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New Regulatory Measures Against Money Laundering

As the U.S. Department of Treasury enhances the requirements for anti money laundering (AML) surveillance, Financial Services Institutions (FSIs) are working to ensure compliance while reducing costs.  These organizations are taking a fresh look at their AML systems with an eye toward expanding automation, improving performance, standardizing processes, and improving transparency.  Firms that invest wisely can create a compliance environment that meets immediate and future AML requirements and serves as a platform for improving overall governance and risk management.

The reality is that this type of organized crime uses FSIs to hide ill-gotten gains and so, inadvertently, financial institutions are lending a hand in these criminal acts.  This issue was brought to the forefront of discussions by 9/11, which resulted in the enforcement of the Bank Secrecy Act (BSA) and USA Patriot Act. Significant efforts of automation of Anti Money Laundering Controls and procedures have been implemented at FSIs in the early 2000’s.

Over the past couple of years, there has been renewed interest in AML solutions and a fresh wave of implementations.  Why?  Here are two reasons discussed in the 2014 RiskTech 100 report by Chartis:

  1. Stricter Regulation and Supervision – A general push to tighten supervision of the financial system and a renewed US-led crackdown on money laundering and terrorist finance have led to the introduction of a new raft of money laundering regulations over the past decade. Supervisors are more willing to use their powers and impose heavy fines; they are also demanding to see greater evidence of well-developed AML programs in financial institutions.
  2. Internet and Mobile Banking – These technologies not only have increased the velocity and volume of transactions but added an unprecedented level of complexity in transacting locations and therefore made money laundering easier and the job of AML teams harder. 

As a result, firms are looking to continually improve their existing AML programs and systems.  Facing a strict regulatory environment, FSIs need technology systems that will allow them to deal with a higher volume of transactions more quickly while complying with regulations.  When updating their systems, financial institutions should look to take advantage of new AML innovations, such as more advanced analytics and real-time technologies.

Navigating the Demands of Regulators

With the increase of unprecedented scrutiny from regulators given the current risk adverse environment, regulators are going after consulting firms as well as financial institutions for wrongdoings. Furthermore, regulators and courts are thinking of holding senior management responsible for AML violations.  Refer to Hot Topic #4 in: Compliance Officers May Be Held Personally Liable for Other Employees’ Misconduct.  Courts in the state of Delaware have found that corporate compliance officers have the same legal duties as directors.  Therefore, they may be found personally liable for illegal misconduct of employees if the compliance officer failed to implement or adequately monitor the company’s compliance program.

Lastly, regulators and examiners are getting more and more “under the hood” when conducting their periodic reviews.  They want to know the products and systems in place at the FSI, as well as the models and scenarios being deployed.

Seeking Greater Value and Investing Wisely

A financial institution’s willingness to work with regulators and take strides to meet the stringent demands of the BSA illustrates a higher level of corporate responsibility, and therefore reduces the risk of costly sanctions.  However, as the pressure to do more to stop money laundering increases, the job of AML monitoring and compliance grows even more complicated.  Today’s large banks process hundreds of millions of transactions daily processed in many different siloed systems.  At the same time, financial crime schemes grow more and more sophisticated, thus making it harder to provide a comprehensive view to support investigation.

According to the 2014 RiskTech 100 report by Chartis, mobile technology is among the top 5 technologies that financial institutions rank as a source of risk.  The increased use of internet and mobile banking has increased the volume of transactions and has made it much easier for financial criminals to go about their business.  This is one of the main reasons, banks’ AML groups need to invest in a solution that takes modern-day technologies such as social media, mobile, and cloud computing into account.

Consequently, FSIs should be focusing on data quality, flexibility and scalability, making most of automated analytics, optimizing their investment, and building on a solid data foundation.  Those that invest wisely have the opportunity to gain a new level of transparency, insight, and automation, which can significantly reduce risk and compliance costs.

Controlling Costs of Compliance

As transaction volumes continue to increase, more servers are needed to screen transactions for AML, which equates in higher costs.  FSIs are reaching a point where throwing more hardware at the problem won't fix it.  A fundamental data consolidation is imperative to allow proper system scaling.  If not, the problem compounds with additional volumes, and will exponentially scale.

Financial institutions seem to be facing an explosion of false positives.  This is because the AML monitoring systems are tuned with the “let’s not miss anything” approach and rightfully so because of increase regulatory scrutiny.

More Transactions = More Alerts = Even More False Positives

Therefore, FSIs are struggling with the need to hire more people to look at these alerts.  Why?  Because once an alert is generated, it has to be adjudicated within 30 days.  Is throwing more people at the problem helping?

How is your organization handling the new threats of money launderers?  I would love to hear your thoughts on this.


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