The Right Stuff for AML Means the Right Software

One phrase says everything about anti-money laundering (AML) enforcement: Mission creep. Since 9/11, federal agencies supporting the financial war on terror have developed a number of new regulations, apparently designed either to create the perfect trap for every money-laundering scheme, or to build its power base.

Whichever it is, the burden to comply falls on financial institutions of every stripe. And not every new regulation is the fault of over-zealous bureaucrats: The fertile minds of money launderers are always finding new ways to do business, and government needs to keep up.

The real battle with money laundering is a matter of forensics, not mere compliance. At the end of the day, going after people dumb enough to use banks or money-service businesses is the anti-terror equivalent of busting street dealers: Moving real money can’t be done $9,000 at a clip, and it’s easier to get money from Miami to Bogota or Peshawar by smuggling it, taking out life policies on dying relatives, or buying a shack for $10 million, than trying to evade the ever-narrowing gaps in the established financial system.

Nevertheless, even if AML compliance is more a matter of politics than of having any real effect, it’s a serious matter. Non-compliance can mean big legal bills, a loss of reputation, and multi-million dollar fines—or even being shut down—for institutions foolish enough to give the task short shrift. And with most institutions processing thousands—if not millions—of payments daily, this task is clearly beyond any sort of manual monitoring.

The result, says Eva Weber, an Aite Group analyst, is that financial institutions must take the necessary steps to satisfy the regulators. "The size of the problem is continuing to grow, and not going away," she says. "Regulators are always saying that the focus for banks should be on preventing money laundering, and not necessarily on compliance, but of course, one can’t exist without the other, so the focus has been heightened on AML compliance."

As for the cost, expect no slack from Washington: "It’s natural for regulators to expect more from financial institutions when they know there are many tools available to them," she says. "They’re mindful of the cost, but the goal of AML compliance is, in their minds, more important than the price tag."

That being the case, those few banks still struggling with the task—and the many non-banks about to be faced with it—had better get their ducks in a row. There really is no way out of it, and any bank chairman who doubts it need only read one of the many cease-and-desist orders on the website of the Office of the Comptroller of the Currency (OCC).

Compliance means more than a software installation. AML forces change in managing a typical bank over and above computer issues. To take just one example: Almost every OCC cease-and-desist order includes a directive to train staff in AML issues, including being familiar with a written AML policy and procedures manual.

Software is unavoidable. The job is just too big. "Compliance officers are really stretched these days, because they’re the sole person responsible for complying with all those regulations, and it’s too time consuming to go through all a bank’s transactions, manually go through all the lists, and check for all the red flags," says Weber.

However, software is not good enough, and an institution that over-relies on it, and does not go to the trouble of knowing their customers—usually number one in any compliance regimen—is asking for trouble.

Consider, for instance, a wine importer who decides to hold a November nouveaux Beaujolais festival, and orders 40 cases of wine from 10 vineyards for roughly $9,000 each. That transaction would be flagged by any software package as suspicious, and generate a Suspicious Activity Report (SAR). But automatically sending it on to the Financial Crime Enforcement Network (FinCEN) would only lose you a customer, and annoy FinCEN. Appropriate procedures need to be in place to avoid a stumble like that.

"The most common reason for filing a SAR is structuring (making numerous payments just below the reporting threshold), but it’s not always people looking to avoid filing a CTR (currency transaction report). A lot of times, it’s just the nature of their business," says Weber. "It’s difficult for a larger institution, but you should know your customer pretty well, and hopefully, you’ve already spoken to them about this particular sort of incident. But you still need to investigate it."

The cumulative effect of AML implementation shouldn’t actually change the bank, she adds, as long as the bank has already been vigilant. "If you haven’t been doing this already, then this is going to hurt," she says. "Training your staff about what the red flags are and the importance of complying, and that any form that needs to be filed, is filed, is too important to ignore."

"Everything should begin with your risk assessment," she adds. "That means knowing what sort of transactions your customers execute and what sort of businesses that you’re dealing with, so even when you implement the technology, things shouldn’t change that much. You should already know what you should be looking out for."

At the end of the day, says Weber, the AML task is a chore that’s only going to grow, if only because regulators will be constantly thinking up better ways to do their job, and look better before a Congress hungry for ways to look like it’s doing its job. "The enforcers are always going to want more information, and not less," she says. (Contact: Aite Group, Eva Weber, 210-688-0123)

Money Laundering Creates Problems for Stored-value Cards


The U.S. Treasury’s U.S. Money Laundering Threat Assessment, published last December, says that many types of stored-value cards have the potential to become major avenues for money laundering, suggesting—although not saying explicitly—that stringent anti-money laundering regulations are in the offing for the card products.

Industry groups are preparing what amount to pre-emptive negotiations to keep the issue off the floor of Congress, hopefully minimizing potential regulations that could, in the view of many in the industry, cripple the business case for what bankers and other payments executives consider several promising new revenue streams. But prepaid-card executives are declining to speak publicly about the issue, hoping to keep public discussion about stored-valued cards “positive.”

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Manhattan District Attorney and Money Laundering Regulations

Manhattan District Attorney Robert Morgenthau, together with federal and New York state banking officials, is on the verge of settling serious money laundering charges against the Bank of America Corp. with a reported $25 million fine, making this the second largest money laundering case the long-time DA has settled in three months. In December, the Manhattan DA, the New York State Banking Department, and the Federal Deposit Insurance Corp. settled a similar case with Israel Discount Bank of New York, also for a fine totaling $25 million, including the costs of the investigation.

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Fox leaving FinCEN for Bank of America

The Financial Crimes Enforcement Network (FinCEN) said today that William J. Fox, its director since Dec. 2003, is leaving to become senior compliance executive for compliance risk management at Bank of America (BofA). Fox starts at BofA on Feb. 21; he’ll be replaced as director by Deputy Director William F. Baity, effective February 4.

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Federal Anti-Money Laundering Regulations

Get ready for Patriot Act II, says Peter Djinis, a former FinCEN official now practicing law in the Washington, D.C., area: The reach of U.S. anti-money laundering (AML) regulations will keep growing in 2006—from banks, brokerage houses and the like, which have been under the AML umbrella for years, and into industries like insurance, gems and precious metals, hedge funds, investment advisors, and off-shore real estate transactions.

The source of life insurance policy payments, for instance, is about to get a close look, and the ingenuity of bad guys is to blame. Djinis mentions a case broken by the U.S. Customs Service in 2003 in which Columbian drug cartels were buying U.S. life insurance policies with offshore money, cashing them out for near-face value in the U.S., and then either getting the money directly, or having it paid to third parties. “The paper trail was all messed up—(criminals) had all sorts of explanations of why they had that money, and none of the policies showed the illegal nature of the funds that bought the policies,” he says.

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