering, with an estimated 98%-plus of dodgy money still finding its way into the banking system through a variety of means.
Salv, which is based in Estonia and has just bagged $2m in seed funding, including from the well-known London-based investor in legal tech, Seedcamp, hopes it can make a real difference to AML work and the compliance sector.
Its main thesis is this, and it contains some fairly shocking truths: take for example Estonia; four out of five of its largest banks have been embroiled in money laundering scandals in the last few years, yet each one was a ‘fully compliant bank that had been passing [AML] audits for years‘.
So, what was the problem?
The problem was that the compliance function was operating in a way that was primarily to make sure the bank passed its audit, i.e. ticked all the boxes the regulators had created for it.
The compliance teams who had been given loads of AML software didn’t find that many criminals, instead they spent their days as ‘software jockeys’ with little actual impact. I.e. the banks had created a system where being seen to be doing the right thing had ended up becoming its compliance function’s raison d’être.
Therefore the multitudes of compliance staff, the thousands of lines of legalese setting out regulations and the well-meaning efforts by management and inhouse legal teams, and external law firms, nevertheless all resulted in failure when it came to ‘stopping criminals’, as the founders of Salv put it.
So, how is Salv trying to change things? Here are a few aspects the startup is working on:
- An alerts system that is easy to customise without the need for coders, that allows you to edit out false positives from your checking ‘typologies’, so you can focus more on going after the bad guys, rather than spending your day managing inefficient compliance software.
- A realtime bank2bank data sharing platform that uses cryptographically secure multiparty computation to eliminate data leak risks. Secure data sharing gives institutions the financial puzzle pieces they need to catch more criminals, recover more funds, and protect more good customers, they say.
- Salv has also built an entire ‘synthetic bank’ with millions of active customers and criminal patterns. This means a financial institution can first test out Salv’s platform before committing to anything. You can try out your own typologies and risk rules, they add.
The last two items are especially interesting. Data sharing is key for pattern spotting. By chance, Artificial Lawyer was having a chat with someone this week who also had worked in the area of money transfer and the issue of building large enough data sets came up.
They noted that a single business, even quite a large one, will never be able to develop the best possible systems because it only has its own sample of money laundering activity. When institutions come together and share data then they can create a more powerful picture that sees patterns of behaviour far more comprehensively.
After all, money launderers are famous for being ‘clever’ and spreading their own risks across multiple banks and a mix of transfer channels. One could say they are counting on the fact financial institutions are not sharing data enough to be able to spot their real patterns.
The other aspect that stood out was the sandbox virtual bank. Implementation is always an issue – for all technology. Creating a risk free means of testing out the software in Salv’s ‘synthetic’ bank looks to be a great way of solving at least part of the implementation barrier.
Final point: Salv clearly believe strongly in what they are doing, and rightly so. The challenge is that banks and other financial services institutions that get caught up in money laundering are primarily trying to make sure they don’t get harmed in the process. I.e. the incentives for compliance are all around self-protection, not actually going after the bad guys.
The system demands that banks and others have compliance teams and compliance software and compliance checklists and so on. But, this can all become a massive tick box exercise that ‘proves’ the bank has ‘done the right thing’. And that’s because that’s the limit of their responsibility. They can always say: ‘We tried to stop it, look at the resources we’ve invested in our processes.’
But, does this mean that money laundering cannot be stopped? As Salv notes, 98% of money laundering still carries on as usual each year. And it amounts to around $2 trillion per year globally, according to the United Nations. Or – and it’s a hard to accept reality – AML efforts are in practical terms having little to no impact at all on a global basis. And, in sheer volume, money laundering remains one of the largest industries on the planet. By comparison, approximately $500 billion worth of software of all varieties is sold annually around the world.
So, to conclude, that Salv can help is great, but banks and money transfer companies (and estate agents in London…..) are going to need a different set of incentives to have a major impact. If the limit of responsibility can be covered off by saying ‘we have a compliance team’ then there’s no great reason to do more – even though it seems powerfully clear more needs to be done…
[P.S. this is also a good example of having laws in place that make little or no difference. The law in most….no, all countries, says that money laundering is illegal. Yet, the fact that there is a law against it makes, as seen above, little to no difference. As explored in the review of Richard Susskind’s latest book, the law in itself has limited power to influence what happens in society – even if it’s essential to at least try and put in place laws in order to do what good they can achieve. Human behaviour clearly needs more than legislation to change direction.]