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Compliance with anti-money laundering and fraud standards, laws, and regulations is a familiar topic to financial institutions. After all, some of the rules and processes banks have had to deal with go back 20, 30, or even 40 years, including:
The Bank Secrecy Act, passed in 1970, requires U.S. financial institutions and agencies of foreign banks to develop risk-based anti-money laundering programs. It was later updated to incorporate provisions of the USA Patriot Act, requiring banks to adopt a customer identification program.
In 1989, the International Financial Action Task Force was formed to set standards fight money laundering.
The International Monetary Fund has been expanding its anti-money laundering efforts since 2000.
Jump ahead a few years to the Fourth EU AML Directive - a regulation which required compliance by June 2017 - demanding enhanced Customer Due Diligence procedures must be adhered to when cash transactions reach an aggregated amount of more than $11,000 U.S. dollars (USD). (The Fifth EU AML Directive is on the way, with a June 2020 deadline.) In New Zealand’s Anti-Money Laundering and Countering Financing of Terrorism Amendment Act of 2017 it is stated that banks and other financial entities must provide authorities with information about clients making cash transactions over $6,500 USD and international monetary wire transfers from New Zealand exceeding $650 USD. In 2018, the updated open banking European Directive on Payment Services (PSD2) that requires fraud monitoring also went into effect. And the Monetary Authority of Singapore is developing regulations regarding the use of cryptocurrencies for terrorist funding and money laundering, too.
Not done yet! The anti-money laundering compliance list in the U.S. now includes New York’s Department of Financial Services’ risk-based anti-terrorism and anti-money laundering regulation, which was put into effect in 2017. It requires relevant regulated institutions to review transaction-monitoring and filtering programs and ensure that such programs are designed to comply with regulatory safeguards. The Financial Crimes Enforcement Network’s Customer Due Diligence (CCD) program requirements that were implemented in May of 2018 are an amendment to BSA, requiring financial institutions to conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. This Enhanced Due Diligence (EDD) requirement explains that higher-risk customers and their transactions should be reviewed even more closely - upon account opening, and more frequently throughout the term of relationship - to reduce bank reputation, compliance, and transaction risks.
How to practically respond to anti-money laundering rules
As you can see, there’s no shortage of anti-money laundering and anti-fraud mandates touching financial institutions across the globe. Certainly, as regulations increase, the impact on these institutions grows. Thomson Reuters disclosed in its 2018 U.S. Anti Money-Laundering Insights Report that 51 percent of surveyed respondents cited the CCD’s regulatory criteria as a challenge. More than a third saw the Fourth EU Anti-Money Laundering Directive as a challenge.
But cases like that of Danske Bank, the largest bank in Denmark, make a point on the importance of regulatory adherence. The bank has admitted to deficiencies in anti-money laundering controls in its Estonian branch, with the total laundered money amounting up to $150 billion USD, according to Reuters.
It is possible that applying too many stringent steps to monitor the estimated $800 billion to $2 trillion that is laundered annually could be difficult for banks to maintain. It can be costly for them to make extensive investments in anti-money laundering processes, technology, and training considering that the actual percentage of a bank’s accounts that truly represent a threat may be very small. But banks also don’t want to risk fines for non-compliance.
Commercially-supported open source infrastructure and middleware may offer an effective and cost-efficient way to help address the dichotomy. With open source capabilities, financial firms can be better equipped to glean insight from existing and real-time data from predictive methods and integrate new data from wherever it may reside. Such capabilities can also help manage rules for transaction investigation, with self-serve capabilities available in containers, available to authorized personnel when they need. The flexibility that commercially-supported open source solutions can offer can make it easier to scale to analyze the growing volumes of transactions and specialists, helping implement transparent, automated business processes that can be more easily mutable to changing regulatory mandates.
Financial firms can benefit from a sophisticated way to match data elements across disparate sources and leverage scalable and flexible solutions to be able to verify customer identity, establish Ultimate Beneficial Ownership (UBO), validate customers, and support enhanced due diligence across multiple data domains. An in-memory open source data management system such as Red Hat Data Grid can synchronize results across multiple servers and locations for increased data accuracy, integrity, and availability, as well as for querying, based on exact metadata matches and full text search with relevance scoring.
Simplifying, integrating, and improving anti-fraud and anti-money laundering capabilities with an integrated Fraud Reduction Anti-Money Laundering (FRAML) system that addresses specific business processes should be a key step to being able to make the most of predictive methods that identify anomalies, detect patterns, and understand potentially fraudulent behavior. Continual automated integration within systems can reduce maintenance burden and business disruption, too. The Red Hat operational efficiency solution can fill this bill. The solution can provide capabilities to automate and integrate business processes so that employees can more quickly determine which cases involve customer activity and which need additional scrutiny.
Once identified, banks also need a tool to automate and facilitate investigations by standardizing processes and providing visibility into resolutions. The Red Hat operational efficiency solution also includes the ability to develop and manage a step-by-step approach to investigations by following a bank’s defined business processes and policies, with visibility into which steps have been completed and which remain, providing an audit trail.
Red Hat’s open system architecture for addressing anti-money laundering can provide the flexibility and innovative features that can help financial organizations adapt to an ever-changing regulatory environment. Focused on business agility, self-service tools, automation, and embedded analytics for various data types from multiple sources, financial institutions can have access to tools that can handle anti-money laundering more cost-effectively and can lessen potential disruptions to other strategic initiatives. Among the products in Red Hat’s AML solution stack include the automation technologies and cloud architecture of Red Hat OpenShift Container Platform, and Red Hat Decision Manager to more easily create an audit trail of AML rules that have been executed. Dive into the solution capabilities to learn more.
About the author
Anthony Golia is 20-year technology veteran in the Financial Services industry, and is passionate about collaborating with my clients to help them realize value and a competitive advantage from open source and emerging technologies in today's fast-changing industry landscape.