Written evidence submitted by Simon Dennis, Director for Future Government and public affairs, SAS UK&I (IEF0029)
SAS COMPANY AND TECHNOLOGY
- SAS operates at the frontiers of technology in areas such as computer vision, deep neural learning, natural language processing, entity resolution and computer vision and is the world-leader in both Analytics and Artificial Intelligence Platforms. The company invests over $1Billion per annum in research and development on behalf of its customers at nearly 90,000 sites worldwide.
- SAS is committed to ethical use of data and is recognised for its socially responsible, ethical, and moral business practices and is the leading global partner to governments and private enterprises who want to make better decisions faster. SAS enables fully informed, consistent decisions to be taken throughout organisations based on the sum of institutional knowledge.
SAS DOMAIN EXPERTISE IN ILLICIT FINANCE
- SAS has been developing analytics software for more than 40 years. Working closely with financial services customers, SAS has expertise in developing solutions that tackle financial crime including comprehensive Anti-Money Laundering (AML) capabilities encompassing suspicious activity monitoring, customer due diligence, watch-list filtering and investigations case management.
- In this business domain, SAS is already working with FCDO across many of the Atlantic overseas territories to provide intelligence and crime recording technical capabilities through the Overseas Territories Regional Criminal Intelligence System (OTRCIS). OTRCIS is accessible to many local law enforcement departments as well as centralised users in the UK and offers a possible fast track route to tackling illicit financial activities.
SAS RESPONSE TO INQUIRY
Q1. What are the pressures affecting the global rules-based economic order and how might illicit and emerging forms of finance affect these?
- The shifting global power relationships are breeding uncertainty and potential instability in the global system. The new economy, in part brought about by globalisation and decentralised finance, has increased geostrategic tensions. Competition for resources whether fuel or food has led to a re-emergence of nationalist policies and their promotors. Challengers to the rule of law are now being emboldened by the seeming impunity of western governments faced with accusations of lawbreaking, cronyism and corruption.
Q2. How effective are existing international governance regimes and other measures to tackle illicit finance, and what gaps rEmain?
- Existing international governance regimes, prior to the 2022 Russian invasion of Ukraine, suffered from a patchwork approach to tackling illicit finance flows. This was due to the fragmented nature of the various frameworks, agreements and systems in place.
- Economic sanctions on individuals or entire nation states, whether to counter illicit finance, punish rogue behaviour that goes against the ‘rules-based international order’, or to achieve strategic foreign policy goals, have been criticised for failing to achieve the intended outcome and instead having a negative effect.
- The 2016 OECD report, Better Policies for Sustainable Development 2016, A New Framework for Policy Coherence, acutely identified problems facing the international community, stating: “Illicit financial flows can be a fundamental determinant of growth, development, governance, security, and rule of law outcomes and, as such, should be considered a significant disabler of sustainable development.”
- The government published Global Britain in a competitive age: The Integrated Review of Security, Defence, Development and Foreign Policy, which formally outlined the government’s aim to “promote effective and transparent governance, robust democratic institutions and the rule of law” (p.48). This unambiguous statement is partnered with a commitment to “reinforce cooperation in traditional policy areas such a security and intelligence and seek to bolster it where together we can have greater impact, such as in tackling illicit finance” (p.20). The landmark partnership between the UK and UAE to tackle illicit finance is a good example of this collaboration in action. The UK should also turn to its existing strengths in areas such as Tech, Finance and promoting ethical standards, particularly in AI application. This puts the UK in a strong position to provide guidance and leadership on future international governance regimes.
- SAS strongly endorses an international approach, which includes mechanisms for identifying, and then sharing, appropriate data and methods that has safeguards for both operational security and individual privacy. Furthermore, there needs to be consideration and coordination of national and international laws. For example, the Economic Crime (Transparency and Enforcement) Act 2022 will enable UK authorities to easily sanction those already being targeted by the USA and the EU. Making it easier to streamline responses is one step towards a more harmonised and effective international approach.
Q3. How effective are the UK’s sanctions regimes on corruption and human rights? How could sanctions be used to greater effect in countering illicit finance?
- Prior to our modern economic sanctions, the equivalent weapon was the siege or blockade. The term blockade entered the European vocabulary in the mid-17th Century but international coercive or restrictive acts of force can be traced right back to Thucydides account of The Peloponnesian War around 431–404 BC. The use of blockades or economic sanctions were viewed as a terrible and indiscriminate weapon to wield against the combined military and civilian, young and old throughout an enemy nation as an act of total war. This brute force use of blockades as mass-effect blunt instruments were what started to distinguish them from protectionist trade tariffs or other negotiated restrictions against an industry sector or the use of a financial levy to protect domestic craftsmen against the inflows of cheap foreign imitations.
- Modern day sanctions arose in the three decades following World War I and were viewed by the League of Nations as a more terrible weapon against a problem state than physical warfare. This was due to the widespread suffering of the whole population and the subsequent multigenerational legacy left by malnutrition, hunger, stunted growth and birth anomalies which led to a cycle of reduced productivity and increased disease.
- These long term effects are starkly similar to those that may be expected following a (limited) nuclear conflict in terms of radiation effects and so it is unsurprising to learn that modern sanctions were principally conceived to act as a deterrent to bad state actors, rather than a punishment or an act of full spectrum warfare. In developing plans for nuclear warfare, Britain will have tested and simulated scenarios to maximise the disruption and destruction to the enemy whilst minimising the risks to friendly forces and lasting radiological hazards. By adjusting the nuclear-yield, detonation altitude, geographic location and so forth we would seek to optimise the effects.
- The same approach should be applied to economic sanctions by identifying suites of intervention regimes that prove the most effective in achieving the required behavioural change to a particular target culture, demographic or industry, that cause the least amount of undesirable collateral damage to the wider population, and the most effective as a deterrent to others. This type of intervention has proved successful in preventing and/or reducing breaches of tax-compliance when potential perpetrators are exposed by personal observation, sponsored media coverage and the devastating consequences of interventions (sanctions).
- However, it should be noted that use of sanctions as a deterrent was clearly less than successful in the early 20th century and more recently failed to prevent the Russian offensive against Ukraine in February 2022. Sanctions have also failed to stem human rights abuses or authoritative dictators who shun the rule of law and the international system
- Given that sanctions should correctly be viewed as part of a nation’s armoury across many channels and may therefore increasingly be viewed as an act of war, then it may be sensible to manage their use as part of the Integrated Review, rather than an adjunct to trade negotiations. This would also help to avoid the moral hazard of balancing commercial and existential factors.
Q4. What other measures beyond sanctions can counter illicit finance, including bilateral and multilateral approaches?
- Preventing the need for sanctions and other measures being imposed would be the preferred solution. Diplomacy, the development of healthy civil societies in emerging nations, to embed accountability and ethical behaviour is the preferred, though long-term solution to ‘raise the floor’ internationally. Though challenging this long-term solution, there are several other approaches at our disposal, which remain underutilised.
- Legislative changes, including updates to the regulations governing cryptocurrencies. This includes shutting down cryptocurrency exchange services favoured by criminals and better regulation and control of bitcoin ATM. The Economic Crime (Transparency and Enforcement) Bill, soon to be Act, is a positive step in the right direction as mentioned in paragraph 5 but also because it reinforces existing powers available to XXXgovernment like Unexplained Wealth Orders. However, more needs to be done to legislate the new technological areas vulnerable to abuse if accessed by the wrong people.
- In order to identify and then attack illicit finance activity, it is the role of the government to convene the various stakeholders and ensure a wide spread of capabilities from people of all backgrounds. Government also needs the active engagement and participation of a wide range of entities outside government. For instance, software vendors who can support government entities in their quests for greater integration of data, coherence, and contextualisation.
Q5. What is the potential impact of new distributed ledger technologies and digital currencies (both cryptocurrencies and central bank digital currencies)
- On illicit finance and money laundering?
- Cryptocurrency fraud has become a dominant topic of discussion for governments globally and associated crime had a record-breaking year in 2021, with a report finding scammers took $14 billion worth of crypto last year alone. Instant transactions and international reach mean digital currencies can be used as a new tool for the furtherance of tax avoidance, money-laundering, and bribery. Examples of common frauds include:
- Pump and Dump Schemes - where owners of a stock try to drive the price up before selling off their holdings at an artificial peak. Whenever false claims can hype up demand, they permit the originators or dominant holders of the cryptocurrency to earn massive phony profits.
- Market Manipulation - Improper market manipulation may include spoofing, front-running, churning, and other schemes.
- By-passing remittance laws - every country has a limit of transferring and receiving money internationally but this limit can be avoided via cryptocurrency.
- Non-fungible token’s (NFTs) should also be contemplated when examining the impact of new distributed ledger technologies on illicit finance flows. The global NFT market generated over $23 billion in trading volume in 2021, its best year yet. However, over 90,000 NFTs were found to be fake. Additionally, NFTs are part of the overall metaverse concept and identity theft is sure to be a major concern in the metaverse. The fundamental issue is that the metaverse by nature is unregulated, so the security concern will only increase. The leading marketplaces, where you can buy and sell NFTs, do little to prevent the trade in fraudulent NFTs. It is therefore troubling that in the government consultation on Regulating the promotion of certain types of cryptoassets concluded in January 2022, the government decided to retain fungibility in the definition of qualifying cryptoassets, leaving non-fungible tokens out of scope.
- The key differentiator of digital currencies which presents the biggest potential impact on illicit finance is the ability for criminals to conduct international transfers, while maintaining a level of anonymity. As noted by the Financial Action Task Force (FATF) back in 2014, it “offers a level of potential anonymity impossible with traditional credit and debit cards or older online payment systems.” This creates major problems for law enforcement trying to stop a transaction or cease a certain activity.
- The lack of reliable data on cryptocurrencies draws parallels with more well known types of fraud, such as VAT. Both have missing data as part of the problem in attacking it, with VAT data being located within a third party and cryptocurrency data being encrypted. Zoning in on the data issues is imperative to tackling illicit finance at home and abroad.
- To combat potential impacts, SAS recommends the UK government follow the example set by the U.S. Department of Justice, who are dedicating resources to safeguard the crypto system by establishing an enforcement team with a specific focus on digital currencies and assets. The U.S Federal Bureau of Investigation (FBI) have also recognised the growing threat, and on 15th March 2022, they officially “announced the creation of the Virtual Assets Unit (VAU), a nerve center for the FBI’s virtual currency programs where intelligence, technology, and operational support will flow to other divisions.”
Q9. What skills and expertise does the FCDO need to respond to the challenges and where are these lacking? What skills on illicit finance has the FCO merger with DFID brought, and how are these skills being exploited?
- The development of skills in FCDO need to centre on empowering officials with the ability to articulate the problems and potential solutions to policy makers. As a first step, the department should recognise that there will be a continuum of rapid change, requiring proactive and reactive adjustments to be made in-flight. Skills and areas of expertise to be developed include:
- Data ethics and data protection
- Data management
- Data analytics
- Industry knowledge, e.g., Decentralised Finance (DeFi)
- It is important to remember that any form or training and skills development should be accompanied by the establishment of a broad and flexible technology capability, to allow a high degree of freedom for analysts to keep ahead of illicit/criminal elements and to share techniques with other departments when appropriate.
- In order to deploy rapidly it may be sensible to repurpose existing systems in which FCFO staff or other civil servants who use similar technologies in monitoring compliance and managing sanctions (interventions) such as tax inspectors or other counter-fraud professionals. This would provide the opportunity to work cases from a local perspective or to use experience in broader financial crime problems. Given the existing technologies within FCDO, deployed in our small island overseas tax-haven territories and the broader requirement for an overarching holistic view from across all territories, then use of the OTRCIS application to deliver a Pilot system would seem sensible.
- This approach has considerable merit, provided agreement can be reached for breaking down some of the confidentiality barriers that may exist between international territories. Once proven in this limited capacity it would then be a low-risk extension to develop a global capability and thus allow the output from financial monitoring and due diligence activity to be combined with local intelligence already known about individuals and entities in all foreign territories.
 OECD (2016), Better Policies for Sustainable Development 2016: A New Framework for Policy Coherence, OECD Publishing, Paris, https://doi.org/10.1787/9789264256996-en.
 OECD (2016), Better Policies for Sustainable Development 2016: A New Framework for Policy Coherence, OECD Publishing, Paris, https://doi.org/10.1787/9789264256996-en - Chapter 4
 https://www.gov.uk/government/consultations/cryptoasset-promotions (p.11-12)