THE FUTURE OF ENTITY DUE DILIGENCE

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THE FUTURE OF ENTITY DUE DILIGENCE

The world has gone through an incredible amount of technological transformation over the past ten years.  While it may seem hard to imagine that change will continue at this pace, it’s not only likely to continue, but it will accelerate. There are various functional areas within institutions that support global commerce, but some have been laggards in adopting new technology for a plethora of reasons.

Structural market trends will force organizations to innovate or they will be subject to consolidation, reduction of market share, and, in some circumstances, complete liquidation.  Future proofing the entity due diligence process is one key functional area that should be part of an organization's overall innovation road map because of the impacts of trends such as: rising regulatory expectations, disruptive deregulation initiatives, emergence of novel risks, explosion of data, quantifiable successes in artificial intelligence (AI), and changing consumer expectations.

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LESSONS LEARNED: RECORD HACKS, BREACHES TO CONTINUE IN 2018 AS MORE CRIMINALS MONETIZE STOLEN DATA

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As ACFCS surveys the landscape of what new challenges and opportunities in financial crime 2018 will bring, we are continuing our “Lessons Learned” series, asking key thought leaders what last year taught the community and how that knowledge should help arm compliance professionals for the year ahead.

Not surprisingly, a good predictor of what will happen in 2018 is rooted in trends from 2017, a year where criminals made history with record hack attacks and equally massive data hauls that put millions of people and companies at risk.

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TREND ROUNDUP: CRIMINALS TURNING TO ONLINE RENTALS TO LAUNDER MONEY, SOCIAL MEDIA TO ENLIST YOUTH

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TREND ROUNDUP: CRIMINALS TURNING TO ONLINE RENTALS TO LAUNDER MONEY, SOCIAL MEDIA TO ENLIST YOUTH

In the last month, organized criminal groups, fraudsters and identity thieves have shown their creativity to launder money and monetize stolen credit card data, in some cases using online rental services to cleanse funds, while in others duping millennials into becoming “money mules” through sham social media job posts.

Early last month, in the aftermath of the Paul Manafort indictment, more than two dozen New York city and state lawmakers sent a letter to online home rental site, Airbnb, pressuring the company to identify and remove illegal listings on its site that could be used by thieves and criminals to launder money, according to the New York Daily News.

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How beneficial ownership can add crucial context to suspicious activity identification→

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How beneficial ownership can add crucial context to suspicious activity identification

The fight against money laundering and counter-terrorist financing is evolving like never before, and more external data sources are being integrated with compliance systems. Why is this and how can we make better use of beneficial ownership-related information?

As we discussed in the Bureau Van Dijk's "Beneficial ownership – have you got it right?" webinar, on which I was a panellist, one of the key drivers for the evolution of anti-money laundering (AML) and compliance programmes is the rising regulatory burden financial institutions face, such as from the Customer Due Diligence (CDD) Final Rule and the Fourth Anti-Money Laundering Directive (AML4).

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MERCHANT-BASED MONEY LAUNDERING PART 3: THE MEDIUM IS THE METHOD

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MERCHANT-BASED MONEY LAUNDERING PART 3: THE MEDIUM IS THE METHOD

The previous editions of this series on merchant-based explored the many manifestations of the dark side of the terminal, including suspicious transactions merchants may see that could be tied to fraud groups and the risks tied to both closed loop and open loop prepaid cards.

To read the first story, covering “phantom shipments,” please click here. To read the second story on “prepaid gift card smurfing,” please click here. 

Merchants can be involved with phantom shipments to move value across borders and cash can be anonymously loaded on prepaid gift cards through smurfing operations and used at US merchants to make sales revenue appear legitimate. 

The rules and actions of the payment sector have direct implications on bank anti-money laundering programs.

How? Because while banks are technically not liable for the illicit actions of their customers’ customers – the customers of a merchant or payment processor – the bank is on the hook for properly inquiring about the risk of that customer base and compliance procedures, if any, of the merchants.

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Data reusability: The next step in the evolution of analytics

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Data reusability: The next step in the evolution of analytics

Data reusability will lessen the response time to emerging opportunities and risks, allowing organisations to remain competitive in the digital economies of the future.

  • If data's meaning can be defined across an enterprise, the insights that can be derived from it expand exponentially
  • When financial institutions work together to identify useful data analytics solutions they can produce great results and add a lot of value to their customers
  • The analytic systems of tomorrow should be able to take the same data set and process them without modifying them
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Guest blog: answers to 15 extra questions from our beneficial ownership webinar

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Guest blog: answers to 15 extra questions from our beneficial ownership webinar

Editor's Note: This article originally appeared on the Bureau Van Dijk blog on July 18, 2017.

Last month I was delighted to join Bill Hauserman as a panellist on Bureau van Dijk's webinar, Beneficial ownership – have you got it right?

Bill and I discussed smarter ways to integrate beneficial ownership information into our viewers' compliance processes, so they could start focusing on higher-level decision-making and spend less time on data discovery, and the webinar is now free to watch on-demand.

During the broadcast we received dozens of open-ended questions from our worldwide audience of compliance professionals. We only had a chance to address a few of them on the day. But we couldn't let the rest go to waste, so I offered to answer some in this guest blog. Bill will tackle some of the others in a follow-up blog.

So, in no particular order – and noting that these are my personal views – here they are. You're welcome to contact me for clarification at info@dataderivatives.com.

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10 things I learned at the Future of Finance Summit in Singapore

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10 things I learned at the Future of Finance Summit in Singapore

1 - Don’t say the F word. 

No not that word. Fintech. The Founder of The Asian Banker, Emmanuel Daniel, drove this point home by holding up a jar during his opening speech on the first day of the event demanding a person pay S$1 each time they said the f word. 

 The point he seemed to be making is that we have come to use fintech so loosely that it has lost its meaning. Fintech is short for financial technology and it’s so broad and all encompassing that we, especially in financial services, lose sight of the gravity of the digital transformation happening before our eyes.

He stressed the new power of the consumer demanding friction-less financial services in many different verticals including payments, lending and investing. He left the audience with a somber warning that the banks that become leaders in the digital economy will survive and the ones that don’t will die within the next 20 years.

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Data integrity can no longer be neglected in anti-money laundering (AML) programs

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Data integrity can no longer be neglected in anti-money laundering (AML) programs

The New York State Department of Financial Services (NYDFS) risk based banking rule, went into effect on January 1, 2017 and will have a significant impact on the validation of financial institutions’ transaction monitoring and sanctions filtering systems.  The final rule requires regulated institutions to annually certify that they have taken the necessary steps to ensure compliance. 

Data integrity is particularly interesting because it arguably hasn’t been given the same emphasis as other components of an effective anti-money laundering (AML) program, such as a risk assessment. 

There has always been an interesting dynamic between the way compliance and technology departments interact with one another.  This new rule will force institutions to trace the end-to-end flow of data into their compliance monitoring systems which could be a painful exercise.  This exercise will demand the interaction between groups which may have stayed isolated in the past and it will require some parts of the organization to ask tough and uncomfortable questions to others.  Clearly, gaps will be found and remediation projects will have to be launched to address those items. 

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Micro-jurisdictional risk: One of AML’s missing links

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Micro-jurisdictional risk: One of AML’s missing links

High level jurisdiction risk assessments alone are often too broad in scope to include in anti-money laundering policies; Micro-jurisdictional risk analysis could help allay model bias.

  • Some aspects of AML policies and procedures are in need of an overhaul, to capture variables important to making accurate analysis
  • Low risk jurisdictions have high-risk neighbourhoods and, conversely, not all customers and transactions from high-risk jurisdictions warrant heightened scrutiny
  • Financial institutions should go beyond existing AML guidelines and apply a more granular risk-based approach to geography to stay ahead of upcoming best practices
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B2B Fintech: Payments, Supply Chain Finance & E-invoicing Guide 2017

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B2B Fintech: Payments, Supply Chain Finance & E-invoicing Guide 2017

A new guide produced by The Paypers explores the evolving world of transaction banking, B2B payments, supply chain finance & e-invoicing market

By downloading the 2017 Guide, you will learn:

  • what shapes digital transaction banking: the journey towards customer centricity (Innopay, BNY Mellon), the benefits of digital solutions for (currently underserved) corporate customers (Aite Group, Nordea), how banks are preparing for the upcoming regulations of PSD2 (Open Banking and APIs), KYC & the 4th AML directive (Deutsche Bank, Accenture, Data Derivatives);

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AML Data Quality: The Challenge of Fitting a Square Peg into a Round Hole

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AML Data Quality: The Challenge of Fitting a Square Peg into a Round Hole

As mentioned in my previous articles, traditional rule-based transaction monitoring systems (TMS) have architectural limitations which make them prone to false positives and false negatives:

This article focuses on the third drawback of existing TMS solutions: how their inflexible data models lead to poor data quality, resulting in additional false positives and false negatives.

I think many of us working in the anti-money laundering (AML) technology space have experienced the frustration of spending many hours retrofitting new data types to squeeze into the rigid data model of a TMS. Unfortunately, the more effort we spend retrofitting data, the more likely we introduce data quality issues. Further, when we don’t complete it in a timely fashion, we’re exposed to risk of large fines from regulators. That said, there’s hope on the horizon from machine learning solutions that are more forgiving of disparate data formats.

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BankThink De-risking shows failure of AML teams to innovate

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BankThink De-risking shows failure of AML teams to innovate

Anti-money-laundering rules have always been a challenge in the financial services arena, with regulatory bodies demanding high standards of compliance and levying fines for noncompliance. Financial institutions have long struggled to meet those demands.

But the high regulatory burden of satisfying these rules is not an excuse for the current de-risking phenomenon, in which financial institutions are pulling out of regions and client relationships seen as carry money laundering risk, rather than face the costs and regulatory risk of maintaining those relationships. The conundrum associated with satisfying AML regulations has as much to do with a failure of imagination in efforts to follow the rules as it does with how onerous the regulatory requirements are.

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The Other Elephant in the Room: Defeating False Negatives in AML Systems

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The Other Elephant in the Room: Defeating False Negatives in AML Systems

False positives have a terrible reputation among anti-money laundering (AML) circles. As mentioned in my previous article on ending the false positive alerts plague, approximately 90-95 percent of alerts generated by Transaction Monitoring Systems (TMS) are false positives. So, why don’t we tighten our rule thresholds to let fewer alerts through?

Unfortunately, tightening thresholds typically increases false negative alerts, which are real money laundering activities that the TMS didn’t catch. Though false positive alerts lead to high operational overhead, false negative alerts can cost you both in reputation and in major fines and penalties. As AML teams know, regulators have no qualms handing over hefty fines, which have risen considerably in the last decade.

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End the False Positive Alerts Plague in Anti-Money Laundering (AML) Systems

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End the False Positive Alerts Plague in Anti-Money Laundering (AML) Systems

Based on a report issued by PricewaterhouseCoopers (PwC), 90 to 95 percent of all alerts generated by transaction monitoring systems (TMS) are false positives. Not only does this translate into operational overhead, it may also lead to missing real alerts hiding under the mountain of false positive alerts. This is not news to those in the anti-money laundering (AML) space. I often hear the same complaint from my colleagues who implement TMS at other financial institutions. It’s not uncommon to hear:

“Our TMS was generating a few hundred alerts every month, but after we went through the upgrade, it’s generating thousands!”

The problem with false positive alerts is that it creates huge operational overhead that translates into absolutely zero substantive suspicious activity report (SAR) filings. At a certain point, there are diminishing returns for alerts generated. A bank can only investigate so many alerts and still conduct effective investigations.

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Merchant-based money laundering part 2: Prepaid gift card smurfing

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Merchant-based money laundering part 2: Prepaid gift card smurfing

During the holiday season, when you were in a time crunch to get something for that special someone, or an acquaintance you felt obligated to shop for, you may have entered a pharmacy and noticed how easy it was purchase a prepaid gift card.

For you, it was an easy gift, because the recipient could likely use the plastic cash anywhere to get themselves something they actually wanted.

You could easily have gotten several prepaid cards and spent a few hundred dollars. In that scenario, everyone is happy because you get to shop en masse, and that ridiculously long Christmas list finally started to shrink – about the same time as the weight of your wallet.  But that freedom of choice also extends to the criminal element, who also want the financial freedom and anonymity prepaid cards can offer – that is, if you employ classic smurfing techniques used to launder drug money and adapt them to the prepaid card, or stored value, front.

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Trade-Based Money Laundering in Southeast Asia: Risks, Trends and Mitigation Measures

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Trade-Based Money Laundering in Southeast Asia: Risks, Trends and Mitigation Measures

Trade-based money laundering (TBML) in Southeast Asia has been on the rise in recent years, driven by a confluence of factors including robust economic growth, a relatively weak regulatory environment (with the key exception of Singapore,) corruption issues, and the presence of sophisticated transnational criminal networks. These factors, as well as political, socio-economic and cultural dynamics, put the region at heightened risk for TBML in which financial institutions, corporations and governments should play a greater pro-active role in combating.

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Money Laundering in Canada 2016 Conference

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Data Derivatives was featured as one of the sponsors at the Money Laundering in Canada 2016 Conference.

Keith Furst giving a presentation on The SWIFT transparency problem and How to conduct an anti-money laundering (AML) system assessment.  Both presentations were filmed and will be posted in the coming weeks.

The presentation from the event is below.

Merchant-based money laundering Part 1: Phantom Shipments

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Merchant-based money laundering Part 1: Phantom Shipments

First in a three-part series

By Keith Furst
Founder of Data Derivatives
A boutique consulting firm focused on financial crimes technology.
September 8, 2016
kfurst@dataderivatives.com

With editing and a brief introduction by Brian Monroe, Director of Content and Business Development at ACFCS

This is an important story looking at the creativity of criminal networks in attempting to use credit cards, rather than cash deposits, wires or ACH transactions, in laundering their illicit proceeds and moving value across international borders while hopefully evading the transactional scrutiny of ever-more aggressive anti-money laundering (AML) teams.

This is a key development for financial crime compliance teams to be aware of because, though they may be very attuned to suspicious or aberrant activity tied possible money laundering, and in tandem, well-versed in the classic red flags of credit card fraud, AML analysts may not be looking at credit card transactions as a means to launder ill-gotten gains.

With that in mind, it would behoove banks with oversight responsibility of certain credit card relationships – and potentially related third-party payment  processors and the merchant acquirers themselves, even those not subject to formal AML obligations – to start looking at credit card transactions and asking many of the same questions about if the activity could be a red flag for money laundering or the foundation of a suspicious activity report.

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