Tools wanted to fight $$ laundering

New regulatory challenges from recent legislation in Canada and the U.S. is prompting financial institutions on both sides of the border to invest in anti-money laundering technology, according to the Global Payments service of TowerGroup.

Demand for anti-money laundering technologies will extend well into 2003, with spending by U.S. banking institutions estimated to more than double from 2001 to 2002, and grow 15 per cent from 2002 to 2003, according to new TowerGroup research.

The Needham, Mass.-based research and consulting firm reported April 1 that the U.S. financial services industry is increasing its investments in anti-money laundering technologies following the enacting on October 25, 2001, of the USA Patriot Act. That Act introduced the most comprehensive anti-money laundering requirements for U.S. financial institutions since the Bank Secrecy Act of 1970. It also introduced new anti-terrorist financing provisions requiring additional compliance activities of financial institutions. As well, it begins to equalize requirements placed on both bank and non-bank institutions such as securities brokers/dealers and other types of investment companies.

TowerGroup predicts that the increased “know your customer” requirements relative to account opening, ownership and usage patterns — will make manual compliance difficult for most institutions. The need for greater automation of the compliance process will drive investment in anti-money laundering technologies, especially among large banks and securities firms, the company reports.

As greater regulatory complexity makes manual compliance untenable for most large financial institutions, automated tools will become increasingly vital, reports Breffni McGuire, senior analyst, TowerGroup Global Payments. “TowerGroup believes these technologies will become more important not just in meeting added regulatory mandates, but ultimately in safeguarding the integrity of an institution’s reputation in the marketplace.”

TowerGroup expects spending by U.S. banking institutions on anti-money laundering and related technology to reach at least U.S.$60 million by the close of 2002, with total financial services industry spending likely double that figure.

McGuire points out that the Canadian financial services industry is affected by “the total environment” created by our Proceeds of Crime (Money Laundering) Act (Bill C-22), our anti-terrorist law (Terrorist Financing Act) and the new USA Patriot Act, the latter two coming into effect this past fall.

“For Canadian institutions, you’ve got your own laws to deal with – and yours are relatively recent so they are coming into effect now, so the banks are having to pay a lot of attention to those laws and the implications of them,” she says. “At the same time, because you are so closely involved with us, the USA Patriot Act… may have deeper implications with Canadian banks because of the shared border and the amount of business that you do south of the border as well. I think what is going on in Canada is driven by your own laws coming into effect and the implications for those on your programs and technology – and they are going to feel a side effect from the USA Patriot Act.

“The environment has changed so substantially that banks – and Canadian banks are no exception – have all been taking steps. They’ve had programs in place. They do their due diligence. They know their customers. But the ramifications of having two new laws of your own plus a U.S. law that’s going to impact you when you’re dealing with knowing millions of accounts and a huge volume, especially with the big five, double-digit thousands of wires coming in and out of your payment systems in a day — getting much more versed in technology becomes much more important.”

McGuire sees three major types of products to combat money laundering now being presented to the market:

    record-keeping and reporting products;rules-based products; andintelligent systems.

She notes that vendors come from a variety of industry backgrounds including regulatory compliance, risk management and business intelligence.

She describes the record keeping and reporting products as straight-forward and useful in meeting a lot of the mandatory requirements for keeping track of all transactions greater than $10,000. These will even aggregate wires and flag three $4,000 cash deposits in a day, she says.

The more sophisticated rules-based products look more at behaviour and what might be suspicious. They let you monitor all wire or funds transfers over whatever limits you set, or you can monitor transactions which would be out of character for a given individual or business, she explains. “So you build up a profile of what is normal for that customer and also what is normal for the peer group, a comparable company. The rules can be tolerances, frequencies or very complex. They apply rules that flag something that appears to be out of character.”

Intelligent technology looks at transactions in context, says McGuire. “You could tie deposits to payments or multiple deposits to different accounts or look at different kinds of activity – new instruments being used that might not have been used before. They have different money-laundering scenarios as well and they do risk calculations. You can do things like monitor high-risk countries or accounts or financial institutions. You can put an institution or entity on there that you might want to monitor for other reasons that you might consider them potentially risky for any number of criteria.”

“You can see where some of this would bump into the privacy,” she adds. “The reaction in this country when the USA Patriot Act came out – and still is – is that it is much more important to know your customer and co-operate. I think any other concerns will be addressed over time as they surface. September 11 fast-tracked a lot of things going forward.

“That’s why there is so much interest in the technology. Number one, bankers are concerned as much as everyone else in doing their part in the war on anti-terrorism. Also, it just heightened the need for really understanding and knowing your customer to not only have the procedures in place but the technology in place to be able to monitor and look at potentially suspicious activity whether that is money laundering or terrorist financing.”