As this blog has repeatedly catalogued over the last year here, here and here, Money Laundering is a massive global headache and one of the biggest crimes against humanity. Not a month goes by when we do not hear of billions of dollars in ill gotten funds being stolen from developing economies via corruption as well as from proceeds of nefarious whether it is the Panama papers or banks unwittingly helping drug cartels launder money.
I have seen annual estimates of global money laundering flows ranging anywhere from $ 1 trillion to 2 trillion – almost 5% of global GDP. Almost all of this is laundered via Retail & Merchant Banks, Payment Networks, Securities & Futures firms, Casino Services & Clubs etc – which explains why annual AML related fines on Banking organizations run into the billions and are increasing every year. However, the number of SARs (Suspicious Activity Reports) filed by banking institutions are much higher as a category as compared to the numbers filed by these other businesses.
The definition of Financial Crimes is fairly broad & encompasses a large area of definition – the traditional money laundering activity, financial fraud like identity theft/check fraud/wire fraud, terrorist activity, tax evasion, securities market manipulation, insider trading and other kinds of securities fraud. Financial institutions across the spectrum of the market now need to comply with the regulatory mandate at both the global as well as the local market level.
What makes AML such a hard subject for Global Banks which should be innovating quite easily?
The issues which bedevil smooth AML programs include –
The challenges are hard but the costs of non-compliance are severe. Banks have been fined billions of dollars, compliance officers face potential liability & institutional reputation takes a massive hit. Supra national authorities like the United Nations (UN) and the European Union (EU) can also impose sanctions when they perceive that AML violations threaten human rights & the rule of law.
The various elements that make up the risk to banks and financial institutions and the technology they use to detect these can be broken down into five main areas & work streams as shown below.
Illustration: The Five Workstreams of AML programs
Financial institutions that leverage new Age technology (Big Data, Predictive Analytics, Workflow) in these five areas will be able to effectively analyze financial data and deter potential money launderers before they are able to proceed, providing the institution with protection in the form of full compliance with the regulations.
The business benefits include –
Virtually every leading banking institution, securities firm, payment provider understands that they need to enhance their AML capabilities by a few notches and also need to constantly evolve them as fraud itself morphs.
The question is can they form a true picture of their clients (both retail and institutional) on a real time basis, monitor every banking interaction while understanding it’s true context when merged with historical data, detect unusual behavior. Further creating systems that learn from these patterns truly helps minimize money laundering.
The next and final post in this two part series will examine how Big Data & Analytics help with each of the work streams discussed above.
 Building AML Regulatory Platforms for the Big Data Era – http://www.vamsitalkstech.com/?p=5
Big Data – Banking’s New Weapon Against Financial Crime – http://www.vamsitalkstech.com/?p=806
 Reference Architecture for AML
 WSJ – Know Your Customer’s Customer is the New Norm – http://blogs.wsj.com/riskandcompliance/2014/10/02/the-morning-risk-report-know-your-customers-customer-is-new-norm/