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By Neil Ainger

Compliance with sanctions and AML rules is an increasing burden for financial institutions. One solution is to merge operations and adopt a holistic approach, reports Neil Ainger

The desire of criminals to launder money or to avoid tax is a constant, as are governments’ desires to restrict bribes or the flow of finance to terrorist organisations or to regimes they deem unsavoury. The result is an ongoing game of global monetary hide and seek, with banks often stuck in the middle and subject to huge fines if they get it wrong or are caught out.

A number of substantial fines have been imposed on banks that have fallen foul of AML and sanctions rules. Such cases show either a lack of supervision, robust procedures, or adequate reporting and training systems. Each case is different, which is why banks use technology to help spot suspicious patterns in transactions. Technology can speed up the raising of any ‘red flags’ that require expensive manual investigations, and reduce the amount of false positives that waste valuable man-hours and infuriate innocent customers whose payments are delayed.

Professional and experienced staff are also vital in complying with AML and sanctions rules – knowing when and how to deploy them shows a successful organisation. “IT is not a solution alone; but nor is a strictly clerical approach,” says Bob Lyddon, managing director of the Ibos Banking Association. Lyddon says non-automated work always should be done by experienced professionals.

The sheer volume of transactions that must be screened is a problem for banks. Unrest in the Middle East means many more ‘politically exposed persons’ are being added to watch lists. “The complexity of managing multiple screening lists, with more frequent updates, has increased,” says Christine Doria, a managing director and product executive at JP Morgan Treasury Services. “It’s one reason why banks are investing more in their overall compliance model, including in expert staffing and technology.” AML compliance always has been a critical issue and an operating imperative for banks, she says.

The burden on banks has been increasing recently because of a convergence of costly high-profile enforcement actions, political events and more regulations such as the planned update to the Financial Action Task Force’s (Faft’s) 40 key recommendations and nine anti-terrorist funding rules, which will be adopted in February 2012. An inter-governmental body that coordinates efforts to combat money laundering, Faft sets global rules, but individual national regulators define their own interpretations. For example, UK financial regulator, the Financial Services Authority has issued guidance on high risk money laundering situations as has the Joint Money Laundering Steering Group, which comprises representatives of UK trade associations and the financial services industry. There is also the possibility of a EU Fourth Money Laundering Directive, which builds on the Faft stipulations, but again diverges in certain aspects.

This divergence of interpretations of AML and sanctions rules has caused many multinational banks to adopt a ‘maximum effort’ approach that adheres to the strictest readings so that a single AML definition can be followed internationally.

Other related regulations, such as the UK’s new Bribery Act and the older US Foreign Corrupt Practices Act, may not directly cover AML but still require transactional monitoring and archive keeping from the banks. If this can be integrated into one system it will possibly reduce running costs down, but it’s a big if.

The impending Foreign Account Tax Compliance Act (Fatca), which will clamp down on tax avoidance by US citizens from 1 January 2013 and covers non-US banks and brokers that hold US investments, will cause procedural and operational changes. Much more data will have to be sent to the US Internal Revenue Service when Fatca comes into play and many financial institutions are already struggling with the ever-expanding sanctions lists, such as that of the US Office of Foreign Assets and Control.

However, new technologies promise to cut operational costs by addressing AML and fraud management simultaneously across an entire enterprise. These business intelligence-type solutions could help to reduce the cost of running large volumes of transactions through screening systems and cut the amount of expensive false positives and manual interventions required. The approach relies on one set of data with multiple activities and interrogations of this dataset happening simultaneously, using business process management-style software tools and analytics.

Many financial institutions have appointed financial crime directors to encourage a universal approach and some are seeking to merge the functions as well as the data. “More firms are gravitating towards a unified, centralised financial crime approach as the technology is available,” says Malcolm Taylor, Emea and Asia managing director at Accuity, a payments software developer. “[After all] fraud is a predictable offence for money launders.”

Merging fraud and AML compliance staff and procedures can be difficult, particularly the merging of datasets, so it should be approached with caution. The benefit of a financial crime strategy, quite apart from the efficiency savings, is that if intelligence is shared on an AML suspicious activity report it may turn out to be fraud and vice versa, improving oversight and compliance enterprise-wide.

Potential problems need to be considered too, as lines of responsibility may become blurred if employees are merged unwillingly and the distinct skills and knowledge of each function may not be properly understood or policed in a wider context. Moreover, obtaining one universal financial crime dataset may not be easy because banks notoriously operate in silos – a bank may end up with just another reporting dashboard.

Some banks are happy to merge their sanctions screening and AML or anti-corruption activities as these are more traditional bedfellows, leaving the incorporation of fraud at a later date.

Mary Campbell, global head of cash and trade operations at Deutsche Bank, says: “With the ever-increasing pace of new areas to focus on from a sanctions perspective, it is essential to continue deploying cutting-edge technology to effectively meet the necessary regulatory obligations.”

Having a standardised, scalable global platform minimises ongoing IT support costs and allows the bank to respond quickly to changing requirements, she says. “By spending once on one global application [at Deutsche Bank], it is easy to calibrate to meet local business requirements. One platform also facilitates the standardisation of related processes and workflows, including training of staff.” Campbell says offering one scalable, global application enables Deutsche Bank to meet its regulatory obligations worldwide while containing costs in an environment where profit margins are continuing to be squeezed.

Tony Wicks, director of AML solutions at Nice Actimize, believes that the technology behind sanctions, AML and compliance solutions has improved so much in terms of analytics and computational capability that end users are now entitled to expect solutions to do more. “In the sanctions area, in particular, we see the replacement of early generation ‘synonym’ and ‘phonetic’ match-based systems and a move towards systems that apply the latest intelligent computational linguistics techniques,” he says.

Girish Naidu, financial crime solutions manager at Logica, says new filtering technologies can also intuitively learn from bank customers’ previous actions. “You are therefore able to white list more payments transactions that once might have been wrongly categorised as suspicious and have led to a false positive result.”

The fact that AML sanctions screening is moving up the agenda at banks can be seen by the increased expenditure being lavished on it during tough economic times. The Trends in Anti-Money Laundering 2011 report from  consultancy Celent, for example, shows that spending on AML compliance, including operations and technology will reach $5.8 billion globally in 2013, with $1.4 billion of that on technology.

An Aite Group report, Global AML Vendor Evaluation: A Reinvigorated Market, predicts the packaged AML software market will be worth $690 million by 2015. The report is based on interviews with 36 financial institutions and 18 global AML compliance vendors.

Some of the key conclusions of the Aite Group report are that analytics will increasingly come into play as AML exception volumes increase and the lines between AML and fraud blur. Rule sets are a good start, but can only identify a finite number of scenarios. Analytics are required to look beyond the individual rules to find broader patterns.

 Link to Banking Technology article, October 2011