Getting Tougher on Money Laundering

Bank: Northwest FCU
Problem: Having one employee manually slog through hundreds of pages of raw AML reports for signs of money laundering was not working.
Solution: Automated AML software now finds needles in the data haystack.


Northwest Federal Credit Union knew it was putting itself and its 100,000 members at risk by having one employee visually scan about 25,000 transactions every day to sniff out suspicious activities that could have signified money laundering. So it automated a portion of its anti-money-laundering procedures in 2010 with SAS and turned several days of manual work into a single shift.

The $2 billion-asset Herndon, Va., credit union is now turning to a new householding feature designed to reveal relationships between members — sponsored customer-member access poses unique money laundering risks for credit unions — so Northwest can bolster its defenses against the structuring of illicit proceeds.

Northwest's path to AML automation began during a routine annual audit in 2009 by the industry's regulator, the National Credit Union Administration. The in-house IT department was custom programming the parameters for the daily production of three raw data reports that could top 100 double-sided pages. The manual efforts were aimed at culling potential suspicious transactions, which could number 25,000 on certain days, and Northwest's AML compliance officer had to visually scan for items that may need further analysis. "It was rare that we could complete a day's worth of alerts in one day," said Nancy Huntoon, security and fraud manager and Bank Secrecy Act compliance officer at Northwest. "You're asking one person to look at a lot of data and make an analysis based on a very limited set of parameters. There was nothing extraneous to help her analysis other than herself, except for the raw data on these reports. We knew we weren't using our time wisely."

Being headquartered in an area heavy with defense contractors and spooks could make a slipup all the more noticeable and embarrassing. Plus, some would argue, it engenders more risk of nefarious activity than that of institutions based in less intriguing locales: There is arguably the highest concentration of at-risk-for-corruption politically exposed people — known as PEPs in the AML vernacular — in the Washington metropolitan area than in any other part of the country.

Huntoon's team began after the audit to perform due diligence on AML vendors until they whittled a list down to three top contenders, which the group then recommended to management.

AML providers that seek to service credit union or small bank customers include ACI Worldwide, Experian, FIS, Fiserv, NICE (Actimize), Jack Henry (Yellow Hammer), Oracle (Mantas), SAS, TCS, Verafin and Wolters Kluwer. Such solutions generally work by scanning customer transaction data digitally for activity considered suspicious based on preset money laundering scenarios — SAS offers over 80 indicative examples — and via analytics that spot anomalous deviations from typical behaviors. The systems then flag suspicious items for follow-up by AML compliance officers via electronic alerts.

"They have these out of the box and a lot of what we were interested in seeing we didn't have to create ourselves," Huntoon said. "And things like high velocity: We really couldn't target that sufficiently via our old methods." Northwest uses SAS specifically to monitor big cash and wire movements, the frequency (or "velocity") of debit card transactions, and "smurfing," which is moving money in ways meant to avoid bank reporting requirements. Northwest in August turned on a householding feature that enables the credit union to apply scenarios against members' transactional relationships. "We're trying to find the money side of relationships," Huntoon said, "because we don't validate familial relationships. This is where we're not sure if members are really brothers or sisters or whether they're just getting people to open an account to move money around."

Money laundering risks unique to credit unions also include shared branching, which one institution called a compliance "nightmare" in a February report to the Financial Crimes Enforcement Network, the Treasury Department's lead agency for AML data collection, as part of the regulator's outreach to institutions with under $5 billion of assets. "A major driver of enforcement actions recently has been the failure of smaller financial institutions to implement effective AML programs," wrote Julie Conroy McNelley, an Aite Group analyst, in a report she authored and released in May. Perhaps because of that, smaller financial institutions, McNelley said, have been replacing outdated "manual processes with automated solutions." Licensing fees for AML software can range from $40,000 for a small credit union or community bank using a hosted solution to $1.5 million for a large bank using on-site software.

For reprint and licensing requests for this article, click here.
Bank technology
MORE FROM AMERICAN BANKER