Anti-Money Laundering in a Flat World
by Balaji Yellavalli
Recently, I attended a conference on “Money Laundering” in New York. I was surprised to meet more than 500 people representing banks, financial institutions and government agencies on a cold Monday morning to discuss a topic that one would normally associate with the underworld! Well, to be fair, the conference was to discuss the emerging regulations to curb Money Laundering or “Anti-Money Laundering” (AML) as they are collectively known.
How is AML relevant in a Flat World? Well, just as there are benefits of the flattening world, there are unscrupulous elements in society that take advantage of business and technology advances to perpetrate financial crimes. Money laundering is potentially the tip of the iceberg – it may be a conduit that feeds into international corruption, drugs and in the post 9/11 world, terrorist financing. In other words, fraud can be an unanticipated outcome of the Flat World, if regulators and the private sector do not work together in a timely fashion to detect and weed out the bad elements of society.
Interestingly, this conference was the sixth or seventh in an annual series and elicited active participation from well-known top tier global banks and investment firms as well as US regulators from Washington DC. A leading Swiss Bank executive said on a panel that they use “Artificial Intelligence” based algorithms to sift through terabytes of customer transaction information to detect suspicious patterns and uncover potential wrongdoing. At the same time, the bank maintains the classic “Swiss” tenet of privacy and customer anonymity. Well, I can imagine how difficult and complex it can get!
I may be wiring some money from the US (where I live) to India (where I was born) to invest in a holiday home for the family. I may have done that after juggling my savings, e.g., selling a portfolio out of my retirement accounts or liquidating my time deposits held with US banks. So how do the regulators and banks ensure that this is a genuine transaction? Do they know that I am just an innocuous consultant working for a large global professional services firm or a front for some other suspicious person or transaction? Not to scare you, but it illustrates the challenge government agencies and financial institutions face in linking the myriad, seemingly ordinary transactions that people conduct in the course of their daily lives, to suspicious and potentially dangerous activities.
The challenges can be a minefield, fraught with financial risks for banks and financial institutions.
Now, going back to the Swiss bank illustration, it is about mining existing customer transaction data globally and across the enterprise to uncover patterns; how does one go about doing that?
A client executive from a leading global financial institution recently put this matter in perspective by illustrating the challenge of opening new customer accounts:
It is now imperative to institute strong regulatory checks while on-boarding new accounts to ensure they are not being set up for future abuse – a requirement of the “Know Your Customer” or “KYC” regulation in the US. On one hand, it can mean much bureaucracy and paper work for an existing customer, who, say, wants to open a new private wealth management account with the institution. However, it can result in genuine customers being turned off, especially if these customers already have deep relationships with another line of business within the same financial institution! So, out through the door goes an opportunity for increased lifetime revenue and worse still, one has annoyed a customer for good!
The solution - leverage technology to integrate all pertinent information about a customer’s relationships across lines of business and ensure the institution has one view of such information. It will avoid duplicate requests for data from the customer and accelerate on-boarding. Also, it will enhance the relationship with the customer and improve his/ her experience with the institution, ultimately impacting positively on the institution’s revenue/ profitability and hopefully, better customer retention! As my client put it, “The engine that we build on top of existing silos of data is very critical to establishing a single view of customer information” – and therefore making money from existing information.
It is true that in a Flat World, such “engines” that run sans friction on top of existing platforms spewing disparate transaction data are absolutely de rigueur. While all this seems and sounds relatively simple, in practice it is certainly not!
Comments
The havala racket with its khoka language is the real route of money laundering. This havala business may seem peanuts since it does not involve Swiss banks' or other offshore accounts. However, individual small transactions are teeming in the havala market and its relatives the matka (lottery) market and betting rings. It is this market that is laundering a lot of cash globally. And try understanding this market before even thinking of regulating this market! Internet,moble phone and other IT enabled technologies are raising the effectiveness of the processes in these grey market! Recollect the recent arrest of a certain Hasan Ali of Pune who is worth over Rs. 30,000 crores!
Posted by: Sunil S Chiplunkar | March 27, 2007 04:13 AM
Nice Post.
In the last two decades, IT has eased out the way of transaction happening in the world. EFT, RTGS in India are bright examples. But in future, it should be more personalized and comfort level should be increased to a great extent. You have social security number(US) and permanent account number(India),integrating them with accounts can provide more personalization to the usage.
Posted by: gundumama | March 27, 2007 06:19 AM
Yes, Flat World has its set of disadvantages too. If good people want to take advantage of this new world then so do bad people. No matter how smart our systems become, people will find ways to bypass them to their advantage. It is necessary therefore to think like "them" in order to stay one step ahead in the game. Although, from a customer's perspective, all these changes should be as seamless as possible. Easier said than done...indeed.
Posted by: Ricky | March 27, 2007 10:52 PM
The data mining/pattern recognition technology behind this is becoming frighteningly good... As someone in AI, it certainly makes me think about trying to minimize the amount of information I "give out" ;)
Posted by: ai-depot | March 27, 2007 11:53 PM
There is definitely a flat world solution for this flat world problem - I recently helped a large global bank implement a global (what else?) AML solution - the approach was 'Follow the Sun' - when operations start in Australia, a team in Sydney starts looking into all transactions (real time) and determine whether that million dollar payment should go out of the door or be held for further scrutiny. When the team calls it a day, there are still payment instructions coming in that cannot be trapped in an AML system for the next 12 hours and the team from Tokyo takes over, handing over to London and Zurich when their time is up which later passes on the task to the team in New York to hold forte.
So you can imagine the complexities - global systems, multiple teams, multiple regulations, further compounded by chinese walls and business specific rules - all for finding that needle in the hay stack.
With the perpetrators getting smarter than systems by devising intelligent startegies, things are bound to get more difficult than ever. Cost of doing business, you said?
Posted by: Geetha Bellu | March 28, 2007 08:10 AM
While data quality and unified customer views are unquestionably important issues that need to be resolved by individual BFSI players, the success of a unified compliance solution also depends on the velocity of convergence in regulations around the world. I say “velocity” and not “speed” because there has to be a clear sense of direction as well. Even in developed markets, regulations are emerging in piecemeal fashion; their impact on business processes and underlying systems is not fully understood. Emerging markets by and large have inadequate laws and other regulatory mechanisms to govern the movement and deployment of money.
As global financial institutions expand in such markets, they will find themselves needing to comply with local laws as well. Under the pressure of competition from domestic players, it may be tempting to comply only with the less stringent local regime. It is such multiplicity that can come in the way of adopting a truly Unified Compliance Solution delivered from a single platform. But it is in the long term interest of the global financial system that global players lead the way by adhering to the highest regulatory standards.
As recent weeks have proved once again, the very same emerging markets that offer the potential for super-normal returns also tend to be more volatile. The Chinese and Indian stock markets cracked a few weeks ago, and the effects were felt across the world. With a significant increase in hedge funds and other investment vehicles that operate across national boundaries, issues like Operational Risk, Counter-Party risk etc. come to the fore. The challenge is compounded when you consider that significant chunks of investment into markets such as India tend to happen via the private equity route- bringing valuation norms into focus. Overlay on this a scenario of global M&A, and you begin to understand the overwhelming magnitude and complexity of harmonizing financial systems round the world.
How important these and related issues are at least to the Securities industry can be gauged from the fact that The International Organization of Securities Commissions (IOSCO) is meeting in Mumbai (India) in April 2007. Perhaps another piece of evidence that supports the view that our world continues to flatten.
Posted by: Anand Krishna | March 28, 2007 09:42 AM
Here's a timely news update:
The Government of India's Financial Intelligence Unit (FIU) has contracted Ernst & Young to set up systems for money laundering.
The Indian Express reports that Ernst & Young have entered into a two-year contract, valued around Rs 2 crore, with the Financial Intelligence Unit (FIU) to set up and implement a computerized system that records and analyzes all "suspicious" financial transactions.
Posted by: Bijoy Venugopal | March 29, 2007 08:30 AM