The recent HSBC (HBC) money laundering case, in which the U.S. Senate says the bank failed to prevent billions of dollars' worth of money transfers linked to drug cartels and terrorist groups, has heightened awareness of money laundering controls, particularly where banks have relationships with third parties in local countries to help execute mobile money transactions or remittances. Celent says spending on operations and technology related to anti-money laundering compliance will reach $5.8 billion in 2013-including $1.4 billion in internal and external spending globally.
A case in point is Michigan First Credit Union, a $620 million-asset credit union based in Lathrup Village, Mich. "It's not something where we can manually look at every single account, and know to look at a certain person right away," says Ed White, risk management supervisor for the credit union.
To handle the expanding fraud threat facing the financial services industry, the credit union has turned to a hosted, centralized case management system that integrates with the credit union's core banking system to capture transaction and user data to spot potential fraud or money laundering.
The product, called Aithent Fraud Manager, accumulates data from multiple business segments and feeds it into a single database. This database is analyzed to spot suspicious transactions or users, as well as transaction patterns that can suggest fraud. These patterns and red flags are used to build a case profile that the credit union's management leverages to halt transactions, close accounts, and build reports for investigators, law enforcement or regulators.
"This system allows us to include every last detail we would want, from names of people writing a check or who may have written a check on that account in the past," White says. Checks, payments, financial activity and correspondence are imaged and run through the Aithent system to generate suspicious activity reports. "It can be letters, emails, anything that can allow us to generate a report," White says.
The new software, which Aithent installed on the computers of the executives charged with managing fraud risk, bundles a mix of detection, case building and reporting functions that had been previously handled by various point solutions and manual processes. By consolidating money laundering and fraud risk, White says the credit union can build cases of potential criminal activity faster. It can also benefit from continual analysis of transactions across the entire credit union. This is designed to shorten the scope and timeframe of transactions being examined.
"The new system can process transactions while I'm sleeping and have a list of transactions that I can look at in the morning," White says.
Venu Gopal, CEO of Aithent, contends anti money laundering and other fraud detection remains siloed, creating an opportunity to improve prevention by aggregating transaction and correspondence data from the systems that underpin accounts, payments, and CRM, and placing that data into a centralized database for analysis. Gopal also says the software uses probabilistic theory — or the analysis of past transactions to inform forward looking predictions — as part of the analytics that aim to spot fraud.
Hazem Mulhim, CEO of EastNets, a firm that sells anti-money laundering, fraud prevention and identity theft protection to a roster of clients that includes ING Direct (ING), says the increasing cost of anti-money laundering (AML) technology is driving the trend toward centralizing and standardizing AML strategies. "We are starting to see an increase in the number of financial institutions how willing to adopt an enterprise-wide compliance approach because of the heightened need to respond to challenges brought on by the need to meet regulatory requirements, fears in mitigating their reputational risks and organization mandates to protect their brand. The future trend of AML strategies for many multinational firms will drive the integration of AML systems and antifraud operations across business silos and geographic regions."
Mulhim says the money laundering risk can be high for mobile money transfer services (MMT), which are frequently used to establish financial services in emerging markets that lack infrastructure for branches, but where smartphone penetration is heavy. This leads banks to partner with local wireless or telecom providers — or other local financial institutions — to establish mobile remittance and other financial services. "Because mobile money is a relatively new product in most countries, this alone brings risks for mobile/web heavy financial services business models," Mulhim says.
Mulhim says the need to comply with local and international anti money laundering and terrorism finance laws is standard practice for banks establishing mobile money transfer services, but knowledge of such laws often lags among the mobile money network operators-or the wireless service providers that partner with financial institutions to expand into an emerging market.
"Financial regulators and mobile operators have to work closely together to understand the risks involved in a new generation of financial regulation for mobile money transfer services. This ultimately will lead to the emergence of new regulatory concepts of e-money and payment regulation. Regulation on the use of agents determines if entities other than banks are allowed to handle cash at both ends of the mobile money transfer service, whether on behalf of banks or non-banks, or remittance providers," Mulhim says.