22 Jun 2020
If criminals have the advantage in the fight against financial crime, that’s due in no small part to how the anti-money laundering sector functions, according to Jim Richards, principal and founder of RegTech Consulting LLC.
For one, bank supervisors are focused primarily on technical compliance with AML regulations rather than on how well an institution keeps money launderers at bay, Richards said in a recent episode of KYC360’s AML Talk Show. This has contributed to banks tuning their AML controls in a way that increases false positive alerts and contributes to defensive filings of suspicious activity reports, he said.
Consequently, banks and law enforcement agencies alike are left with a deluge of data, the vast majority of which doesn’t result in actionable intelligence for investigators, according to Richards, who previously served as the Global Head of Financial Crimes Risk Management at San Francisco-based Wells Fargo.
Transaction monitoring has also failed to effectively shield institutions from an influx of dirty funds.
“Transaction monitoring has never worked. I don’t think it ever will work,” he said. “It’s a very blunt instrument. It’s single bank, generally, with bad data, operating from a place of regulatory fear.”
To more effectively identify criminal activity, the compliance sector should be focused on producing SARs that have a “tactical or strategic value” to investigators, according to Richards, who noted that this would likely mean the production of fewer reports that are of a generally higher quality than those currently filed.
Richards has also advocated for what he calls “relationship-based inter-action surveillance.”
“It’s very, very different than simple transaction monitoring,” he said. “Rather than looking at a customer, you look at the total relationship. Rather than looking at transactions, you look at all inter-actions, which include transactions that the customer is doing.”
One example of how interactional surveillance could work better than traditional transactional monitoring is reflected in how banks identify the so-called “funnel accounts” used by drug traffickers sending illicit proceeds out of the United States.
“When we look at accounts that are opened up along the Southwest Border, with cash deposits around the United States, we can see that funnel account activity based on transactions,” he said. “But then when you take a look at who is accessing those accounts, checking balances, et cetera, and we can see one device with a single IP address, not doing any transactions, but it’s accessing 10 different funnel accounts.”
“We have now found that guy who is managing those 10 funnel accounts, not through transaction monitoring, but through interaction monitoring.”
Listen to the full podcast here
RiskScreen: Eliminating Financial Crime with Smart Technology
Count this content towards your CPD minutes, by signing up to our CPD WalletFREE CPD Wallet