Watch list filtering is every compliance officer's worst nightmare. With a single name like Muammar Gaddafi, spelled hundreds of different ways, and multiple watch lists to manage and update, the work is time consuming, costly and onerous.
Banks have often complained about the number of false positives generated, all of which need to be investigated. Some firms have even outsourced false positives' investigations to offshore locations in order to cope with the workload.
Anti-money laundering vendors are under pressure to not only reduce the number of false positives, but to make the filtering process more intuitive. In a report on Achieving Global Sanctions Compliance, Neil Katkov, senior vice president, Asia, Celent, says, "Achieving consistency in global sanctions compliance involves standardising operations, technology systems, and perhaps most essentially the compliance data—watchlists—that drive sanctions filtering.”
The lists themselves can be onerous and difficult to manage. Dr Tony Wicks, director, AML solutions, NICE Actimize, says HM Treasury's sanctions list in the UK had 3652 changed entries this year alone. There are also other lists banks need to comply with depending on the scope of their activity, including the well-known OFAC list, there is also an EU and UN watchlist and a Japanese FSA list.
The so-called Arab Spring has also had an impact on sanctions activity with new sanctions coming out associated with Iran. Anti-money laundering (AML) vendors like NICE Actimize say they are trying to lessen the workload for banks and the number of false positives using "fourth generation computational linguistics" - throwing raw computing power at "transliterate" words .
Explaining how the technology works, Wicks of NICE Actimize, says it can understand 800 million names, the context of those names and their cultural significance and make a "probalistic match" against the source of the name, which he says is important in terms of reducing false positives.
Showing posts with label Anti-money laundering. Show all posts
Showing posts with label Anti-money laundering. Show all posts
Wednesday, 5 October 2011
Increased risk of money laundering using pre-paid cards
There could be a high risk of increased fraud during the 2012 Olympic Games as a result of pre-paid cards, which could also potentially be used to launder money.
Dr Tony Wicks, director, AML solutions, NICE Actimize, sounded the warning last week, having walked into a shop in a UK high street, asking if he could buy an unlimited number of pre-paid cards which contain a stored value. According to Wicks, the shopkeeper responded by saying he could buy as many pre-paid cards as he liked.
Unlike credit cards, pre-paid cards are not linked to a bank account and no ID is required to buy them over the counter. Wicks says outside of a closed loop environment where the amount that can be spent on pre-paid cards or what they can be used for is controlled, anyone can buy a pre-paid card. He says most cards have an annual spending limit of £25,000, but there are no obvious restrictions he says on someone being able to buy multiple cards, top them up and use them to potentially launder money. "There is an increased risk of fraud with pre-paid cards as you can buy them anywhere and there are no credit checks or ID required," says Wicks.
Pre-paid or stored value cards are a relatively new phenomenon in Europe. They are also being promoted as a form of payment during the 2012 Olympics by Visa. There are different pre-paid card systems throughout Europe. In Italy most pre-paid cards are "open loop" whereas in other European markets, including the UK, they are typically part of "close-looped gift card schemes." Wicks makes the distinction between closed loop and open loop debit cards schemes, saying the greatest threat in terms of fraudulent use lies in "open loop" schemes.
Laundering money using pre-paid cards? According to AML experts, as banks deploy more sophisticated technologies to detect money laundering, fraudsters are turning to other means, such as cards, as a means of laundering money. While credit cards can be traced back to a user, pre-paid cards have no user ID or credentials.
Dr Tony Wicks, director, AML solutions, NICE Actimize, sounded the warning last week, having walked into a shop in a UK high street, asking if he could buy an unlimited number of pre-paid cards which contain a stored value. According to Wicks, the shopkeeper responded by saying he could buy as many pre-paid cards as he liked.
Unlike credit cards, pre-paid cards are not linked to a bank account and no ID is required to buy them over the counter. Wicks says outside of a closed loop environment where the amount that can be spent on pre-paid cards or what they can be used for is controlled, anyone can buy a pre-paid card. He says most cards have an annual spending limit of £25,000, but there are no obvious restrictions he says on someone being able to buy multiple cards, top them up and use them to potentially launder money. "There is an increased risk of fraud with pre-paid cards as you can buy them anywhere and there are no credit checks or ID required," says Wicks.
Pre-paid or stored value cards are a relatively new phenomenon in Europe. They are also being promoted as a form of payment during the 2012 Olympics by Visa. There are different pre-paid card systems throughout Europe. In Italy most pre-paid cards are "open loop" whereas in other European markets, including the UK, they are typically part of "close-looped gift card schemes." Wicks makes the distinction between closed loop and open loop debit cards schemes, saying the greatest threat in terms of fraudulent use lies in "open loop" schemes.
Laundering money using pre-paid cards? According to AML experts, as banks deploy more sophisticated technologies to detect money laundering, fraudsters are turning to other means, such as cards, as a means of laundering money. While credit cards can be traced back to a user, pre-paid cards have no user ID or credentials.
Thursday, 28 May 2009
Increased focus on AML as banks look to recoup losses
Financial crime is likely to dominate banks' IT spending in the months to come, experts say, as banks look to recoup millions lost to fraud every year.
I was at an event recently held by business process management vendor, Pegasystems, on the topic of financial crime and the message from most speakers at the event was that financial crime and anti-money laundering (AML) had moved up the banking agenda. According to Daniel Mayo of analyst firm, Datamonitor, 37% of banks expect anti-money laundering (AML) will drive IT project spending in 2009.
Yet, questions remain about the effectiveness of AML in detecting terrorist financing and the quality of Suspicious Activity Reports generated by banks pertaining to proceeds from crime, including fraud, AML and terror financing.
Like it or not, banks are at the coalface of fighting fraud and while the Serious Fraud Office in the UK says it is going to rely more on market intelligence and whistle blowers to unearth fraud, a lot of the onus for detection of fraud is still on the banks.
False positives remains a major issue for banks, given that banks are required to demonstrate sufficient due diligence around investigating alerts. "When it comes to financial crime alerts, most firms are faced with a high volume of false positives and a low volume of true hits," says Khosla. "However, the regulators point out that the risk of not evaluating each alert at some level is extremely high.
I was at an event recently held by business process management vendor, Pegasystems, on the topic of financial crime and the message from most speakers at the event was that financial crime and anti-money laundering (AML) had moved up the banking agenda. According to Daniel Mayo of analyst firm, Datamonitor, 37% of banks expect anti-money laundering (AML) will drive IT project spending in 2009.
Yet, questions remain about the effectiveness of AML in detecting terrorist financing and the quality of Suspicious Activity Reports generated by banks pertaining to proceeds from crime, including fraud, AML and terror financing.
Like it or not, banks are at the coalface of fighting fraud and while the Serious Fraud Office in the UK says it is going to rely more on market intelligence and whistle blowers to unearth fraud, a lot of the onus for detection of fraud is still on the banks.
Reetu Khosla, director of financial crime solutions at Pegasystems, says the regulators want to see banks take a more enterprise-wide, multiple-siloed view of fraud across all lines of business. "Regulators are saying not only should firms be looking at fraud, anti-money laundering and KYC, they should also be looking at these aspects across all lines of business," says Khosla. Banks will also need to be able to gather information from disparate systems and analyse it in such a way that links can be made between seemingly unrelated events.Banks attending Pega's breakfast briefing on financial crime were interested in learning whether banks could follow the example of the insurance industry which has collaborated on setting up a database enabling insurers to share claim information. The database has helped insurers successfully reduce fraud. However, banks sharing customer information may open up a can of worms in terms of data privacy issues, and banks still see financial crime as a competitive issue, particularly in terms of how long it takes them to resolve alerts and transactions held up by false positives.
False positives remains a major issue for banks, given that banks are required to demonstrate sufficient due diligence around investigating alerts. "When it comes to financial crime alerts, most firms are faced with a high volume of false positives and a low volume of true hits," says Khosla. "However, the regulators point out that the risk of not evaluating each alert at some level is extremely high.
Friday, 24 April 2009
Cultural impediments to AML in Middle East
The UK's Independent newspaper was the first to report that ransom money paid to Somali pirates was being laundered via the Middle East. The newspaper quoted shipping industry investigators who claim that approximately $80 million (£56 million) had been paid out in the past year alone in ransom money to Somali pirates, with millions being laundered through bank accounts in the United Arab Emirates and other parts of the Middle East.
Dubai's deputy police commander general has since denied any involvement by the UAE saying it has strict anti-money laundering (AML) legislation that requires all transactions above 40,000 dirhams ($10,889) to be reported.
Yet, a common laundering technique is to split large sums of money up into smaller amounts so that it cannot be detected by AML controls. I also stumbled across an interesting article posted on the web by Hany Abou-El-Fotouh, director of Policy & Corporate Affairs at CI Capital, the investment banking arm of Egypt's Commercial International Bank (CIB).
He points to cultural factors, which he says makes the strict enforcement of AML procedures in the Middle East difficult. Abou-El-Fotouh says that in some Middle Eastern countries setting up proper controls and strictly enforcing them in order to detect suspicious transactions or activities, conflicts with customer relationships and cultural customs.
He says many Middle Eastern financial institutions are adopting corporate cultures that weaken AML and anti-terrorist financing efforts. "One of the biggest problems for AML initiatives in the Middle East is cultural customs that accept deference to customers and anonymity. Accounts lacking full identification details or with misleading information are not unusual in the region," he said.
Dubai's deputy police commander general has since denied any involvement by the UAE saying it has strict anti-money laundering (AML) legislation that requires all transactions above 40,000 dirhams ($10,889) to be reported.
Yet, a common laundering technique is to split large sums of money up into smaller amounts so that it cannot be detected by AML controls. I also stumbled across an interesting article posted on the web by Hany Abou-El-Fotouh, director of Policy & Corporate Affairs at CI Capital, the investment banking arm of Egypt's Commercial International Bank (CIB).
He points to cultural factors, which he says makes the strict enforcement of AML procedures in the Middle East difficult. Abou-El-Fotouh says that in some Middle Eastern countries setting up proper controls and strictly enforcing them in order to detect suspicious transactions or activities, conflicts with customer relationships and cultural customs.
He says many Middle Eastern financial institutions are adopting corporate cultures that weaken AML and anti-terrorist financing efforts. "One of the biggest problems for AML initiatives in the Middle East is cultural customs that accept deference to customers and anonymity. Accounts lacking full identification details or with misleading information are not unusual in the region," he said.
Abou-El-Fotouh says Know Your Customer (KYC) requirements are lacking at many Middle Eastern financial institutions as customers may view banks' requests for additional information as intrusive or offensive. "For example, it can be difficult for a bank to refuse to enter into or to exit a relationship with a politically connected person," Abou-El-Fotouh explained. "Doing so could mean trouble for the staffer involved."
Friday, 3 April 2009
Combating AML and terrorist financing
The International Monetary Fund (IMF) is reported to have announced a "donor-supported fund" that will provide $31 million over the next five years in the fight against anti-money laundering (AML) and terrorist financing. Fund donors include the United Kingdom, Switzerland, Norway, Luxembourg, France, South Korea, Saudi Arabia and Japan.
The fund will commence operations in May and is geared towards providing "technical expertise" to those countries that want to strengthen their national AML and counter-terrorist financing strategies. Currently, at least in countries such as the UK and the US, a lot of the onus for detecting money laundering and terrorist financing falls on banks, however, not all funds are laundered through banks. The diamond trade is also a conduit for laundering.
The figures speak for themselves in terms of how successful governments have been in seizing terrorist funds. Since 2001 in the UK there were £400,000 worth of cash seized under the Anti-Terrorism, Crime and Security Act, £475,000 seized under the Proceeds of Crime Act, and £477,000 frozen by HM Treasury.
One of the challenges for banks is that some of them have been unwittingly caught out by US terror financing legislation for transferring money to organisations in Palestine, for example, that the US recognises as terrorist organisations, but which other countries don't necessarily.
The fund will commence operations in May and is geared towards providing "technical expertise" to those countries that want to strengthen their national AML and counter-terrorist financing strategies. Currently, at least in countries such as the UK and the US, a lot of the onus for detecting money laundering and terrorist financing falls on banks, however, not all funds are laundered through banks. The diamond trade is also a conduit for laundering.
The figures speak for themselves in terms of how successful governments have been in seizing terrorist funds. Since 2001 in the UK there were £400,000 worth of cash seized under the Anti-Terrorism, Crime and Security Act, £475,000 seized under the Proceeds of Crime Act, and £477,000 frozen by HM Treasury.
One of the challenges for banks is that some of them have been unwittingly caught out by US terror financing legislation for transferring money to organisations in Palestine, for example, that the US recognises as terrorist organisations, but which other countries don't necessarily.
Tuesday, 6 January 2009
AML programs should be tailored to business models
"Brokerage firms' AML programs must be tailored to their business models," said Susan L. Merrill, executive vice president and chief of enforcement at US-based regulatory agency, FINRA (Financial Industry Regulatory Authority). Merrill was commenting on the $1 million fine it recently imposed against E*Trade Securities, LLC and E*Trade Clearing, LLC, collectively, for failing to establish and implement anti-money laundering (AML) policies and procedures that could reasonably be expected to detect and cause the reporting of suspicious securities transactions.
While E*Trade provided trading customers with online electronic access to the securities markets, according to FINRA, it did not apply the same levels of automation when it came to monitoring trading acccounts for suspicious or "manipulative" trading activity.
According to FINRA, E*Trade relied on its analysts and other employees to manually monitor for and detect suspicious trading activity without providing them with sufficient automated tools, which was deemed to be insufficient given E*Trade's online business model, which requires "computerized surveillance of account activity to detect suspicious transactions and activity."
Financial service providers have invested millions in automated solutions for detecting suspicious account activity, but AML is still largely viewed as a 'box ticking' exercise, with some academics questioning the large number of Suspicious Activity Reports that have been generated, with few resulting in actual prosecutions.
The British Bankers Association has previously said that law enforcement officials need to take AML more seriously by following up on reports and information gathered by banks whilst monitoring account activity.
While E*Trade provided trading customers with online electronic access to the securities markets, according to FINRA, it did not apply the same levels of automation when it came to monitoring trading acccounts for suspicious or "manipulative" trading activity.
According to FINRA, E*Trade relied on its analysts and other employees to manually monitor for and detect suspicious trading activity without providing them with sufficient automated tools, which was deemed to be insufficient given E*Trade's online business model, which requires "computerized surveillance of account activity to detect suspicious transactions and activity."
Financial service providers have invested millions in automated solutions for detecting suspicious account activity, but AML is still largely viewed as a 'box ticking' exercise, with some academics questioning the large number of Suspicious Activity Reports that have been generated, with few resulting in actual prosecutions.
The British Bankers Association has previously said that law enforcement officials need to take AML more seriously by following up on reports and information gathered by banks whilst monitoring account activity.
Tuesday, 4 November 2008
Individuals in the firing line for AML
A landmark case which saw the UK's financial regulator, the Financial Services Authority (FSA) fine a money laundering reporting officer for the first time, is a sign regulators are taking a no-nonsense approach towards AML.
The FSA fined Sindicatum Holdings Limited, a corporate advisory firm, £49,000 for failing to implement effective systems and controls for verifying client identities. It also fined the company's Money Laundering Reporting Officer (Mr Michael Wheelhouse) £17,500. The fines imposed would have been 30% higher if Sindicatum had not agreed to an early settlement with the FSA.
"This fine is a warning to firms and individuals about the importance of complying with our rules in this area and we will not hesitate to clamp down on failures, where necessary," said William Amos, head of retail enforcement at the FSA.
Mark Dunn, manager, Risk & Compliance Services at LexisNexis said, “This is the latest indicator that the FSA is toughening up its approach to anti-money laundering compliance. Firms have had almost a year to update their systems and controls since the Money Laundering Regulations 2007 came into force last December. Dunn said that record keeping in particular was important in order to demonstrate that the MLRO has taken reasonable steps to verify the identity of all clients.
The FSA fined Sindicatum Holdings Limited, a corporate advisory firm, £49,000 for failing to implement effective systems and controls for verifying client identities. It also fined the company's Money Laundering Reporting Officer (Mr Michael Wheelhouse) £17,500. The fines imposed would have been 30% higher if Sindicatum had not agreed to an early settlement with the FSA.
"This fine is a warning to firms and individuals about the importance of complying with our rules in this area and we will not hesitate to clamp down on failures, where necessary," said William Amos, head of retail enforcement at the FSA.
Mark Dunn, manager, Risk & Compliance Services at LexisNexis said, “This is the latest indicator that the FSA is toughening up its approach to anti-money laundering compliance. Firms have had almost a year to update their systems and controls since the Money Laundering Regulations 2007 came into force last December. Dunn said that record keeping in particular was important in order to demonstrate that the MLRO has taken reasonable steps to verify the identity of all clients.
Tim Dolan, a financial services partner in Pinsent Masons' Corporate Group and a former member of the FSA's Enforcement Division remarked that:
"This case is significant as it is the first time that the FSA has fined an individual Money Laundering Reporting Officer ("MLRO"). It serves as a timely reminder that individuals who hold the MLRO function have responsibilities and can be personally liable for their firm's failings."
Dolan said the case was also significant as it demonstrated that the FSA is prepared to take action in the case of corporate advisory firms' anti-money laundering systems failing. In Sindicatum's case, Dolan said a number of shortfalls in their AML measures were highlighted:
- clients were not being identified at the time of take-on by the firm
- no attempt was made to verify which particular individuals were directors or controllers of clients;
- documents were in foreign languages, but the documents and their translations were not reviewed by the MLRO;
- photocopies of documents were not properly certified;
- relevant documents (including in one case copies of passports) were lost;
- client acceptance checklists were not complete or had not been reviewed by the account executives and the MLRO.
Monday, 20 October 2008
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.
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.
Subscribe to:
Posts (Atom)
