Wanted: Money Launderers

USA PATRIOT Act declares war on fraud, requires accountability from financial institutions by Mark Moorman and Laurie Rose

Money laundering is top of mind with every major global banking institution, chiefly due to anti-terrorism legislation known as the USA PATRIOT Act.

The act requires financial institutions with accounts in the United States to establish "due diligence" policies and procedures to prevent, detect and report possible instances of money laundering. They also must designate an internal compliance officer and establish an ongoing employee-training program related to anti-money laundering. A combination of short-term solutions and long-term strategy will allow financial institutions to mitigate their own risk of implication in money laundering and related fraud by spotting potential money laundering activities more quickly and with greater accuracy.

The act has required financial services firms to define a solution to spot patterns of behavior likely to reveal money laundering. Nearly all have pursued technology as part of the answer – namely, exception-based money laundering detection software that can be implemented relatively quickly in individual business units. These systems are designed to analyze customer data, including deposits, withdrawals, transfers and trades, and then, develop "typical" or "normal" patterns for a general demographic. Each customer action is matched against this norm, enabling examiners to spotlight potential fraud or illegal financing activity more quickly and reliably.

While these basic software packages can solve the immediate problem, banks should be aware of some potential concerns.

Addressing one problem at a time
The strength of these new "point" solutions is clearly in their ability to meet a given, specific need. For example, most of the general prepackaged software tools pinpoint potential money laundering for a single area, such as commercial banking, retail banking or mutual funds. While they may excel at targeting potential concerns in one business area, these solutions will require time-consuming and costly integration to cover multiple "silos" of services. Only a few software vendors have the expertise to span the needs of and integrate the data from all the lines of business at the affected banking and financial institutions.

The limited approach of fixing one problem at a time also fails to address the larger issue of cross-institutional abuses. For example, a suspect could receive a series of wire transfers of $10,000 into his checking account, an amount that typically would not raise suspicion. He could use those funds to purchase an insurance policy and then sell it promptly. Proceeds from the sale could then be deposited into another account, successfully and illegally laundered.

Only by putting these transactions together and comparing them against typical behaviors can financial institutions hope to detect money laundering activities successfully. Financial services firms today must look at their entire enterprise and view each individual customer as a single entity.

One view of the customer
The requirements of the USA PATRIOT Act are leading banks to develop a single, comprehensive view of every customer. By mandating compliance from every branch of the financial services world – including retail, commercial, securities and insurance – savvy financial institutions must change their view of the customer, and thus, their businesses.

Certainly, privacy protection issues (e.g., the Gramm-Leach-Bliley Act) are important considerations in the use of customer data. But the potential for identifying money laundering and other fraudulent activities lies in accurately tracking and analyzing that data.

Today, several financial services firms already use existing customer data to detect patterns of behavior and to understand their customers better. UK-based Unity Trust Bank serves trade unions, charities and credit unions, a client base that poses an unusual challenge for tracking suspicious behaviors. Many of the clients have complex arrangements for donations and transfers, which look highly suspicious to any ordinary anti-money laundering system. Because the accounts may involve a number of foreign transactions, Unity Trust Bank must be sure that all processes adhere to the extensive anti-money laundering regulations set out by the Financial Services Authority. The bank needed a clear and integrated view of the customer, one that would analyze behavior trends, consolidate multichannel transaction information and incorporate the knowledge of the bank’s customer relationship staff. So the bank implemented a powerful business analytics solution that could provide a comprehensive view of the customer while offering the flexibility to amend rules for detection.

For Unity Trust Bank and other institutions addressing anti-money laundering needs, the underlying technologies that ensure compliance, short-term results and long-term relationships are data management and high-end analytics.

Superior data management allows organizations to gain a comprehensive view of their customers by accessing, managing and transforming data from across the enterprise into analytical and predictive knowledge. The foundation of this quality information creates a holistic view for organizations to fuel their analytical capability needs.

Advanced analytics allow financial institutions to maintain a high level of accuracy in pinpointing suspicious transactions while decreasing the rate of identifying false positives. It’s this kind of total view of customer data that will enable financial institutions to do their part in the fight to eliminate money laundering channels. The adage to "know your customer" simply can’t apply to just one business unit at a time.

Compliance today, long-term strategy for tomorrow
The USA PATRIOT Act is being implemented in phases, but when it is complete, the entire financial services community must be prepared to detect and report all suspicious transactions. By providing faster, more accurate detection and understanding of money laundering activities, anti-money laundering technology enables the financial community to better allocate their investigative resources for all kinds of fraudulent activities. Terrorists aren’t the only perpetrators of money laundering fraud; drug dealers, organized crime groups and tax evaders also clean their money this way.

With so much at stake, financial institutions and the compliance officers responsible for defining their strategy need a holistic and nimble solution able to meet their near-term objectives while providing a solid, protective foundation for the future.