A Failure of Trust: The Next Financial Crisis Starts in the Pipes

Editorial Calendar World-Region-Country A Failure of Trust: The Next Financial Crisis Starts in the Pipes The contributed piece below argues that those two facts belong together: that the plumbing which moves money is now a bigger systemic risk than the reserves sitting behind it, and that rules-based transaction monitoring is the reason. Its author runs a company that sells AI-based monitoring to banks, so the conclusion is not a disinterested one, and readers should weigh it in that light. Brad Levyis chief executive ofThetaRay, a provider of AI-based financial crime detection and transaction monitoring to banks and fintechs.

The article that follows sets out his opinion. The financial industry has spent the last decade meticulously perfecting balance sheets, capital cushions and liquidity ratios. While it has been busy protecting cash reserves, the literal pipelines that move cash around have been decaying from the inside out, with bad actors leveraging legitimate avenues to move criminal money.

With record regulatory fines and billions of dollars laundered, these activities jeopardise the whole system. As a result, the next financial crisis will emerge from financial markets losing trust in the networks themselves before a single bank runs out of money. The cracks are already beginning to appear.

The UK’s Financial Conduct Authority (FCA) targeted Barclays last year over deep-seated, historic vulnerabilities in its anti-money laundering processes, revealing signs of compliance design failures. Even regions held up as standards of clean banking are showing faultlines. In Sweden, a recent public finance analysis revealed that the criminal economy now generates an annual turnover equivalent to 5.5 per cent of the country’s GDP.Petra Lundh, Sweden’s national police chief, has openly warned that this illicit capital is seeping into legitimate industries and society at large.

The financial industry must ensure that networks are vigilantly guarded, and that trust