Banks Are the First Line of Defense Against Money Laundering
Q: How have the anti-money laundering (AML) requirements placed on banks changed since 9/11?
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Eva Weber, Aite Group | |
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Eva Weber, Aite Group: There is tremendous regulatory pressure on banks to be a virtual front-line defense against money laundering. The threat of significant fines and potential damage to their reputations is driving banks to make significant investments in technology, training and process controls. Banks must now be able to articulate the AML risks inherent in their businesses, and must have programs and tools in place that are appropriate for those risks. Doing this right requires that institutions have a solid understanding of their customers and what constitutes "normal" behavior for each customer. Banks then need to get a handle on the millions of transactions that occur every day.
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Teresa Pesce, KPMG | |
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Teresa Pesce, KPMG: One of the most significant developments has been the enactment of the USA Patriot Act, which has increased and formalized AML requirements for virtually all financial institutions, not just for banks. The Patriot Act sets a high bar, and regulators have heightened their expectations, evidenced by the many enforcement actions we have seen over the last several years. To meet these high expectations, institutions must understand and analyze the risks inherent in their products and their customer base, and must effectively use that understanding to monitor customer transactions for suspicious activity. Given the variety of products available, the many channels through which business is conducted and the global nature of banking, this amounts to a continually evolving process.
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Stephen Epstein, Mantas | |
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Stephen Epstein, Mantas: By far the biggest impacts to banks have been the adoption of automated surveillance solutions and reengineering of anti-money laundering processes and procedures, in addition to much more robust Know Your Customer(KYC) and Enhanced Due Diligence (EDD) processes/solutions. KYC, in particular, involves the assessment of the risk associated with each customer as banks continually monitor customers' behavior based on their transactions.
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Bhairav Trivedi, PayQuik | |
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Bhairav Trivedi, PayQuik: The most significant developments have been stricter adherence to AML guidelines by banks and financial institutions. This comes in light of increased oversight by the regulatory bodies. Of these activities, OFAC compliance, Know Your Customer and Customer Identification Program (CIP) requirements are the most important and most developed.
The biggest AML challenge banks face today is ensuring their technology is constantly updated to [comply with] new regulations. With increasing product flexibility, AML challenges will become even more complex as banks struggle with increasingly complex KYC decisions.
Q: What is the current state of AML regulations? Are there any new AML-related regulations on the horizon, and what are the IT implications?
Weber, Aite Group: There has been significant ramp-up of AML regulation over the past few years. Regulations that define customer identification and AML monitoring procedures are in place. But regulators continue to fine-tune, primarily through published guidance in response to evolving money-laundering risks. Given the dynamic nature of money laundering, banks must ensure they have the flexibility to adapt. Changes in standards and best practices are expected as money laundering threats are identified and explored. Having the right AML technology is a critical means of achieving this consistency and in executing AML procedures efficiently.
Pesce, KPMG: With numerous regulations governing the obligation of financial institutions to monitor and report suspicious activity, systems are key to a successful AML program that can assist with the customer data collection and use that information to risk rate customers and monitor transactions. Meanwhile, regulators -- in particular those from FinCEN -- have indicated that there will be a move toward a more risk-based system and toward better organizing requirements so that particular industries will have an easier time interpreting the regulations.
Epstein, Mantas: Local, regional and federal regulators are constantly learning from the examinations they conduct and trends within the industry. This leads to modifications of the AML regulations on a fairly regular basis. Evidence of this was recent changes to the USA Patriot Act around allowing for a risk-based approach to transactional surveillance and stricter guidelines around Section 326 (KYC).
Q: What are the key technologies banks are using to detect and prevent money laundering? What emerging technologies can help banks improve AML efforts?
Weber, Aite Group: There are too many moving pieces to the AML puzzle for it to be handled manually. Technology is clearly needed to analyze and manage the vast amounts of information that most institutions churn out daily. To support the broad goal of identifying and tracking situations with money laundering potential, vendor solutions typically provide list-checking and transaction-monitoring functions, case management, and reporting and audit capabilities. As they move toward second-generation solutions, most banks will be seeking out enhanced analytics and tools that provide an enterprisewide view.
Pesce, KPMG: Tools that effectively assist in risk analysis and transaction monitoring are key. Institutions must first understand what is normal for a customer and the risks associated with that customer before they can know whether activity is unusual/suspicious.
Epstein, Mantas: In an effort to continually meet AML regulations and control compliance costs, banks are looking for more-innovative ways to assess client risk, understand surveillance models and tune detection systems in order to drive up the quality of an alert while preventing false positives. This is playing out in many different ways within the context of technology. For example, banks are spending more time understanding the output and quality of their AML solutions (historical data); modeling and predicative analysis based on potential tuning changes are becoming increasingly important; and consolidating compliance solutions onto common platforms in order to achieve the benefits of better data/process reuse while lowering costs also has become an important objective.
Trivedi, PayQuik: Currently banks use a number of technical tools to detect and prevent money laundering. Among these are sophisticated database tools and lists that can detect if a name is among a list of banned entities or individuals, or is an individual that has a transaction pattern that is abnormal from what is expected of that individual. Emerging technologies that will increasingly play a part in helping banks improve their AML efforts include biometric identification, predictive modeling, and sharing of data at the national or geographic level to detect structuring across multiple banks.
Q: How can banks leverage their investments in AML solutions in other areas?
Weber, Aite Group: Over the past few years, AML solutions have matured. This is good, because banks' expectations for AML technology have been rising as well. Anti-money laundering solutions based on enterprisewide platforms are rich sources of all kinds of customer and operational data. Robust solutions not only help banks identify and mitigate various types of risk, they can also provide valuable insights into customer behavior and help identify marketing opportunities. As lines of business, C-level executives and IT work more closely with compliance departments, investments in technology will address both compliance and business strategies.
Pesce, KPMG: Banks can further leverage their investments in tools that analyze customer risk for AML by using those systems to house credit risk information as well. Certainly, AML tools can also be leveraged to detect fraud, and systems that process payments can house filters for scanning those payments against sanctions lists, such as those provided by OFAC or other data points.
Peggy Bresnick Kendler has been a writer for 30 years. She has worked as an editor, publicist and school district technology coordinator. During the past decade, Bresnick Kendler has worked for UBM TechWeb on special financialservices technology-centered ... View Full Bio