AI, link analysis, and blockchain: three weapons in the fight against financial crime Seed Patel, Group Director at Eastnets, the compliance, payment, and fraud protection experts, explains how to protect against terrorist financing in 2022.
Meeting the requirements of ever-evolving anti-money laundering (AML) and counter-terrorist financing (CTF) laws, regulations and guidance is no mean feat. The sheer depth and breadth of requirements from such as wide range of bodies can be daunting for even the most seasoned industry experts.
The first place they might look in relation to AML is the sanctions and politically exposed persons lists, to ensure the latest regulatory requirements are incorporated in the financial institution’s watchlists.
There’s a broad range of international and national regulations to comply with, including the UN Sanctions List, the US OFAC Consolidated Sanctions List, the US OFAC SDN List, and the EU Financial Sanctions List, the UK Govt Sanctions List and the Monetary Authority of Singapore Sanctions List.
Other notable AML guidelines include the standards developed by the Financial Action Task Force (FATF), the intergovernmental organization formed to halt money laundering and the financing of terrorism. It aligns standards throughout 36 member states by issuing regular guidance to financial authorities.
There are 40 FATF recommendations on AML and CFT. This provides a complete set of counter-measures covering the criminal justice system, law enforcement, the financial system, regulation, and international cooperation. These have been endorsed and adopted by individual countries, regional and international bodies.
Of the FATF recommendations, FATF 10 is notable with its requirements for customer due diligence measures prohibiting financial institutions from trading with anonymous or fictitious accounts. Another prominent recommendation is FATF 16, known as the Travel Rule, it requires countries to collect identifying information from the originators and beneficiaries of domestic and cross-border wire transfers. The aim is to improve the traceability of transactions.
Added to this are UN resolutions, the USA Patriot Act, and the EU 6th Anti-Money Laundering Directive. The latter introduces harmonization of AML/CFT rules across the EU member states, creating a new Anti-Money Laundering Authority (AMLA) to fight money laundering and for promoting cooperation.
Despite the complexity and plethora of different regulations, it’s crucial to ensure that financial institutions comply with the rules. Their integrity and reputation, and that of the markets they operate in, is at stake.
Financial institutions need to ensure they invest in appropriate systems and controls to detect and report suspicious activities. This means nothing can be left to chance. New advanced financial crime risk solutions are required to tackle the dynamically changing and growing complexity of watchlists, AML rules, SAR’s and STR’s reporting obligations.
A technological solution
The question is, what should financial institutions be looking for in their bid to remain compliant? The answer lies in understanding the important elements of the rules and then making sure systems are fully up-to-date and fully conversant to the regulatory requirements.
In the case of AML and CTF, the key components are the watchlists that underlie compliance screening systems. They include the details of every organization or person that has a sanction against them, including those on the Politically Exposed Persons (PEPs) list.
Most manual watchlist updates happen once a day, leaving financial institutions open to breaches between the time an entity is placed on a watchlist and the time they begin screening. There needs to be instantaneous compliance to avoid breaches and fines.
This can be achieved with Blockchain-based, real-time updates. As soon as a country, individual, or entity is added or deleted from a watchlist, updates securely flow to AML systems. This means screening solutions are always current, ensuring the highest level of protection.
But this is just half the job. The other is putting the watchlists into action. Screening and monitoring software needs to make use of the up-to-date watchlists by detecting potential criminal behavior in real-time or batch mode.
It must be able to monitor all transactions for AML including checking all financial traffic including different message types such as SWIFT ISO 20022, SEPA, ACH, Target RTGS, and Ripple. It needs the ability to quickly and comprehensively screen everything from huge databases to names, files, and messages against an unlimited number of lists and sophisticated rules.
Of course, this can create a huge amount of “noise” and potentially problematic transactions, which might be false positives. There needs to be a mechanism to monitor these and take automatic action based on rules set by the financial institution.
As the process continues, systems need to learn from previous decisions and automatically replay these on future detections, reducing false positives and the time and effort needed to clear detections. Of course, there also needs to be reporting and audit functions so that regulators can see how decisions were made and what action was taken.
By following this model where watchlists are always 100 percent up-to-date and then actioned effectively using advanced software that can make the right decisions, financial institutions stand a chance of meeting the huge pressure on them to AML and CFT.
And one thing is for certain. The landscape will only get more complex, the transactions harder to detect, and financial criminals to be more determined. In this context, the battle against financial criminals and terrorism, demands every tool in the box.
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