Good-bye 2016: To 2018

Happy New Year (a bit early)! 2016 was quite an exciting and busy year with many personal and professional transitions that left little time for blogging.  However, I’m back with insights as the financial services and authorities work throughout 2017 to implement the AML/CTF and data protection legislation and agreements for 2018.

Before I discuss recent developments in the field, I’d like to comment on the release of my SWIFT Institute-sponsored paper on US-EU AML/CTF & Privacy for Multinational Banks,* which was published in August (download here). The Institute also invited me to speak about it at Sibos in Geneva, Switzerland in September (download slides here).

My experience with the Institute has been fantastic. A sincere thank you to Peter Ware and Nancy Murphy for their kindness, professionalism, and support for independent research that allows academics to reach practitioners with meaningful analysis.**

19 AML/CTF & Data Privacy Compliance Conflicts Graphic from the Paper (Caution: Not as Impressive as SWIFT’s interactive graphic!)

I highly recommend that you visit the Institute’s fabulous interactive graphic for an overview of the 19 compliance conflicts (view here).

Don’t forget to read the last section of the paper that covers Profiling! It lives in all 19 issues and impacts every single AML/CTF compliance function.

About the paper:

The paper is a primer for financial institutions and policy-makers to identify 19 legal conflicts that may affect a multinational’s ability to comply with the AML/CTF and privacy regimes.  I hope that this information enables private actors to understand how their internal processes may expose them to regulatory risk; for public actors, I hope it provides a better understanding of the challenges the private sector faces in multi-jurisdictional compliance, but especially how these issues affect the quality of data that private corporations ultimately provide to authorities to achieve the end goal – combating financial crime and political violence.

As one can imagine, there was not enough space for an analysis of all the dimensions or actors involved, so a few things to note;

  • The US Terrorist Financing Tracking Program (TFTP) demands a paper of its own due to developments regarding the development of an EU TFTS.
  • I shelved an anonymous AML/CTF & Privacy survey due to an insufficient data sample. I will conduct the survey again, but the preliminary results demonstrated a clear US and EU divide.  Respondents did highlight AML/CTF and data protection concerns when dealing with high risk third country areas.
  • Section 3.2 on Public-Private cooperation could have been a paper onto itself (and may appear as a forthcoming chapter). Multinationals face tough decisions when they operate in multiple countries where they must comply with data requests from authorities.

The Takeaway

Despite the difficulties ahead, in the paper’s conclusions, I state that the financial services should be acting now to align their data protection obligations in 4AMLD to the GDPR.

4AMLD and the GDPR consistently refer to ‘safeguards’ for data processing, but these safeguards are ultimately left up to EU Member State law, so the diversity among EU Member State law will continue.  The GDPR formally calls for cooperation among industry associations to formulate “codes of conduct” to set the technical and organizational standards outlined in the Regulation.  Article 38 (40 and 41 in final version) outlines the codes’ provisions, which are broad enough to accommodate compliance’s risk-based regime, including secure systems and fair and transparent data processing for legitimate interests.

The private sector should work with Member States to create AML/CTF & privacy-centric ‘codes of conduct’ that harmonize with these developing national safeguards .

I’ll be posting updates on those efforts as I become aware of them.

Have a healthy and safe 2017!

Want to learn more?  Join me on 22 February 2017 for a webinar on Nomoneylaundering.com 

Still to Come:
4AMLD Amendments (aka 5AMLD) and the GDPR impact

*Paper referrals to EU legislation predate the final version of the GDPR and the articles and recitals may have changed.

**This blog represents my personal opinions and does not represent LexisNexis Risk Solutions.  My research is my personal intellectual property and has been in no way influenced by any member of the financial services community or by government officials.

Separation Anxiety: AML, Privacy, Vendors & Multinationals

Last month, I had the pleasure of speaking at the 20th Annual ACAMS AML & Financial Crime Conference in Hollywood, FL.  From my understanding, it was the first time the organization had offered a panel on compliance and privacy for cross-border data flows. Our panel was well-attended, which demonstrated the industry’s growing concern about these issues. It was a great experience and I had a wonderful time with my fellow panelists.

I attended many panels in those two days as the lone academic in a sea of compliance professionals (social anthropology note: they dress better than academics, drinks are free and top-shelf, nice swag).  I had great conversations, quite a lot of fun, and the insights I gained from these interactions reinforced some of the mantras in my research.

So this intrepid academic decided to do some very informal interviewing and observations at the exhibition hall.  I walked through to see if any vendors listed privacy as a service in their displays (only 2). At the same time, I randomly asked about their experience with AML and privacy.

My opening salvo went something like this:

Do you have any technology-driven or governance-centered services that address AML and data protection for national or international banking?

“No, each of those services are client-driven.”
“We don’t have anyone at this conference who can speak about privacy.”
“It’s separate from AML.”
“Our service doesn’t handle data protection.”

At this point, there are few, if any, services able to provide the financial community with technological solutions that take into account INFOSEC, data protection, and compliance (AML and otherwise).   And, we cannot ignore the governance and policy instruments that must come with them.   I love the automated aspects of the filed but they cannot, and should not, dominate compliance.

Now I’m not blaming the vendors solely for these shortcomings.  They respond to their customers’ demands.  Everyone is focusing on AML because the fines are getting bigger and privacy is pushed to the low-risk back-burner.   (By the way, I’ve found similar problems with privacy professionals, so I’m not picking on AML.)

These conditions also reflect a separation between security and privacy in the regulations themselves (e.g. I’ll be speaking about the still unresolved problems in the 4th Money Laundering Directive and data protection in London in May).

However, privacy is catching up.

I predict that in 5 years financial institutions will find themselves scrambling to respond to data protection/privacy regulations that are already issues, or in the pipeline.  They will spend money to employ a new team of specialized consultants, which will produce redundant services that could easily be integrated into existing structures with a little ingenuity. They will do all of this not realizing that privacy is already part of their business, because their clients already expect it.

Innovation involves seeing relationships beyond your nose – and the horizon.

Common Interests, Uncommon Responses

Last month, Jan Philipp Albrecht, Member of European Parliament (Greens/EFA) and rapporteur for the EU’s Data Protection Regulation stated, “There is an urgency to build a common interpretation of national security.  It is on our common security interest.” 

It caught my attention because I have been writing about the correlation among threat perception, counter-terrorism, and data-sharing.

It is important to build a common interpretation of national security for a number of reasons. Governments are more likely to cooperate when they share similar perceptions of a treat. However, because of their experiences with political violence, the US and EU have developed different institutions and procedures to deal with terrorist threats, which have heavily influenced their views and laws on privacy, surveillance, and data-sharing.

In short, they understand why it is important to confront political violence, but disagree about how to do so.

Today President Obama and Chancellor Merkel recognized how historical experience had produced divergent approaches to government surveillance. Mr. Obama stated, “Given Germany’s history, there are going to be sensitivities around this issue…There are going to be irritants like there are among friends.”  Merkel concured, “There are still disagreements on some points.” [Es gibt da nach wie vor unterschiedliche Auffassungen in einigen Punkten.”]

First, neither the US nor Europe will be able to completely alter the way they confront terrorism because their experiences have produced different methods and institutions to counter these threats.   (And even here we cannot lump Europe into one EU basket either.)

Second, the US and European have little choice but to get along because of the transnational nature of the terrorism.   Their differences, however, have not halted data-exchange among intelligence and police networks.  That’s also because there’s a shared sense of purpose and duty among these groups across the Atlantic. There are numerous examples of bilateral and multilateral cooperation, but the one that comes easily to my mind is the Terrorist Finance Tracking Program, TFTP.

To me, the TFTP, Safe Harbor, (and even the limited SIGINT reform) demonstrates something else – that cooperation on the collection and transfer of transatlantic data (both public and privately held) is slowly (and painfully) producing a hybrid system that takes the histories, values, and institutions of the US and EU into account.

Whatever the result, it’s going to be bumpy ride, and sure to displease everyone.

 

 

A Note on Extraterritoriality

“Extraterritoriality” keeps coming up in interviews and conversations, and as I write about the legalities of data sharing I find this concept has a curious pedigree.

In some instances it is exclusionary.  Diplomatic immunity is the most often cited example, where a host country cannot prosecute foreign dignitaries’ misdeeds under local law, but in certain circumstances his/her native land will waive this right.  The term can also denote inclusion, where states claim national law applies beyond its sovereign borders citing the ‘effects test.’

In both, boundaries are defined and crossed.  They perfectly illustrate the legal and physical dichotomies in the world(s) of information communications technologies, finance, and data, which may be geographically and legally defined, yet transnational in their virtual and physical existence.  As I have been told, “Banking is local” – regulations, attitudes about money and investing reflect local expectations, but in the last 40 years the technologies and many of the staffing and services on which we depend to facilitate these relationships, are not.  This is also a problem for international organizations like the IMF that worry about interstate cooperation and enforcement in a regulatory world – “How are they [the G20] going to deal with extraterritoriality?” The suggested answer – “They only cooperate when they are scared.”  The danger is that instead of compromise and adaptation, states and corporations will resort to a tug of war mentality of interests based on strict definitions and boundaries.

Extraterritoriality asks, “Whose rules apply, to whom, and when?” It addresses setting standards and enforcing them.   In the end, I do not think that that the corporate world or governments will be entirely successful in avoiding a battle of territorialities, but I do hope that there is enough ‘fear’ to motivate them to recognize the importance of compromise to everyone’s interests. Too often, in the aftermath of crisis (whether it be the national security or financial kind) policy-makers and practitioners fall into a lull of comfort, lose sight of the big picture, and start aggressively pushing politics into areas that desperately demand practical solutions.

Next post:  Qualifying and Quantifying “Big Data” (a buzz word that I’m increasingly beginning to loathe)

 

The Tension between the Private Individual and Technology

The recent hacking of celebrity iCloud accounts (which happens to others) and the Home Depot data breach, has the media once again chirping about the importance of secure data systems.    There’s a lot of talk about how these events bring privacy issues into the light, but I think it is safe to say that most of us live in a digital spotlight now. Long gone are the days where data security and privacy issues reside in darkness.

However, these events are reminders of two realities in the digital world; 1) technological advances are both freeing and limiting to individuals; and directly applicable to 2) the evolution and expectations of personal spaces.

As I’ve been writing about business and governmental viewpoints on data, I haven’t really touched up the individual.  The individual, you and I, are at the very core of data – we provide it to banks and governments when we use services.   But we use communications technology for personal reasons in ways that are not meant to be public or seen/used by others, or at least no one outside of our choosing. Intimate thoughts and pictures obviously fall under this umbrella.

The expectation of privacy in personal spaces is not new, but technology has altered how we must think about personal space and our expectations of privacy and who is ultimately responsible for protecting privacy.

What is the difference between an envelope containing a private letter stashed in a drawer, and a personal email with its code held on a server or your home computer?  The letter could be intercepted in the mail or stolen from our homes or briefcase, but there was a sense of privacy in those spaces.  The email though could be held on a home pc, on the cloud, accessed from work, or on a mobile phone via public or private network.  Is there an expectation of privacy in all these spaces?

The digital word has physically separated us from our data and made interception easier from people we will never know or meet.  The expectation of what constitutes private spaces has been expanded, which is why it is so difficult to control  our data, or to prosecute those who steal it.  The account might be managed by a multinational corporation with offices and servers in several countries, where anyone can access it.  Having what we want or need at any time and anywhere is a wonderful convenience, but it challenges us to think about how we maintain those parts of ourselves we do not want others to see.

Recently we have seen a barrage of headlines asking “Can you trust the cloud?” This question really suggests many things – Can you trust technology to care as much as you do about your data?  Can you trust that you own and control your data? Can you trust that you will be the only one to access your data (Insert a million links to the importance of authentication here)?

Technology is not full-proof.  Like the locks on your front door, there are services that are more difficult to get into (but still vulnerable), while others are there to keep people honest.  It is important to keep these limitations in mind because whether we like it or not, we are not in control of them, there are inherent weaknesses (just like the lock on the door can be picked), and a data breach can impinge on how others see us.

Simply speaking, as individuals we present ourselves in certain ways to certain people.  We tell them things we want them to know, and withhold other details for various reasons. (The Germans call it Persönlichkeit, add Recht to it and you get the legal basis for privacy – “the right to personality”). In a professional atmosphere talking about your home life might not be acceptable so you don’t share it.  You also might feel more comfortable talking about one part of your life with a friend, and another person not so much.  Your relationships are constructed by the type of information that people know about you.

When someone steals your private information and puts it on the web, or controls who has access to it, they are also shaping others’ perceptions about you.  Using technology to store or transmit our thoughts can make data, or behaviors, our view, our beliefs, and our bodies, vulnerable to exposure when others maliciously break into our accounts and steal our data – the bits of information that compose the multifaceted existence of our identities.   They are in control of our personas, not us.

So we have choice I suppose.  We can stop using technology because we cannot be certain that we are protected.  That seems like an unfair and unnecessary option.  Free flow of information can be a good thing and it can expose fraud or ill-intent.  However, I’ve been thinking about how security, or the lack thereof, also has the power to limit my ability to utilize technology in a manner of my choosing.  “If you don’t want something to get in the hands of someone not intended to see it, then don’t post it to the cloud.” Individuals, and companies then, are faced with a dilemma which involves a calculation of risk.  I want to use this service, but by doing so I’m exposing myself too.

A recent interviewee commented that my knowledge about privacy issues was unique and that most people  were fine with allowing others (government, corporate etc.) to control and use their data for the sake of convenience.  While this might be true, he also mentioned that this made me a lucrative niche market for innovation – providers will create services to cater to people like me. As I wrote in Harvard Business Review, I agree with this, but I wonder how much of this is a constraint on my access to technology.

We love technology but our decision to use it and the consequences of doing so increasingly fall under the discretion of others who may not hold our personal interests in mind.  Why should anyone have to find a special service in order to feel safe from prying eyes no matter who that might be? I do not pretend to have these answers, but it is something that should make everyone a little uncomfortable.  It’s a choice, of course. In the meantime, I’d suggest to keep those intimate records a little closer to home because there are few protections.

 

Finance, Secure Systems, Regulatory Compliance, and Data Protection are Not the Same

I’ve been reading a lot about privacy and financial data (including studying for the CIPP/US and EU exams) since returning from Europe for a new book I’m writing about the politics and practice of financial data in transatlantic counter-terrorism cooperation, which I will write about in future posts.

Most people do not think about money and data surveillance. It’s more common to talk about how governments monitor our emails, phone calls, Facebook entries, or mobile data because they are communications technologies in their unambiguous forms, but we don’t put much thought into what makes money tick.  The reality is that money is data and we have to view it as more than an instrument of wealth. 

Financial data is money, and it reveals behaviors.

Banks run entirely on information technologies for everything they do no matter what type of transaction or industry, and they are keen to use that data (or Big Data) as a commodity onto itself to sell you things, create market strategies, and to get ahead of their competition.  If a bank’s IT systems are down for 48 hours, that bank is gone, gone, gone.

And the dawn of a digital currency is not new either (e.g. Bitcoin). The anchor of the international monetary system, Special Drawing Rights (SDRs or XDRs, its formal currency code), were created by the G10 governments in the 1960s and have never existed except in digital form.

It’s time to focus on how money is data because financial institutions and governments certainly do so, since our spending habits reveal our behaviors and intentions.  As the old saying goes – “put your money where your mouth is.”  We tend to invest when we believe in things or people, and not much happens without at least a little money changing hands.

Which brings me to financial data protection and privacy.

The common refrain I heard from regulators and those in the financial services was that “finance is already heavily regulated so privacy isn’t much of an issue.” This is false logic.  Assuring client data confidentiality, compliance with record-keeping and accountancy guidelines, or ensuring sound security protocols does not automatically guarantee data privacy.  It’s a mistake to assume that because banks make sure that their data systems are not hackable, or that they are regulatory compliant, that the privacy of client data naturally follows.

My own bank failed to do this, and I offer this narrative as a small example of the disconnect among these concepts.   My visa application to Belgium required a bank letter stating that my accounts were in good standing.  I was not required to provide amounts, but in the end the bank gave me no choice but to disclose this information to 3rd parties.  I received a letter from corporate (after I tried to obtain the letter at the local branch I was told that they did not have that information – so you can decide to give me a loan, but this is too much?) with all the amounts of my accounts incuded.

The legal disclaimer was priceless:

 “Our response is commensurate with the purpose and amount of your inquiry. The information provided is strictly confidential and intended for use solely by the requesting party and in reliance on your statement of intended purpose or use.”

No, the letter was not generated to the “purpose and amount” of my inquiry, and it certainly exceed my intended purpose and use.  I specifically asked for no amounts to be listed in the letter.  The customer service representative said that it was a form letter, they could not alter it, and it “was generated by our lawyers.”

  “The information is furnished as a matter of courtesy without a duty to do so and without responsibility, liability or warranty, express or implied, on the part of ________________ to you to any third party. Information is obtained from electronic data sources, which may not contain all information in _____________ possession’ information is not guaranteed to be accurate and may be a matter of opinion. We do not accept any responsibility for errors, omissions or alterations after delivery. The information is constantly changing and therefore subject to change without notice.  _______________ will not update this response unless another written inquiry is received. This information applies to the name of the subject of the inquiry as styled in your request and does not include any indirect or related accounts or obligations, unless expressly specified in our response. _______________ encourages you to contact more than one credit reference prior to making any credit decision. If you received this response by FAX and you are not the intended recipient or an agent responsible for delivering it to the intended recipient, you are hereby notified that you have received this document in error, and that any review, dissemination, distribution or copying of the information contained in this message is strictly prohibited. If you have received this communication in error, please notify us immediately by telephone and return the message to us by mail.”

I could comment about a lot of this, but the last part is precious.  So if you send this to someone by mistake, just let us know.  No damage done.

I hope that my bank’s data systems are secure.  I hope they comply with regulations.  But I also know that US law gives me little control of how my data is handled, and corporate procedures imbue precious little concern about my financial privacy into their practices. So my financial data, my financial behavioral data, gets compromised more than I’d like to believe.

Companies, and the law, need to stop thinking of privacy, security, and compliance as mutually inclusive.  They do overlap, but one does not necessarily represent another, and these systems and safeguards need to be developed in tandem.

p.s. I did write to complain and I received a mundane corporate response claiming that they could not do anything about it. They did thank me for bringing it “to their attention” which is corporate speak for telling me to fly off a building.