The USA PATRIOT Act: A Long-Term Financial Services Strategy

Money laundering is top of mind with every major global banking institution, chiefly due to the post-Sept. 11, 2001, anti-terrorism legislation in the USA PATRIOT (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) 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. Other requirements include designating an internal compliance officer and establishing an ongoing employee-training program related to anti-money laundering.

By addressing the USA PATRIOT Act compliance issues with a combination of short-term solutions and long-term strategy, financial institutions can mitigate their own risk of being implicated in money laundering and related fraud by spotting potential money laundering activities more quickly and with greater accuracy.

To satisfy the Act, financial services firms were required 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 on a business unit-by-business-unit basis.

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 then matched against this norm, providing examiners with a way 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 now available pinpoint potential money laundering for one area, e.g., commercial banking, retail banking or mutual funds.

While they may excel at targeting potential concerns in one business area of financial services, they will require time-consuming and costly integration to cover multiple "silos" of services. 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 wire transfers of $10,000 into his checking account, an amount that typically would not raise suspicion. He could then use those funds to purchase an insurance policy and then promptly sell it in an unusually short period of time. The money he received from this sale could then be deposited into another account, successfully and illegally laundered.

This example begs the question: Is there true compliance without crossing and integrating data from all lines of business?

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

One View of the Customer
While the call to have "one view" of the customer may spur derision among the IT team, the requirements of the USA PATRIOT Act are leading banking entities down that road. 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 better understand their customers. UK-based Unity Trust Bank serves trade unions, charities, and credit unions, which poses an unusual challenge when tracking suspicious behaviors. Many of the clients have complex arrangements of donations and transfers, which look highly suspicious to any ordinary anti-money laundering system. As 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. To accomplish this, 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. Unity Trust 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 is critical for these organizations to gain a comprehensive view of their customers through accessing, managing and transforming enterprise-wide data 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 provide financial institutions with intelligence that can maintain a high level of accuracy in pinpointing suspicious transactions while decreasing the rate of identifying false positives. Company resources are better utilized and more effective.

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, giving financial institutions a moving target for compliance. At an Anti-Money Laundering Audit and Compliance Forum in New York in September 2002, for instance, presenters were reading new compliance regulations between sessions and changing their presentations mid-conference to keep up-to-date.

The goal of the legislation appears to cover every conceivable branch of the financial world, any time and any place where money laundering is a clear and viable threat. When complete, the entire financial services community must be prepared to detect and report all suspicious transactions.

The return on investment from anti-money laundering and related technology solutions in this case has little to do with financial gain, other than avoiding non-compliance fines. It boils down to mitigating the risk of an irreparably damaged corporate reputation or even jail time for an offending compliance officer.

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 charged with 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.

About the Authors
Laurie Rose is vice president of industry strategy for SAS, the market leader in business intelligence software and services. SAS clients include 98 of the top 100 companies in the Fortune 500. Mark Moorman is vice president of SAS' Financial Services Practice. SAS has more than 25 years' experience working with the financial services industry, including long-term relationships with top financial customers such as AXA Financial, Barclays, Dreyfus, Hang Seng Bank, ING Bank and U.S. Bancorp. In the banking industry alone, SAS works with 1,100 banks worldwide, including 61 of the 62 banks listed in the Fortune Global 500.

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