Skinning the AML Monster — Are You Doing it Right?
The use of traditional methods and technologies to tackle Anti-Money Laundering (AML) are resulting in more cost overhead and inefficiencies rather than addressing the real risks.
The evolution of banking technology has created alternative methods to transfer, invest and even define money with the advent of crypto-currencies. As banks are finding ways to reinvent themselves in the era of increased transparency and digitization, they are faced by strong operational risks, such as money laundering, that have been posing increasing threat to their organisations.
This article looks into some of the key challenges the industry faces and highlights certain advanced methods that may help banks to strengthen their AML frameworks.
The regulatory crackdown
In August 2016, Monetary Authority of Singapore (MAS) created dedicated AML department that consolidates regulatory policies linked to money laundering and other illicit financing risks into one unit1. In addition, a dedicated supervisory team has been set up to monitor these risks and carry out onsite supervision of how financial institutions manage these risks.
Between 2016 and 2017, banks were fined approximately SGD 29.1 million in aggregate due to severe breaches of MAS-6262 during 1-MDB inquiries3.
These breaches highlighted significant lapses in banks’ customer due diligence measures, controls for ongoing monitoring, as well as inadequate assessment of irregularities in client behaviour and delay in reporting suspicious activity. Regulators noted that these failings were primarily due to:
- Inadequate policies and procedures
- Insufficient oversight of front office staff
- Lack of sufficient knowledge of risks related to money laundering among some staff
In particular, audit findings have brought to light the absence of proper monitoring of suspicious activities, and the inadequacy of the control framework to ensure implementation of robust policies and procedures. The result of these investigations has pushed regulators to enforce higher-standards of AML and Countering Financing of Terrorism (CFT) compliance programs.
To help combat money laundering risks and adhere to new and reformed regulatory guidance, banks in Singapore have taken steps to start collaborations in the financial industry. For instance, in February 2016 OCBC initiated the «Open Vault», where fintech companies could submit their proposals for AML solutions4. Additionally, UBS is sponsoring the Wealth Management Institute Anti-Money Laundering Risk Management Program to reinforce Singapore’s status as a financial centre which adheres to the highest standards5.
The robustness of policies and procedures in one bank or country branch however, cannot be determined as robust in another. There are several risk factors of money laundering that can influence the implementation of AML/CFT guidelines in a bank. For example:
- Types of products and services offered by the bank
- Volume of cash transactions and the primary source of wealth
- The political, economic and cultural environment the bank
Factors contributing to the risk of money laundering
Prevalence of cash transactions and alternative remittance systems
The strong presence of cash-based industries like the casino industry as well as low value money-changing and remittance businesses in Southeast Asia is a significant driver of money laundering in Singapore and Hong Kong. Cash transactions act as an impediment to the effectiveness of AML/CFT oversight and reporting systems as they generally do not leave electronic records, making them difficult to track and report. In 2015, the United States authorities reported that drug proceeds mounting to USD 5 billion was laundered through casinos and currency exchange houses, before reaching bank accounts in Hong Kong and China6.
Political, social, cultural and legal norms
With more than three-quarters of funds managed in Singapore and Hong Kong coming from abroad, banks may be exposed to risks stemming from regulatory gaps or weaknesses in foreign countries. Financial institutions worldwide may not be subject to similar regulatory guidance, leading to higher AML risk for cross-border payments and transfers. Further, some regions are politically or economically unstable and exhibit high levels of
corruption. In addition, the continued tolerance of nominee-owned accounts by regulatory authorities in certain locations prevents the proper identification of beneficial ownership, which reduces transparency and hinders enforcement of «Know-Your-Customer» (KYC) requirements by banks in such regulatory environments.
Advent of crypto-currencies
Traditional methods of banking capture a client’s KYC information and documentation at account opening. Conversely, crypto-currencies with their inherent anonymity and de-centralised systems, create obstacles for regulators and banks to identify and mitigate risks of money laundering
and terrorist financing. It is essential that the current AML frameworks in banks are modified to address any gaps in information related to client activity and payments introduced by novel technologies. MAS and Association of Banks in Singapore (ABS) are leading a consortium to explore the benefits of leveraging blockchain technology to move from a «blackbox» to a more transparent yet secure banking ecosystem7.
Where are banks struggling to cope with AML/CFT frameworks?
Below are the current key challenges banks are facing to identify and prevent dirty money from circulating in the system.
High volume of false-positive results
With increasing availability of information, the number of alerts triggered during client review and transaction screening processes remains a challenge for many banks. A high number of irrelevant and false-positive results cast a doubt on the current capabilities of AML screening systems and deplete the scarce resource of highly trained AML staff to investigate and manually filter such alerts.
Outdated rules-based detection systems
Current tools used to monitor suspicious transactions are primarily rules-based systems, where the same assumptions are adopted for each client regardless of their financial background and intended purpose of the account. Further, most of these systems are not capable of learning from previously approved transactions leading to duplication of effort during reviews.
Additionally, banks struggle to compile and process all relevant
information for complex transactions such as trade-based transactions or those involving correspondent banks.
Distribution of client and payment information across multiple platforms
Though banks are constantly striving to improve the system user experience for relationship managers and compliance staff, information related to client activity is rarely aggregated on one platform. Adverse news, screening results, changes in client’s KYC information, account activities and previous investigations together provide a holistic view of the client. Not viewing this information together may affect the timeliness of identifying suspicious activity.
Lack of ownership and accountability
Connection to money laundering wrongdoings can impair a bank’s reputation. In 2016, MAS directed BSI bank to shut down operations in Singapore due to control failures causing breaches of anti-money laundering regulations and poor oversight by senior management. Also in 2017, MAS issued large fines to banks such as Credit Suisse and UOB due to weaknesses in their control processes and breaches of anti-money laundering regulations. Following their involvement in the 1MDB scandal
in 2016, DBS and UBS have declared that they will be taking appropriate action to hold staff, including senior executives, accountable for their lapses in implementing proper anti-money laundering policies8.
How can banks overcome challenges and strengthen their AML framework?
As money launderers and terrorists become more sophisticated, banks should invest in advanced systems and specialized staff to continue the fight against financial crime, money launderers and terrorists.
Use a smart approach for screening
Banks should navigate away from simple rule-based systems to a smart approach using fuzzy logic and machine learning. Client screening can now be made more accurate by matching multiple parameters such as date of birth, country, nationality along with the client name and any aliases, reducing the effort required to filter out false-positive results. Transaction monitoring could similarly implement machine learning to
identify out-of-pattern transactions according to the client’s transactional history and anticipated account activity based on the client’s employment industry, source of funds and expected payment counterparties.
Connect to AML-specific databases
With information moving from paper and computers to cloud storage services, banks can now subscribe to databases to leverage additional information related to transactions such as shipment and price validations for trade-based transactions. Using third-party proprietary data to ensure completeness and accuracy of information held by the bank can help to detect changes in client activity and unusual transactions, as well as
allow for timely reporting of suspicious transactions.
Leverage on payment data
With a large volume of clients and transactions, banks can collect the data of multiple payment counterparties and connected parties over time. This information is usually not available to extract from internal databases. Banks can now use technology to verify and consolidate details of major
counterparties and connected parties and identify any common networks. This would also help banks to identify high-risk clients and accounts more accurately and to determine whether enhanced due diligence is required on certain counterparties.
One platform for a holistic review
As recommended by regulators, banks perform regular client reviews to capture any changes in KYC information and expected account activity over a given period. To help relationship managers and compliance units perform comprehensive reviews, banks should implement a single platform which:
- Extracts the captured KYC, client activity and payment information.
- Regularly refreshes information using internal and external databases such as adverse news and PEP/Sanctions screening.
- Displays a summary of changes in client’s risk profile alongside any current or previously reported unusual transactions.
- Captures and displays the frequency at which the client’s profile has changed as an additional parameter for possible investigations.
Strengthen the risk culture
Banks can benefit from positive publicity when displaying efforts to comply with regulators. Professional organizations, such as The Asian Banker, are granting awards every year for the top Anti-Money Laundering Implementations. To establish an effective risk-culture, banks should adhere to the following9:
- Setting the Tone from the Top (TFTT)
TFTT ensures that the views and expectation of senior management are clearly communicated and in line with corporate strategy and values. TFTT should be incorporated into all applicable communication campaigns and
- Creating incentives to comply
Banks should formulate a clear governance process, which measures and incentivises staff to live by the right risk culture and responsibilities.
- Investing in people
With recent changes in AML regulations, demands on employees have broadened. Regular and thorough Risk & Compliance training provides confidence to employees and bank management to operate in the current environment.
The volume and complexity of AML cases and the scale of information available to analyse and digest makes AML an ideal case for banks to consider unconventional methods and technologies. There are capabilities in the market that have proven effectiveness to read unstructured data, connect the information gathered from various sources and implement predictive methods in detecting the unknowns. To make effective use of these technologies, a strong understanding of both business and technology and less conventional ways of software development is required.
Synpulse has worked with leading private banks to strengthen their AML systems and address the key AML/CFT challenges as well as conducted research on the various tools available in the market to assess their capability to manage emerging AML risks.
Besides the authors, Anu Meha (Manager) and Parsa Khoshdel (Senior Consultant) have contributed to this article.
- MAS Sets Up Dedicated Departments to Combat Money Laundering and Strengthen Enforcement — June 2016
- Prevention of Money Laundering and Countering the Financing of Terrorism — Banks — April 2015
- Financial Penalties Imposed on Credit Suisse and UOB for 1MDB-Related Transactions — May 2017 ;
MAS Imposes Penalties on Standard Chartered Bank and Coutts for 1MDB-Related AML Breaches — Dec 2016 ;
MAS Directs Falcon Bank to Cease Operations in Singapore — Oct 2016 ;
MAS directs BSI Bank to shut down in Singapore — May 2016
- OCBC sees AI payoff in compliance — Nov 2017
- Seeking Trust, Integrity After 1MDB — May 2017
- Colombian drug cartels used Hong Kong banks to launder more than US$5bn — Sept 2015
- MAS and ABS lead consortium to harness blockchain technology for more efficient inter-bank payments — Oct 2015
- DBS to take action against staff for anti-money laundering lapses — Sept 2015
- The Awards — 2018