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What are the steps for implementing automated transaction testing to prevent money laundering, and how effective will the implementation be in preventing laundering?

Jim Berthelsen, SVP and General Manager, Harland Financial Solutions, Lake Mary, Fla.

Transaction Profiling is becoming more prevalent in determining and preventing money laundering. The ability to define characteristics of each "class" of account within the credit union, the expected behavior within the class, and the ability to review accounts and group them into a class is the first step to setting up a system or process.

Rules would then need to be established for each class of account in an automated system that has the ability to monitor each account's transactions against the established behavior of the assigned class. Then, the institution can research exceptions to determine if the activity for the account is normal or exceptional.

Flexibility needs to exist in order to modify the "rules" as needed, add classes as needed or move accounts within classes as needed. This type of "monitoring" or "testing" will only be as good as the effort put forth by the institution. It requires an on-going commitment to bring to light activity that is out of the norm as defined by the institution. The activity could be money laundering, it could be fraud, or it could simply be a legitimate activity exception.

Sue Pogatschnik, Credit Union Market Manager for Bankers Systems, Inc., St. Cloud, Minn.

Most anti-money laundering experts will tell you "prep work" is the first and most important step before choosing and using a transaction testing system. A transaction testing system will be using your data to establish what "normal" activity is for your member. Therefore, you should be saving enough historical data for the system to see a pattern. Second, you'll need to figure out the source of this data. It's important to note that some credit unions have multiple systems that perform much of the same functions. Each system must be identified even though it may be reporting the same sort of data. Third, you should prepare to deal with the results before you turn it on. Some transactions that are flagged will be easily and quickly resolved. Some will take time. How will this effort be assigned? How will you track and record your work? Do you have the tools you need to investigate further?

In terms of effectiveness, a transaction testing system can be highly effective in detecting money laundering. On the other hand, sophisticated launderers know how to stay within a "normal" pattern. Stopping a launderer before they enter the financial system is one reason that your identity verification system should be coordinated with your transaction testing system. Finally, no system is effective if the employees using the system are untrained or are willing to corrupt the system.

Lea Spagarino, Industry Research Manager, Jack Henry & Associates and Symitar, Monett, Mo.

Any effective implementation of a system to prevent money laundering requires the use of technology developed by professionals as dedicated to preventing laundering as the criminals are to committing it. The technology needs to defend against:

* Structuring or Smurfing-Probably the most commonly used money laundering method that involves many individuals who deposit cash or buy bank drafts in amounts under $10,000 thereby trying to avoid the $10,000 reporting requirement.

* Layering-The second step in laundering, through which money already in the banking system is wire-transferred between several institutions with transactions that in their frequency, volume, or complexity resemble legitimate transactions and hide the true origin of the funds.

This requires a solution that that utilizes the latest advancements in technology, statistical analysis and systems integration. The technology must be able to identify abnormal (suspect) activity by storing and evaluating trends, benchmarking information on member activity, tracking cash transactions and monitoring customer initiated money transfers.

We do all of this at Symitar by utilizing the technology developed for this specific purpose by our sister company, Yellow Hammer. Suspect activity is displayed in an online work queue format for daily review by credit union personnel. All actions on suspect activity are logged in our "Fraud Detective" system for audit and review purposes.

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