The anti-money laundering dialogue

00:00:03: Welcome or welcome back to season three of the Alfie Next Gen Finance Podcast, where we talk about the latest developments in Luxembourg's fund industry.

00:00:11: To kick off this season, we'll be discussing a topic that's making quite the buzz at.

00:00:38: Thanks for joining today.

00:00:40: So to begin with I'd like you each just sort of provide a brief overview.

00:00:43: if your professional roles and When he tells someone outside the financial sector that you work in AML How do you explain what?

00:00:50: You do exactly, and they'll start with you.

00:00:52: Adriana

00:00:53: I will start by saying that i've been working in the industry and specifically in AML for the past six years.

00:00:59: And actually my background in law and economics have proven particularly useful in navigating the realities of integrating regulatory backgrounds with operational realities, business decision making.

00:01:12: so My current role at Funtable brings those elements together because it sits at the intersection of regulatory integrity operational oversight and enabling sustainable business growth.

00:01:23: I usually say that my role in AML is not actually quite what people may think because it's not about investing criminals, but essentially It's more about preserving trust in the financial system.

00:01:37: So markets only work if they're market participants That is investors But also regulators and financial institution.

00:01:46: They are confident that the capital is moving through legitimate channels.

00:01:50: My role is to help their organization understand where financial crime risk may potentially arise in this process, so it can make informed decisions about who does business with but also how those relationships could be effectively managed.

00:02:08: Okay thank you and Pablo How about you?

00:02:10: I've been working on industry for past five years And usually told people that my job is to help keep dirty money out of the financial system.

00:02:20: Now as part of Alfie, and my job it's slightly different As we work for our members And when sure that new regulation That I was applying before.

00:02:30: It's proportionate simple an effective and allow the industry To properly fight against money laundering on a fictive way.

00:02:37: Okay thank you both.

00:02:38: If i may?

00:02:40: Pablo point with, I think complements what they said that our role is about keeping criminally away from the system.

00:02:48: And I like to compare it to the airport security.

00:02:51: so most passengers move through efficiently because controls are created in order to facilitate safe travel right and identifying this smaller number of incidents where higher security is needed, it's more of a rare circumstance.

00:03:08: But the overall system works in order to keep all the participants in a trusted environment.

00:03:14: so To me AML works in the same way.

00:03:17: It's not there to create a friction but its there to facilitate business to facilitate their business relationship but in a trust and safe way.

00:03:29: And again that connects with point you were mentioning about trust and reliability.

00:03:34: When you are flying, your trust that everything is going to be smooth and safe.

00:03:38: And thats what we're doing in the financial ecosystem which is an ecosystem built on the trust people put there.

00:03:46: Okay, thank you both.

00:03:47: We're off to a good start.

00:03:48: when people think of money laundering sometimes they think of suitcases full of cash or exotic tax havens something You might see in a film or series.

00:03:58: but the funds industry?

00:03:59: there's a different story.

00:04:00: What is real-world financial crime risk actually look like and practice?

00:04:04: I will say that in the investment fund industry financial crime is usually much more indirect And much more sophisticated.

00:04:12: Fans are generally not used to clean cash because investors subscribe through regulated financial institutions and payments are made via the banking system.

00:04:22: Instead, they risk relate to understanding who the investor really is where their money comes from?

00:04:30: And whether investment could expose the fund to sanctions corruption fraud or other forms of felicity activity.

00:04:39: I always smile when i hear people mentioning suitcases full of cash because that is the Hollywood version of money laundering and, but it doesn't mean necessarily that is less complex.

00:04:59: So what I mean by that, financial crime risk rarely appears as one obvious red flag.

00:05:04: more often It's a series of individually ordinary events That only become significant when you connect them together.

00:05:11: so As an example and investor from legitimate jurisdiction may not raise concern on its own But combined with for example complex ownership or maybe transactions that do not match the stated investment profile, Or perhaps even more exotic jurisdiction through intermediaries.

00:05:32: And then this situation and reality appears much different.

00:05:37: This becomes even more complex when it comes to asset management reality because we work across different institutions that is distributors, transfer agent or other service providers.

00:05:50: Effective AML therefore depends not only on quality of the information, but also on their ability to connect all different dots together.

00:06:01: Different data points and apply judgment.

00:06:05: what they mean.

00:06:06: What I often say is that modern AML is not about or maybe not only about finding a suitcase full of cash and more often, making sense of data.

00:06:19: And this is also why I think the industry is placing so much emphasis now on data quality information sharing stronger coherent governance and convergence.

00:06:32: at the end we're talking for something that's important for the society.

00:06:39: It's the misuse of legitimate financial channels by individuals who appear legitimate on the surface, so that industry jobs is to identify those risks without creating unnecessary barriers for degenerate

00:06:51: investors.".

00:06:53: Okay thank you both!

00:06:54: AMLs frequently perceived as a cost center rather than value creator how would explain its broader purpose to someone questions whether all these controls are really worth it?

00:07:03: I would say that it's a common question in the business environment when profits are crucial.

00:07:09: But, i'd start with different questions.

00:07:11: What is cost of getting AML wrong?

00:07:15: And that costs actually not limited to what people usually assume or think off?

00:07:21: That is regulatory fine and sanction.

00:07:24: It can also mean reputational damage or more medium and long-term loss of investor confidence.

00:07:31: And also losing relationship that perhaps took years to build, it can be shattered within days!

00:07:38: I would say trust is like a glass right?

00:07:41: Once broken its very difficult to restore.

00:07:44: So

00:07:45: I understand why AML is often seen as a cost center because it requires investment in people, technology and different controls.

00:07:54: But much of its value lies on the events that never happen right?

00:07:59: Because there's an incident which has been prevented or perhaps the regulatory failure that was avoided because of controls.

00:08:08: Or even a reputational crisis just never materialized, so it is similar to insurance where actually you may not see direct return every day but then it becomes obvious when something goes wrong.

00:08:22: Analogies and I think what you were saying before about this societal...

00:08:26: For me AMLs are key pillars for their financial ecosystem also from the society, because it protects the integrity and reputation of both financial markets as we were discussing.

00:08:40: They rely fundamentally on trust.

00:08:42: investors counter parties regulators.

00:08:44: they need confidence that financial institutions are not being misused for criminal purpose And I think that's very important.

00:08:54: AML frameworks create value by reducing risk.

00:08:58: They help institutions to identify potential issues early, avoid regulatory breaches.

00:09:03: To prevent reputational damage and maintain access through international markets.

00:09:09: So in the investment funds industry this is particularly important because Luxembourg and other financial centers are built on credibility and transparency.

00:09:20: Strong AML standards aren't a barrier for business.

00:09:23: they're part of foundation that allows the industry to grow sustainably.

00:09:28: I will also say that the objective is not to create more controls for the sake of controls.

00:09:34: The goal is to have proportionate, risk-based and efficient frameworks that focus resources where risks are highest.

00:09:42: so in my opinion rather than seeing AML as a cost i see it as an investment in trust resilience.

00:09:56: Can I add here from perspective of the business as well?

00:09:59: Um, I completely understand with what Pablo said about trust in their financial sector.

00:10:05: But also I see it as part of building resilient and trusted business itself.

00:10:11: And Here i want to propose another angle where AML and business are not necessarily competing objectives.

00:10:18: um...and The idea that AML is cost center becomes outdated because effective and really modern AML does more than protect the downside, I really believe that firms that genuinely understand their risk within which they operate can onboard legitimate clients with greater confidence.

00:10:39: They also allocate resources more intelligently and therefore respond faster when the risk environment changes So that creates a real competitive advantage.

00:10:50: And therefore, in that sense AML is not simply a compliance function that many may assume but to me as industry evolves and business evolve an understanding of AML and managing risk it becomes strategic business tool.

00:11:08: Okay,

00:11:09: all great points.

00:11:09: Thank you!

00:11:11: Given the shifting global landscape how mature would you say Europe's current AML framework is and how effectively is it adapting to meet todays real-world challenges?

00:11:20: Yeah so there risk half a volt that's clear.

00:11:22: I mean new payment technologies crypto more sophisticated fraud but in many ways they're underlying.

00:11:30: typologies i will say remains familiar.

00:11:34: The volume under detail of rules has also accelerated.

00:11:38: We have been through wave after wave of new obligations and Europe is now rebuilding the entire framework at once, this is not a complaint.

00:11:46: much of it is welcome an overdue but that does raise a genuine question are we really calibrating the rules to risk or adding layers because adding layers feels safer?

00:11:59: The most effective frameworks I've seen are ones that sharpen and simplify.

00:12:04: my worry is when we mistake more requirements for protection and this isn't the same thing.

00:12:12: Do you want to add to that, Andrea?

00:12:14: Yes maybe I'll start by saying that i would describe Europe's AML framework as a mature in its architecture but indeed what Pablo highlighted it still evolving.

00:12:25: how consistently and effectively applies in practice.

00:12:29: however Again, propose maybe another angle looking at the fact that Europe is usually perceived as being over-regulated.

00:12:40: So over the years, Europe has definitely developed a comprehensive more preventive AML framework centered on of course customer due diligence to beneficial ownership transparency and risk based controls.

00:12:54: but for me this framework reflects something fundamental about European market.

00:12:59: In a highly interconnected and cross-border financial system, clear and credible standards are one of the ways investors in institutions gain confidence that market operates with integrity.

00:13:16: This is why I also believe comparisons between the United States and claims Europe overregulated can be too simplistic.

00:13:26: Both systems rely on prevention, supervision and enforcement but they just place different emphasis on those tools.

00:13:34: So indeed, the US can sometimes respond more quickly to the changing market through targeted supervisory or enforcement actions while Europe tends to place greater weight on preventive and harmonized standards in that conversation I believe was born recently around introduction of AI rules and new technologies And it's fair, and these are not necessarily competing models.

00:14:00: They're different ways of building trust because I also believe that those models are shaped by distinct legal tradition market structures, but also investor expectations.

00:14:12: That being said I believe Europe's challenge now is not simply to keep adding rules as Pablo said But it's to make the framework that is already comprehensive and in place be more consistent Be more proportionate and responsive In practice And i think that's the test for the near future

00:14:37: has built a market practice over the last years that works, that is coherent and builds an industry based in trust confidence.

00:14:47: That of course needs to evolve but need to be understood by regulators

00:14:52: To

00:14:53: make it more efficient But at same time keeping things working

00:14:59: Great.

00:14:59: thank you both.

00:15:01: There's been some tension between meaningful risk management and tick-the-box compliance.

00:15:06: As Europe is embarking on the most significant overhaul of its AML framework in decades, how can firms ensure that compliance remains effective proportionate and generally risk based rather than becoming a pure procedural exercise?

00:15:20: Yes, so I think that this is one of the defining challenges for the profession not only within AML but overall compliance sector and particularly in the current market environment because firms are facing more regulatory change, at a higher pace.

00:15:38: More complex business models and of course continued pressure on costs.

00:15:43: And in that situation the safest organizational response can appear to be adding more policies and more controls.

00:15:51: The challenge is many organizations don't deliberately choose tick box compliance but they arrive there gradually because regulation is constantly evolving and the safest response often appears to be adding another control.

00:16:10: A firm can produce more documentation, still make poor decisions.

00:16:15: in fact my experience across different organizations I also observed that excessive process can sometimes become a risk in itself.

00:16:25: And what I mean by that is it absorbs resources, slows legitimate business and importantly really distracts attention from the relationships and behaviors that genuinely require scrutiny.

00:16:39: So because an effective AML formwork isn't simply one that detects more alerts is one that helps distinguish genuine risk from operational noise.

00:16:50: A truly a risk-based approach requires prioritization, so not every client or transaction should receive the same level of attention.

00:16:59: So maybe this question should no longer be do we have control?

00:17:04: but rather asking what risks does this control address?

00:17:09: What intelligence does it produce and improve its outcome as well?

00:17:14: I think that's a very interesting question because people may think the tick-the-box approach will make things easier.

00:17:23: However, it would make firms to collect more papers and documents.

00:17:28: they are not needed.

00:17:30: This is why real risk management is harder.

00:17:35: It asks you for judgment and sometimes it means to do less where the risk is low.

00:17:41: So this is a risk-based approach, This is an important part in our profession.

00:17:45: so we need that judgment.

00:17:47: We don't have to take the box approach because they will confuse firms.

00:17:52: They might think that they are doing less when actually they're doing more.

00:17:57: The capacity to judge on their own I would say most important capacity And its...the thing which makes difference between firms.

00:18:06: At the end it becomes to the point of trust and confidence.

00:18:11: And firms that are following the correct approach will benefit not only from that trust, but also a better process which enhances their capacity for becoming more competitive in order to produce better outcomes.

00:18:29: So talking back about regulation The danger is maybe the opposite the question that we were discussing, that harmonization became a race to most demanding requirements everywhere regardless of whether it fits.

00:18:46: As an industry what we are arguing in AMLA consultations and our advocacy is not like the rules or exemptions.

00:18:54: It's ruled that apply intelligently.

00:18:57: how each sector actually works.

00:18:59: Sharpened systems do not simply thicken them.

00:19:02: OK, thanks.

00:19:03: OK, Pablo you had just mentioned AMLA and Mamonico so AMLA will define it for maybe those who don't know but its the EU anti-money laundering authority which has been described as a game changer.

00:19:14: with that in single AML rule book now taking shape what do think is one thing that industry most hopes policy makers would get right?

00:19:20: And then also sort of?

00:19:21: what are implications to this industry?

00:19:23: For

00:19:23: me answer simple harmonization harmonization across member states, but with the right balance between consistency and proportionality.

00:19:34: So for international cross-border firms such as vulnerable, the problem has not always been the rules themselves but often different ways those rules are interpreted and applied across jurisdictions.

00:19:47: If AMLA and single rulebook work as intended they should provide greater clarity and legal certainty And allow firms to spend less time navigating conflicting expectations and more time managing actual financial crime risk.

00:20:04: That being said, I also want to highlight that consistency should not be confused with uniformity.

00:20:12: The Europe is incredibly diverse right?

00:20:16: We have different market participants we have different products distribution channels and different models so they each present a different risk profile.

00:20:27: hopefully AMLA will reflect those differences when exercising its supervisory expectations.

00:20:34: I believe the challenge for the policymakers is to create a genuinely harmonized standards while preserving enough flexibility and room for firms, to exercise their professional judgment and apply they controls proportionate to their own specific risk in there's Pacific business

00:20:54: model.".

00:20:55: I agree with you Adriana.

00:20:56: i think that single rulebook and a single European authority serial progress Consistency across the European Union is something that industry has wanted for years.

00:21:07: However, at Alfie we are advocating for proportionality and risk-based approach.

00:21:14: Uniform rules must not mean uniform intensity.

00:21:17: regardless of the risks.

00:21:19: What we most hope policymakers get right Is to build their rules around a real structure Of each sector.

00:21:26: For example In the fund industry, regulated supervised intermediaries are part of the defense not a loophole to be closed.

00:21:35: If the new framework does that it will both stronger against real crime and workable for firms applying every day.

00:21:44: There's competitiveness dimension too.

00:21:46: Europe wants deep integrated capital markets And only works if their rules protecting them is smart.

00:21:54: rather than simply having getting that balance right is the whole opportunity in front of us.

00:21:59: From an healthy point-of view, we are on a key moment for industry where we need to advocate rules which will work in practice and understand specificities about our sector.

00:22:12: I agree, and to summarize the success of their new framework will be measured by whether firms and supervisors as you've mentioned developed a shared understanding what effective risk management look like.

00:22:27: Because ultimately harmonization should simplify compliance but not standardize risks.

00:22:33: And if policymakers achieve that balance AMLA and the single rulebook can really strengthen supervisory convergence, while also supporting resilience competitiveness and credibility of European financial sector.

00:22:48: Thank you.

00:22:49: we've touched a bit on technology in sort of analytics but AML is increasingly relying upon those things.

00:22:55: where do you believe human judgment remains really indispensable?

00:22:58: So technology is transforming everything now and AML is a part of it.

00:23:07: Screening, monitoring, spotting patterns across millions of transactions that no human could ever review.

00:23:15: I'm very optimistic about that.

00:23:17: but the herd of AML's judgment deciding what is sexually suspicious understanding the context telling a false alarm from my real one.

00:23:28: A machine can flag But a person still has to decide.

00:23:31: Where I worry is when the rules themselves become mechanical, demanding the same intensive checks regardless of their real risk.

00:23:39: And here we are talking again about the risk-based approach importance that were discussing before.

00:23:45: I agree technology is definitely transforming AML at an incredible pace and in a very positive way because it can process far more information, identify patterns and anomalies much faster than human can.

00:24:02: And essentially it helps firms focus their resources where the risk is greatest right?

00:24:08: I agree with Pablo's argument that human judgment is still indispensable part of the whole process.

00:24:17: What I also want to highlight is that it is indispensable from actually the very beginning particularly when these tools are designed.

00:24:26: It's people who should decide which data is relevant, how risk factors are weighted what assumptions and logic are to be built into the model because if that underlying logic is weak automation will only reproduce those weaknesses at scale.

00:24:46: And in fact, at Vontable we are currently working on more technology-driven AML risk assessment.

00:24:53: The central part of that work has been building a reliable information and database... ...that can ultimately support sustainable automation.

00:25:02: So before automating any decision We really need to make sure that we understand the data That we define the methodology and ensure that the outcome can be clearly explained and challenged because What's important to keep in mind is that regulators will not accept technology itself as a justification for the decision, right?

00:25:24: An organization must still be able to explain how this system works why particular factors were used and how the final outcome was reached.

00:25:35: And to me that's crucial from the very beginning.

00:25:41: I think that technology shouldn't add cost and duplication to the job that has been already done.

00:25:49: I think, again what you mentioned is very important—the judgment is a key part of our profession and we need as human to understand the data that we are given through technology in order for us to produce productive outcomes that can be used to take the final

00:26:07: decision.".

00:26:08: So before we sign off today could each tell us on a nutshell I

00:26:13: think AML is moving from more control-driven model towards a more intelligent driven one because policies, procedures are still essential but the focus is increasingly shifting to whether they can actually improve our understanding of risk and then lead to better decisions.

00:26:36: And i also believe that shift becomes increasingly possible because of emerging technologies as we've just mentioned that allow firms to collect, connect and analyze far more information than before.

00:26:50: But

00:26:51: opportunity depends entirely on the quality of underlying data which I previously argued Because more data does not automatically mean better AML.

00:27:04: And here i want to mention that Cedric Villani recently reminded us at the annual cross-border distribution conference in Luxembourg that AI may not think or understand, because it generates highly sophisticated prediction based on patterns and probabilities which can create a convincing illusion of understanding.

00:27:28: And this is why poor quality data can simply make weak conclusion appear more sophisticated why reliable data, explainability and human challenge still remain a very essential part of the whole process.

00:27:45: So to me, the success relies on combining reliable data explaining technology strong governments And of course sound human judgment.

00:27:56: If we get all those components right We will be heading in the right direction.

00:28:00: Okay, Pablo

00:28:02: I think that AML is getting mainstream Because firms are understanding that it's not a cost center, It is reputational assets and increasingly a commercial one.

00:28:12: Institutional investors and depositaries conduct their own due diligence on managers before they invest or contract And a serious framework shortens those conversations considerably Beyond the individual firm.

00:28:26: this what makes ecosystem work.

00:28:27: as we have discussed The entire model rests in assumption that the counterparty on the other side of depends on that assumption holding.

00:28:37: So AML, it's a key topic that firms are taking more and more serious—that is evolving... ...that is advancing….

00:28:43: …that is creating value —and then this becoming more

00:28:46: important.".

00:28:47: And I like that because another misconception that I think is changing closely linked is that AML is highly technical discipline reserved for especially.

00:28:58: It is not!

00:28:59: The underlying questions are simple.

00:29:01: I have not changed in twenty years.

00:29:04: Who is my client?

00:29:05: Where does the money come from?

00:29:07: Does activity make sense for that

00:29:08: client?".

00:29:09: What's generally difficult, it isn't a concept but an exercising

00:29:13: judgment.".

00:29:14: So everything together puts AML as one of the first pillars that firms and the Luxembourg industry are working on... ...and i'm very happy because this means that Luxemburg will keep its position at the first reference center in Europe!

00:29:31: That's a great point on that one.

00:29:32: Very good!

00:29:35: So thank you both for your time today and sharing your thoughts on AML, there is so much to discuss here but I appreciate your exchange today.

00:29:41: keep things flowing.

00:29:43: as a gentle reminder You can catch more of the series via the Alfie website alfie.lu or in papergem.lu And of course all the usual podcast apps.

00:29:52: Thank you very much Alfie.

00:29:58: NextGen Finance, connecting today's talent with tomorrow's investment fund leaders.