An uptick in banks' suspicious activity reporting is hindering rather than helping the fight against financial crime, industry players have warned.

In Denmark, the number of suspicious transaction reports by banks to the state prosecutor has risen by 122% between 2017 and 2019, amid revelations that Danske Bank A/S, the country's biggest financial institution, was embroiled in a $200 billion dirty money scandal.

This trend is prevalent across Europe, but many national financial intelligence units do not have the capacity to deal with this escalation, according to Wim Mijs, CEO of the European Banking Federation.

"You see many banks report 'defensively,'" Mijs said at an event in Brussels on Feb. 19. "It is literally as if we are delivering a haystack to the police every week, saying 'now please find the needle.' This is stacking up."

The European Banking Federation represents 3,500 European banks and 32 national banking associations.

A large number of European banks have been drawn into the scandal known as the "Global Laundromat," including Deutsche Bank AG, HSBC Holdings PLC, Barclays PLC, Lloyds Banking Group PLC, Royal Bank of Scotland Group Plc, ING Groep NV, Crédit Agricole SA, Swedbank AB (publ) and Nordea Bank Abp.

One challenge is that banks are taking a strictly compliance-based approach to fighting financial crime, rather than one that is strategic and led by intelligence, which makes the reporting ineffective, said Laure Brillaud, a senior policy analyst at Transparency International, in an interview.

"This is problematic because, at the end of the day, it's more a way for them to cover themselves rather than really contributing to the fight against corruption," she said, adding that banks risk being involved in more scandals as a result.

Public-private partnerships

Banks need to improve the quality rather than the quantity of suspicious activity reports, but more feedback from authorities is essential for them to do so, said Mijs.

One solution is private-public partnerships, he said, pointing to the U.K.'s Joint Money Laundering Intelligence Taskforce, or JMLIT, as a notable example that should be studied by other countries.

Launched in 2015, the JMLIT is a collaboration between law enforcement agencies and more than 40 financial institutions in the U.K. to exchange and analyze information relating to money laundering.

So far, intelligence from the JMLIT has been "very fruitful," according to Anne Markey, global head of financial crime innovation at UBS Group AG, one of the initiative members. Speaking at the FT Banking Summit on Dec. 4, 2019, she said the sharing of data through such initiatives "is the only way we can move forward and really fight financial crime."

The initiative has led to private-sector members identifying more than 5,000 suspect accounts linked to money-laundering activity, according to the U.K.'s National Crime Agency.

Denmark's Money-Laundering Task Force, following a year's work by experts, lawyers and representatives from the largest banks in the country, has specifically recommended the JMLIT as a "well-functioning" model that should be adopted in Denmark.

But although public-private partnerships can go some way to help banks improve their reporting, such projects should only be "complementary" to lenders' own reporting systems, said Brillaud of Transparency International.

She said banks need to invest in improving their systems and technology to deliver more quality reports, or else the growing number of alerts will put even the JMLIT under more pressure than it can handle.

While banks are starting to invest in technology to better tackle money-laundering risks, they still generally struggle with inefficient transaction monitoring systems, according to Richard Daniels, head of group financial crime prevention at Nordea.

"We [as an industry] have 95% false positives at the moment. That's a lot of effort going into looking through those many alerts to try to find something that's nefarious," he told the audience at the FT Banking Summit.

Harmonization needed

Mijs called for better resourcing of the national financial intelligence units, or FIUs, to cope with the increasing number of suspicious activity reports.

More harmonization between FIUs when it comes to reporting requirements is another challenge that needs to be addressed.

"Ultimately, there is no reason that the reporting formats and obligations should be different from one member state to another," said Nicolas Véron, a senior fellow at Bruegel, a European think tank, in an interview.

"We're in a single market, and the system is only as strong as its weakest link."

The differences between the various FIUs in Europe is the main problem, said Sebastian Fiedler, chair of the Federation of German Police Officers.

"I don't know how big banks that work in several European countries can cope with these different FIUs," he said, speaking in Brussels on Feb. 19. "We should discuss that more clearly, and it is a real problem."