Getting serious about money laundering

Posted by Anita Hawser

With banks' IT budgets stretched to breaking point and likely to come under increasing strain in the wake of the credit crunch, where does this leave current efforts around combating financial crime and money laundering?

In a webinar on AML trends 2008-2010, Neil Katkov, managing director, Asia research, Celent, says increasingly, banks are looking too "kill two birds with one stone" by seeking solutions that help solve multiple financial crime and compliance issues. Global spend on anti-money laundering was estimated to be $3.6 billion in 2006, with the bulk of the cost tied up in personnel training and reporting.

According to Katkov, some firms, particularly in Europe, are consolidating their financial crime efforts under one umbrella - a “Group Integrity” department that combines anti-money laundering (AML), fraud and, in some cases, security. US banks tend to lead their European and Asian counterparts in terms of AML technology spend - this may have something to do with strict enforcement and interpretation of the US Patriot Act, which places considerable focus on uncovering sources of terrorist financing.

Katkov says Asian banks have "only recently got serious about AML" (although their spending on AML is likely to grow at a faster pace) and that small banks in all regions are grappling with "manual approaches" to AML. At the lower end of the scale firms may prefer to implement an outsourced or ASP AML solution, which is slowly starting to gain traction. According to Katkov, at least one major bank in the US has outsourced its AML compliance operations

While various channels such as the diamond and arms trades are sometimes used to launder money, Katkov maintains that 82% of all money laundering activity goes through banks and brokerages. Insurance companies account for an estimated 10% of activity.

One of the biggest challenges Katkov identifies is applying existing anti-money laundering strategies and techniques to brokerage money laundering, which he says is typically part of the "layering" process - banks are the front line for money laundering. "You can’t just transfer bank AML techniques to brokerage," says Katkov, adding that trading behaviours are different.

For example, transaction peaks may not have the same significance on the brokerage side as they do on the banking side. It is also more difficult to profile customers as "execution only brokerages" may be executing trades on behalf of other firms.