3 ways AI can help prevent AML compliance fines in 2022

January 13, 2022
2021 was another bumper year for fines slapped against financial institutions (FIs) for failures in anti-money laundering (AML) compliance. AML shortcomings in transaction monitoring are a global problem. Countries whose banks were hit with fines include the United States, Germany, the Netherlands, Norway, Latvia, France, the UAE, India, Malaysia, and South Africa.  Fines imposed on FIs by regulators could reach as high as $2 billion for a second year running when the final figures come in, according to estimates. The continuous vigilance of regulators should serve as a wake-up call for financial institutions worldwide to take stock in failures and take action to change the trend in 2022. Some guilty parties lacked an AML compliance culture or even engaged in outright fraud and corruption. Others turned a blind eye. For FIs investing in large and costly compliance teams and tools, it’s surely frustrating to be hit with fines of tens of millions of dollars for non-compliance.  Some banks fined in 2021 were faulted with poor AML programs including implementation or operating outdated AML systems. As we know well, weak AML controls can open the door for financial crimes. With the rising number of players in the financial ecosystem and the growing volume of global cross-border payments, the challenges are not going to diminish. Just the opposite. Financial institutions are surely asking themselves what do to next. Thanks to the advancement of AML technologies based on AI, a direct path has been paved to reverse the trend.  Indeed, 2022 can be the year of change by bringing AI onboard for AML efforts. Here are some ways banks, payment service providers and fintechs can benefit from AML programs powered by AI.    Reduce false alarms Regulators require financial institutions to submit SARs to cover activity suspected as money laundering, terrorist financing or other criminal offenses such as cybercrime and fraud.  They serve as a tool for regulatory and law enforcement bodies.   Failing to submit SARs is a serious violation of AML laws. Many banks took a hit and were fined for this violation in 2021. FIs operating legacy rules-based systems are inundated with a high volume of false positives, which can reach up to 99% in some cases since they monitor for set thresholds. With so many transactions red-flagged, it’s easy to understand how AML compliance teams would have difficulty deciding which cases warrant referral to financial law enforcement. Besides being expensive to operate as they require huge manpower, known rules can be easily accessed and outsmarted by bad actors including in cyber-engineered attacks.  Using unsupervised machine-learning AI for transaction monitoring can pinpoint abnormal activity outside normal patterns of financial transactions. In this way, FIs can focus on the cases that really matter, reduce investigations, and avoid slowing down and blocking transactions. Semi-supervised AI based on known cases of money-laundering can also further train and perfect the detection system. Fill in missing information Poor monitoring of customer identities was another factor that caused FIs to miss cases of suspected money-laundering.   In

Forces driving demand for RegTech

December 3, 2021
RegTech is getting more attention in the fintech ecosystem this year, alongside the surge in cross-border money transfers and expansion of digital transfer platforms. Accelerated by the COVID-19 pandemic, the popularity of electronic payments is spiking both the volume and complexity of financial transaction data. More sophisticated digital financial crimes are another side effect of the uptick in electronic transfers, with fast, ecommerce transactions a vehicle for criminals to exploit and cover money-laundering and other illicit financial activities. These forces are challenging banks and payment service providers to fulfill their compliance obligation to help weed out the financial crime from normal activity. As a result, financial institutions (FIs) are seeking more technologically advanced solutions to automate transaction monitoring. Regulatory technology companies, known collectively as RegTech, are improving tools to help manage increased volumes with optimized performance. Legacy control systems are limited by rules, when the focus should be on highlighting risk factors. RegTech solutions applying AI and machine-learning technology to big data in cloud environments can help financial institutions and payment service providers ensure their growth trajectory, while enabling a risk-based approach. With enterprise momentum toward cloud-based systems, SaaS cloud-hosted RegTech solutions can especially streamline operations. Here’s a deeper look at three major forces driving demand for RegTech solutions:   More action required With the rise in financial crimes, regulators globally are demanding more action to combat money-laundering. Some examples of the many recent directives from regulators around the world:   In the UAE, new guidelines by the central bank from November reflect Financial Action Task Force (FATF) standards. Money transfer firms must maintain effective AML/CFT programs using a risk-based approach to fulfilling obligations, including strong customer due diligence, continuous transaction monitoring, and suspicious transaction reporting. In Asia, the Hong Kong Monetary Authority (HKMA) is specifically encouraging the adoption of cloud-based RegTech solutions as, more advanced technologies can “identify high-risk relationships, suspicious transactions and networks of mule accounts.” The EU is also moving to crack down on money-laundering, kicking off a major campaign headlined: #EUstopsdirtymoney. A new EU AML authority will be set up requiring tighter controls across the EU to ensure the private sector consistently applies AML rules and regulations. Meanwhile, the Bank of Ireland issued new guidelines in June, in line with the European Banking Authority, highlighting the issue of de-risking, noting it is not acceptable for firms to terminate large categories of customers without conducting individual risk assessments to determine whether there are any increased CDD measures which could be applied to allow the customer relationship to be maintained. Rising costs of compliance High costs of compliance are also driving FIs to search for new and more efficient solutions from RegTech providers. The operation of compliance departments and manpower involved in investigations can weigh heavily on the bottom line of FIs. Rules-based systems can be counterproductive and ineffective in dealing with the rising volume of data, as they are known for triggering a high rate of false positives and a large volume of alerts. As a result,

How to ride through the holiday season without too many obstacles

November 22, 2021
Black Friday, Cyber Monday, Cyber Week, Black November, Christmas and New Year’s vacations, aka the commercial part of the “Holiday Season.” For shoppers, retailers, and holidaymakers, it’s one of the most satisfying times of the year. For banks and payment service providers, however, the surge in spending and transactions that comes with this peak season can easily turn into an annual headache. The holiday season is the time of the year when financial criminals can more easily take cover in the surge in global transactions to engage in money-laundering and other illicit activities. Cybercriminals are experts at impersonating people and organizations, which can pose an extra risk when consumers and do-gooders can be off guard as they relish in the frenzy, are feeling generous and more open to special offers. To tackle the uptick in financial crime as transactions surge over the holidays, banks and payment service providers might ramp up compliance operations to support the increased data coming in from higher than usual money-transfer volumes, including both cross-border payments and domestic transfers. But it’s not the only way to head off the compliance challenges posed by these seasonal fluctuations. Here are some ways to better prepare for any eventuality and make it through the holiday season with your resources and avoid trouble from the regulators. Don’t get caught relying on last year’s cases As we have seen since the beginning of the pandemic and surge in digital payments, reality changes very fast. Financial criminals change direction constantly to avoid getting caught. Realistically, it’s therefore not possible to rely only on what you know from the past. Rules-only based transaction monitoring systems are therefore inherently outdated. They can’t be prepared for what new typologies might hit today or tomorrow. When the holiday surge hits and something new surfaces, there won’t be enough time to scramble and write new rules for the system to implement. The effort needed to investigate and analyze during and after a surge period can therefore impede on the capability to file SARs on time, exposing banks and financial institutions to higher costs fines. Detect the anomalies in the crowd Instead of telling the system what to look for like in a rules-only based method, machine-learning- based monitoring using AI can detect previously unknown types of irregularities. An AI-driven approach can manage the unknowns intuitively, calling out something that is out of the norm without knowing its first name. Machine learning lets the data lead the way to the abnormalities and things that are different, saving on the need for analysts to investigate huge volumes of false alerts amid surging transactions. Benefits include: Avoid slowing down and blocking transactions Reduce false positive number and investigation time significantly Identify unknown cases in projects As a result, analysts and compliance officers can benefit from a type of crystal ball to see what is happening in the transaction world irrespective of the number of interactions taking place when a surge takes place. Don’t let your data have limits During transaction surge periods,

Reaping the benefits of lowering money-transfer fees

November 17, 2021
Competition is heating up in the low-cost international money transfer business, with new fintechs putting pressure on the traditional MTOs and incumbent banks. It’s the 31st of the month. A migrant worker working in the Gulf waits in his employer’s office to receive his monthly wages. With cash in hand, Step 2 is the dash to a local branch of a money transfer service to send some funds home to put food on the table for his extended family. Unfortunately, 10% or even more can be lost due to high transfer fees, depending on the destination, currency, and how many stops the amount makes on the way. Foreign workers are a significant player in the global business of cross-border money transfers, with remittances valued at $553 billion in 2021 and expected to grow by 2.2 percent to $565 billion in 2022, according to World Bank estimates. The top five remittance recipient countries are India ($83 billion), China ($60 billion), Mexico ($43 billion), the Philippines ($35 billion), and Egypt ($30 billion). The top sources for the outflows are the United States, the UAE and Saudi Arabia. Today, the remittance transfer market is dominated by money transfer operators (MTOs), such as Western Union, as well as banks. Costs for low-value amounts remain high, compounded by the price of implementing rules to Know Your Customer (KYC) as part of global anti money-laundering (AML) and anti-terror financing efforts. While at an all-time low average of 6.5%, the United Nations has set a target of 3% to reduce inequality within and among countries. Banks remain the most expensive type of service provider, with an average cost of 10.66 percent. . Market disruption triggered by low-cost digital payment platforms Today, the incumbents in the money transfer business are under pressure from the rapid development of alternative payment platforms that are democratizing the consumer-to-consumer (C2C) payments industry. This competition has done more for reducing for the cost of low-value transfers than what the leaders of the G8, G20 and international organizations combined have managed in years of efforts to reform the sector. App-based cross-border solutions designed with foreign remittances in mind are disrupting the market. Fintech startups such as US-based Remitly and UK-based Wise were launched to solve the pain point of migrant workers paying exorbitant fees on small money transfers. Digital platforms have fees that are consistently below the international average for MTOs. In Q1 2021, the digital-only MTO Index was recorded at 3.43 percentage points. Traditional money platforms fighting back In the face of competition from the digital payment providers, incumbent banks are making moves to maintain their share of the high-growth global cross-border business and even expand business with new revenue corridors to smaller banks and PSPs. This summer, SWIFT launched a new service to compete in the fast-growing low-value  payment market. SWIFT Go is a service for consumers and small businesses to send low-value payments across borders directly from their bank accounts. The service offers fast payments, even within seconds, securely with upfront transparency on fees. The move by

The Dark Art of Money Laundering

November 4, 2021
Art is an increasingly attractive avenue for money launderers, and legislators have taken notice Deep in the night at a major European port, a high-end security company guard is on his shift in a warehouse watching over multi-million-dollar art pieces held in storage. Unbeknownst to him, one of the artworks has just changed hands right under his nose, without ever moving a millimeter.  The transfer of ownership could be legitimate, but it could also be a money-laundering scheme and the guard watching over the art would have no inkling that a crime had been committed. Loosely regulated with business conducted under a veil of anonymity, it’s easy to understand why art is an attractive avenue for money launderers.  The high value of art and ability to easily manipulate real values makes it a prime avenue for cleaning dirty money, especially as more conventional types of ML outlets, such as real estate, are increasingly regulated by Financial Action Task Force (FATF) guided regulations. The art trade industry respects the need for client secrecy, also commonly utilizing freeports around the world for storage “in transit.”  Once there, normal tax and customs rules do not apply, and items can be resold without ever leaving the port.  As a result, high-end art and antiquity trading are moving higher on the global radar of regulators working to combat money laundering and terrorist funding.   To complicate things further, when the global art market took a hit at beginning of the COVID-19 pandemic, dropping from an annual market value of more than $65 billion to some $50 billion, the industry pivoted to adapt to a world of online commerce to compensate for the lack of in-person transactions.  The number of annual global transactions is 31.4 million, according to the data. Online sales doubled in 2020 compared with 2019 reaching a record high of $12.4 billion. The figure represented a record 25% share of the market’s total value, according to a survey by the Art Basel and UBS Art Market Mid-Year Review 2021 published in September. An estimated $3 billion of the annual art trade is linked to money launderings every year, with the total crime value including thefts, fakes and illegal imports as high as $6 billion, according to a report published by the International Monetary Fund.  New regulations requiring compliance As governments move to regulate the art trade, new Anti-Money-Laundering (AML) laws to combat money laundering and terrorism financing will require art dealers to establish the identity of buyers and sellers, as well as report transactions to authorities.   In January 2020, the UK enacted legislation aimed to curb illegal activity in the art and antiquity trade by “art market participants”, subjecting transactions over €10,000 or more to be registered with the tax agency and dealers to identify the ultimate beneficial owner” — meaning both seller and buyer — before entering into a transaction. Furthermore, guidelines spell out that multiple sales by galleries to single customers must be accumulated and are also subject to threshold

Money Laundering Through Mobile Apps

October 19, 2021
The first money laundering activities to run through mobile apps took place over ten years ago when 20 of the top 25 downloaded applications in the Danish Apple App Store were downloaded from China and cost between $50 and $100 each. The laundering activity was fairly simple. Criminals created the apps, and used stolen gift cards and credit cards to buy their own products. App money laundering has advanced over the years. In 2018, criminals were caught using free gaming apps to launder money. The scheme was simple. It centered around three games: Clash of Clans, Clash Royale, and Marvel Contest of Champions. They would download the free app, use stolen credit cards for in-game purchases, and sell the fully loaded app to players who didn’t want to spend the time developing their player or building up their repository of tools. Since 2018, money laundering has continued to thrive through mobile applications. It presents a perfect environment for stealing and cleaning money. Applications and mobile payments are lightly regulated, and in-app purchases for thousands of dollars don’t necessarily raise an eyebrow. Furthermore, applications allow gift card purchases, which are even less regulated than credit card payments. Here are a few ways criminals are laundering money. Peer-to-Peer Laundering Airbnb and Uber have revolutionized their industries. Without owning a single property or car, these companies rank among the largest hospitality and transportation companies in the world. Consumers use the apps to book rooms and rides, while criminals use them to easily launder money and move funds across borders. Fake stays in expensive Airbnbs are an easy way to launder money. Using a stolen credit card, the money is sent to the host, giving off the appearance of a legitimate transaction. Fake reviews are the final touch in making the stay look legitimate. Uber can facilitate transactions in a similar way. Criminals book rides that never happen with stolen credit cards, giving the driver a cut of the transaction and taking the rest of the laundered funds. Laundering COVID Relief Money Recently, governments around the world have spent billions of dollars in COVID relief. In the United States, the CARES Act allocated over 2 billion dollars in direct payments to citizens, unemployment benefits, loans to major industries, and loans to small businesses. In an effort to get money into the hands of people who needed it, the government made it quick and easy. Criminals falsified applications to receive checks and quickly deposited them into “money mule” accounts. From there, it was easy to transfer the money into popular mobile applications and move the money around. When the cash arrived in the hands of the criminals, it was clean and could be used for anything. Chinese Money Laundering App Earlier this year, the Indian police in Delhi busted an elaborate money laundering scheme based in China that managed to steal nearly 20-million dollars from half a million Indian citizens over just a few months. Criminals recruited Indians citizens through messaging applications WhatsApp and Telegram,
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