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 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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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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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.

3 things we learned at our Fintech Talks - July Edition Dinner Event→

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3 things we learned at our Fintech Talks - July Edition Dinner Event

Last Thursday we had the privilege of hosting 30 senior banking executives at our quarterly FinTech Talks dinner event. The event theme was Trust, Transaction Monitoring and AML for financial messaging, and Keith Furst, a financial crime expert with experience at leading European and American financial institutions flew in from New York to headline the discussion. 

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Why Banks Must Evolve their AML Process to Manage Micro-Jurisdictional Risk

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Why Banks Must Evolve their AML Process to Manage Micro-Jurisdictional Risk

United States sanctions policies have evolved over the years, from country-wide embargos to more nuanced approaches targeting specific entities. According to Jacob J. Lew, Secretary of the Treasury, the sanctions implemented today are more focused on bad actors while trying to limit the negative externalities. Lew described his view on the traditional sanctions model at the Carnegie Endowment for International Peace which is eloquently summarized by this quote:

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The challenges and benefits of mapping SWIFT messages to your Transaction Monitoring System (TMS)

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The challenges and benefits of mapping SWIFT messages to your Transaction Monitoring System (TMS)

The Regulatory landscape and SWIFT messages

Cross-border payments have been a central theme in recent regulatory actions where regulators levied record breaking fines against financial institutions that failed to comply with Bank Secrecy Act / anti-money laundering (BSA / AML) regulations. The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is, in some sense, at the heart of these violations because it is one of the major facilitators of global money transfers which have come under increased scrutiny.

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Correspondent Banking: Risk rating the respondent bank's customers via watch lists

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Correspondent Banking: Risk rating the respondent bank's customers via watch lists

Correspondent banking could arguably be one of the most difficult business lines for AML (Anti-Money Laundering) suspicious activity systems to monitor, but are there any opportunities for improvement and increased sophistication? The fundamental conundrum for Compliance departments monitoring correspondent banking payment activity is that they must rely on the respondent bank's AML policies, procedures, controls and technology systems to identify suspicious activity and to take appropriate steps to mitigate the risks which could result in the respondent bank ending relationships with nefarious customers. In order to remain proactive banks providing access to the US financial markets via correspondent banking relationships should consider increasing the sophistication of how they detect suspicious activity based on what information is already contained in the wire payments and existing watch lists.

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