Globally, it’s estimated that $1 to $2 trillion annually are due to money laundering, which equates to between 2 and 5 percent of the worldwide GDP. In the 2015 National Money Laundering Risk Assessment report by the U.S. Department of the Treasury, the fight against money laundering was called “a pillar of U.S. national security and a strong financial system.” Even though there are initiatives to combat money laundering and financial terrorism, 70 percent of illicit finances still flow through legitimate financial institutions, according to the United Nations Office on Drugs and Crime, and less than 1 percent are seized or frozen.
“No one wants to be known as the bank that funded terrorism,” said Doug Stevenson, general manager of global financial crimes and compliance at Pitney Bowes.
Many countries are stepping up their anti-money laundering (AML) compliance in the wake of vast recent financial crimes. Officials around the world contribute the emergence of cryptocurrency to a rise in money laundering. Marius Jurgilas, a board member of the Bank of Lithuania, has concerns about money pouring in from Russia using cryptocurrency, “I don’t want to see 70 percent of your investors in your ICO coming from Russia… [An influx of non-transparent capital from Russia is] not in line with our national interests.”
Jurgilas went on to cite the many risks for financial institutions that include massive fines given for trading with sanctioned parties or failing to comply with anti-money laundering initiatives. The Financial Industry Regulatory Authority recently reported a $17 million fine against a financial institution for “failing to establish and implement adequate AML procedures, which resulted in the firm’s failure to properly prevent or detect, investigate, and report suspicious activity for several years.” The AML compliance officer of this institution also received a $25,000 fine and three months suspension.
“While a billion dollars might not mean a ton on the balance sheets for HSBC or Standard Chartered, it means tons for them in publicity,” says Julie Conroy, research director at the financial services industry consulting firm Aite Group. “Their share prices tend to be impacted; the negative publicity is not easily quantifiable but certainly has negative effects on the organizations.”
To avoid fines and negative press, financial institutions cast a wide net in their transaction monitoring systems to catch any potentially harmful activity that is then reviewed by an investigator, who ends up spending their time researching false positives. Between 95 and 98 percent of alerts from these systems are false positives which take between five and 45 minutes to investigate, resulting in an abundance of wasted resources.
“They’d replace you and your organization and cut your budget, because 2 percent yield anywhere else is terrible,” said Jim Burnick, managing director of financial services solutions at Pitney Bowes. “However, in compliance, [banks] are willing to forgo all of those false positives to be sure that, in effect, they’re catching those criminals who are operating within the bank’s routines.”
Senator Ben Sasse (R-Neb.) recently called on his peers to modernize current AML regulations to alleviate financial institutions of “sometimes unnecessary” reporting. Banks and other financial institutions are required to report suspicious deposits of $5,000 or more to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
The House Financial Services Committee is preparing to vote on bill ( H.R. 6068) which would establish new anti-money laundering reporting requirements, raising the reporting level to $10,000 which would reduce bank’s reporting time.
“Our current AML system falls short in many regards,” said Sasse. “We can and must do better than this.”
Until regulations are updated, financial institutions must enact tactics to reduce their false positives by using a relationship-based approach which both increases compliance and reduces false alerts. This approach combines data quality and entity resolution with a graph database that champions compliance by finding data on transacting parties no matter where their data is within the institution, linking related transactions and parties, and helping to visualize the relationships so anomalies can be identified quickly and easily.
The report titled Don’t Blame the Monitoring Systems by Forbes Insights draws from interviews with financial industry experts to explore how a relationship-based approach to financial compliance and crimes can benefit financial institutions by driving risks and cost down while improving workflow and efficiency.
To learn more about the relationship-based approach; click here.