Seminar on “Trade Based Money Laundering” 19 March 2015, New Delhi Leveraging Technology and Analytics for Detection of cases M. ANANDAN* General Manager/Practice Head Regulatory Centre of Excellence TATA Consultancy Services * Views expressed by the author are his personal Index 1 Regulatory Landscape and AML Cost – Industry Trend 2 AML/FCC Framework 3 Industry concerns and magnitude of risks in TBML 4 Red flags - Sources and Classifications 5 Importance of Technology to detect TBML - Why Manual is not possible - Sanction Interdiction Filtering - Wire Stripping - Trade Transaction Monitoring 6 Research, Intelligence and Analytics (RIA) 7 Important consideration for Systems - Diagnostic Anatomy and Scoring - Product Ranking 8 Summary - Lesson Learned & Avoiding Reputational Risk - Future State 2 Current Regulatory Landscape Source: KPMG 2013 report 3 Compliance Costs & Liabilities – Industry Trends COST TOTAL ALLOCATION Estimated - USD 10bn/annum to combat ML HSBC spends USD 750-800mn/yr, increase of USD150200mn from last year LIABILITY INSTITUTIONAL BNP – USD 8.9bn HSBC – USD 1.9bn Macquaire cost tripled in 3 years to A$ 320mn SCB SCB is adding USD 100- 200mn /year BOTM – USD 0.56bn JPMC to spend USD 2bn annually from 2014 onwards Areas of Focus COMMERZBANK – USD 1.45bn Significant Investments are focused in AML & KYC Global Spending on AML Compliance Operations and Technology will reach USD 5.88bn globally including USD 1.4bn of internal and external technology pending Other significant costs for Resourcing / Staffing AREA OF FOCUS – USD 1bn FINCEN (Dec 2014) -CCO of Money Gram – Penalty 1mn, applying Fit and Civil FINCEN (DecUSD 2014) -CCO of Money Gram Proper criteria – cannot participate in future – Civil Penalty USD 1 mn, applying Fit employment and Proper criteria – cannot participate in future employment FINRA (Feb 2014) fined former Global AML Brown Harriman USD officer FINRAof(Feb 2014)Brothers fined former Global 25,000 for AMLoffailures AML officer Brown Brothers Harriman USD 25,000 for AML failures PERSONAL 4 Deep dive into TBML 5 FCC/AML Framework FCC committee - Board Level & Policies and Procedures (CDD /AML / Sanction / ABC) KYC / CDD On boarding Sanction interdiction filtering Customer Screening AML Surveillance Periodic Review Technology / Systems (CDD Platform, TXN monitoring, real time screening and customer matches) Resources (experienced and certified) and Training (mandatory e-learning, specialized, refresher’s training etc.) Financial Crime intelligence / Research/Analytics FATF, BASEL, Wolfsberg, Egmont FIUs, APG, JMLG, EU Directives etc. Independent testing (QA\Thematic reviews) Governance / Oversight (SLA, Metrics and Risk Assessments ) Home and Host country Regulations/ OFAC, HMT, UN etc. Industry / Regulators concern… FATF TBML is an important channel of criminal activity and, given the growth in world trade, it represents an increasingly important money laundering and terrorist financing vulnerability (2006) ML and TF through trade in Diamonds – The specific characteristics of diamonds as a commodity and significant proportion of transactions related to international trade make the diamonds trade vulnerable to different laundering techniques of TBML in general and over/under valuation in particular. This should be viewed in light of the significant world annual trade volume which includes rough, polished diamonds and diamonds jewels. (In 2011 trade in rough diamonds amounted to approximately USD 51 Billion and the polished trade in diamonds amounted to USD 214 Billion (2013). FCA /FSA (2013) About half of the banks had no clear policy or procedures document for dealing with trade-based money laundering risks. As a result, some banks failed to implement adequate controls to identify potentially suspicious transactions related to TBML. Many Banks were unable to demonstrate ML risk had been taken into account when processing particular trade transactions. In particular, trade processing staff in most banks made inadequate use of customer due diligence information gathered by relationship managers or trade sales teams. 7 Industry / Regulators concern Australian Crime Commission TBML and bulk cash smuggling are international concerns that have been identified as emerging or possible threats in Australia (2011) JMLG Given the nature of the business there is little likelihood that trade finance will be used by money launderers in the placement stage of ML. However can be used in the layering and integration stages of ML as the enormous volume of trade flows obscure individual transactions and complexities associated with the use of multiple foreign exchange transactions and diverse TF arrangements permit the commingling of legitimate and illicit funds. Magnitude of risk Global Financial Integrity (2013) estimated around 80% of illicit financial flows from developing countries. US State Department’s Bureau of International Narcotics and Law Enforcement Affairs report said annual estimates of TBML reached into the hundreds of billions of dollars. UN (2012) – The global merchandize export trade - USD 18.3 trillion business, challenge is to identify the needle in haystack. 8 Major sources of Red flags Global FATF report – TBML – June 2006. FATF report – Best practices on TBML – June 2008. FATF report on TBML typologies – July 2012 FATF report – ML & TF through trade in Diamonds – Oct – 2013 Europe FCA Banks’ control of Financial Crime Risks in Trade Finance – July 2013. Americas FINCEN – Advisory of FIs on filing suspicious Activity Reports regarding Trade Based Money Laundering – February – 2010 US Immigration and Customers Enforcement (US) – TBL Federal Financial Institutions Examination Council (US) – ML & TF Financing “Red Flags” American Bar Association – Identification of ‘Red flags’ for the possible violations of keys US Laws for Companies Operating Overseas. APAC Australian Institute of Criminology – TBML: Risks and regulatory responses – 2011. 9 Classification of Red Flags BPME / Diamonds Control / Sanctions misconduct Third party Shipment Customer Document Transaction Payment 10 Classification of Red Flags BPME / Diamonds Customer Control / Importance of Technology, Sanctions Document misconduct Research/Intelligence and Analytics …. Third party Shipment Transaction Payment 11 Fines for the banks that breached US Sanctions Source: Thomson Reuters GRC01713/9-14 12 Why Trade AML Compliance is so complex? 400+ lists $ 14+ billion 20-30% Sanctions, Regulatory and Law Enforcement lists Approx fines levied for sanctions violations in recent years 6 hr -1 3-4 billion + day Average interval of list updates Possible fuzzy logic combinations Increase in names and aliases in last few years 3,000 New aliases in a single EU update on 19 July 11 13 The Challenge (and costs) keeps growing Source - SWIFT Operations Forum Europe 14 Challenges in TBML TBML involves transferring of goods as a substitute to money and occurs outside the Bank. Banks must leverage all the information available to them to determine whether their customers’ transactions are consistent with their businesses. Trade finance brings its own unique challenges and whether the documents are reviewed manually, or the information regarding the trade is input into a system and alerts are thrown out properly. There is a difficulty in detecting complex relationships between trading operations, operators, and money movements. Three key barriers make it tough to detect tradebased money laundering: 1. The tremendous volume of trade makes it easy to hide individual transactions; 2. The complexity that is often involved in multiple foreign exchange transactions; and 3. The limited resources available to agencies wanting to detect the fraud. 15 Need for Technological Solutions… Description of the letter of credit process The process works like this: 1. On behalf of the importer, a letter of credit (LC) is opened by an issuing bank. 2. The issuing bank transmits the LC to the advising bank. 3. Once the advising bank receives the LC, the advising bank notifies the exporter. 4. Goods are delivered from the exporter to the importer, and shipping documents are provided to the advising bank. 5. Upon receipt of the proper documents, the advising bank pays the exporter. 6. The advising bank then sends the documents to the issuing bank, and receives reimbursement from the issuing bank. 7. The issuing bank delivers the shipping documents to the importer and debits the importer’s account. 16 Need for Technological Solutions This scenario assumes that there is only an advising bank and an issuing bank, acting on behalf of both the importer and the exporter. The reality of LC processing, however, could be more complicated with additional parties involved. Those parties\entities could include: remitting bank, 1st reimbursing bank, 2nd reimbursing bank, other intermediary banks, 2nd advising bank, confirming bank, negotiating bank, shipping agent, insurance agents, pre-carriage vessels, vessels, forwarding agents, consignee, notifying parties, Ports/ Flags etc. This is where the picture becomes much more difficult. The core foundation (importer, exporter, advising bank and issuing bank) is still there, but many other elements are added. The addition of these elements, multiple financial institutions, multiple agents, multiple ways to move the goods, etc., all add a level of complexity to the notion of monitoring for money laundering Manual is impossible – Technology plays a major role in Screening/ Surveillance 17 When to do screening New to Bank customers - Before Account Opening/COB Existing customers - Periodically to adhere to changes in the Sanction lists Front End - It is more operationally effective to screen these data elements before a MT700 is created Outward SWIFT Messages - Before Screening against black list database UN/ Local list OFAC (country sanction program, SDN, SDT, SDNT list etc.,) FTO, etc BIS (Denied person, Un verified, Entity list, de barred list) HMT, EU list, NCA, PEP etc. creation of MT103 Inward SWIFT Messages and Remittances – Before credit of funds to beneficiary 18 Voyage check - Shipping and Vessels To manage AML risk (shipment exist) and sanction risk (shipment route) Eg: ICC/IMB, Lloyd Intelligence, TR/WC exclusive vessel check list, Carriers Website… The Casablanca, Celtic, Cotty, Huntsland, Violet or West or Rose Islands, Sand Swan, and the Ravens – All fly flag of Cuba. The pilot, police 1,2 or 3, sky sea and Antara… All fly the flag of Iran. Vessel - OFAC requests that banks screen against Vessel data that can cause high rates of false positives Ports - Where is the vessel stopping along the route, is there a potential of supporting sanctioned countries Critical vessel details includes Current Name / All Former Names International Maritime Organization (IMO) Number Port of Registry/ Country of Economic Benefit Vessel Type/ Group Beneficial Owner Operator/ Registered Owner Manager/ Technical Manager What needs to be screened Trade Documents – Bill of Lading/ Commercial Invoice , MT103/202, MT103/203, MT700/701, MT710/711, MT711/721 Dual-Use Goods and Controlled Goods - What are the goods carried by these vessels and do they pose a threat for the development of WMD Payment Routing - SWIFT/BICs for all sanctioned bank offices globally. Companies and Organizations Country Details - principle cities, towns, airports and seaports of all fully sanctioned countries. People – PEPs, including family members and associates, enhanced with unique identifiers. Checking for suspicious patterns of characters in originator or beneficiary fields, such as sequences of digits, special characters or empty spaces. (e.g., “AAAA”, “ “, “$%&#”) Filters any message types including SWIFT, FEDWIRE, SEPA, CHIPS, etc., 19 You have to check too many tools? Source: Accuity 20 What if… these checks done through single tool Source: Accuity 21 Screening Process flow Monitored from a single location Centralized Oversight Enterprise Risk Dashboard Flexible KYC systems to integrate with multiple systems Global Customer Profile Combination of Global and Regional Regulatory Requirements 22 Wire Stripping …. Perform field level checks and detect common wire-stripping techniques Some typical red-flag checks that can be implemented against payment transactions include: Checking for suspicious patterns of characters in originator or beneficiary fields, such as sequences of digits, special characters or empty spaces. (e.g., “AAAA”, “ “, “$%&#”) Checking for suspicious phrases usually used to conceal originator or beneficiary identity (e.g., “No name,” or “On behalf o f a customer”) Deriving the country of the sending institution from the BIC code in the SWIFT message and comparing it to the country code of the originator’s address 23 Analytics for combating Wire Stripping Source: CEB Tower Group Research 24 Automated Trade AML Operations Industry Best practices model Trade documents / Trade Transactions FP Management RM / Trade Sales Team Based on Matching algorithm Automated Screening Contact Customer for docs etc.. CARE: Without tipping off FCC RIA Team (Analyze Price / Weight / Link Analysis / Counter Parties/ Share Intelligence) If Suspicious Level 1 & 2 Investigation Raise Report Specialized Trade AML Team If Suspicious confirmed, report SAR Internal Watch list Scenario Logic - Pre / Real time check - Post Check Local regulator 25 Automated Trade AML Operations … Industry Best practices model Factors contributing Internal Investigation Reporting & External SARs Level 1 & 2 Investigation done by Trade Goods not in line with customer processing team with AML Knowledge. 4 eye checks Level 3 by experienced FCC professionals Independent sample QA for level 1, 2 and 3 business. Movement of goods to tax havens. Payments to third party and unrelated party Round figure bills submission. Mismatch in price details/ prices too high or too low. Mismatch in port of loading as per IMB, based on vessel check. Fraudulent bill of lading. Withdrawal document after raising queries. 26 How to balance system and Sanctions concerns? Source - SWIFT Operations Forum Europe 27 Research Intelligence and Analytics (RIA)… Data Analytics and Predictive Analysis Few Police Departments and Organizations are using data mining and predictive analytics for a variety of law enforcement and intelligence applications, including tactical crime/Suspicious analysis risk and threat assessment behavioral analysis of unusual/suspicious, and proactive deployment strategies. To discover hidden patterns and relationships in large amounts of information. To make accurate and reliable predictions of future events, based on the identification and characterization of these patterns and trends in historical data Perhaps the most important required skill for data mining is domain knowledge One of the biggest challenges is that most, if not all, data encountered was never intended to be analyzed. Challenges associated with data form, content, reliability, and validity Traditional tactical suspicious analysis generally involves creating a model that represents a suspicious or series of suspicious alerts, which can then be used to link cases, identify and apprehend and prevent future . 28 Research Intelligence and Analytics (RIA)… 29 Research Intelligence and Analytics (RIA)… Information Source: Goods gone bad - PwC Report Jan 2015 30 Research Intelligence and Analytics (RIA) Unit price analysis A RIA approach, using publicly available data and third party sources to detect if unit prices exceed or fall far below global and regional established thresholds Unit weight analysis Similar to the unit price analysis. Searches for instances where money launderers are attempting to transfer value by overstating or understating the quantity of goods shipped relative to payments International trade and country profiling analysis Uses publicly available and third party data to establish profiles of the types of goods that specific countries import and export, flagging outliers that potentially indicate TBML. Network (relationship) analysis of trade partners and ports Use RIA method to identify hidden relationships in data between trade partners and ports, and between other participants in the trade lifecycle; and can flag shell companies, tax havens or determine outlier activity Information Source: Goods gone bad - PwC Report Jan 2015 31 Important considerations for the AML System Algorithms and Scenarios Data Management Integrated Investigation and Alert Management Enterprise Case Management AML Optimization Analytics Monitoring and Regulatory Reporting Product components 32 AML Diagnostic Anatomy Source: CEB Tower Group Research 33 Anatomy Scoring Methodology Source: CEB Tower Group Research 34 Product Rankings Source: CEB Tower Group Research 35 Summary - You don’t always get a second chance... Lesson Learned – Commerzbank Commerzbank fined by NY DFS in March 2015 Commerzbank will pay a $1.45 billion penalty, terminate individual employees who engaged in misconduct, and install an independent monitor for Banking Law violations in connection with transactions on behalf of Iran, Sudan, and a Japanese corporation that engaged in accounting fraud From at least 2002 to 2008, Commerzbank used a series of measures – including stripping out information identifying clients subject to U.S. sanctions (“wire-stripping”) – to process 60,000 U.S. dollar clearing transactions valued at over $253 billion on behalf of Iranian and Sudanese entities. Additionally, deficiencies in Commerzbank’s anti-money laundering compliance program resulted in Commerzbank’s facilitation of numerous payments through the Bank’s New York Branch that furthered a massive accounting fraud by the Olympus Corporation, a Japanese optics and medical device manufacturer. 37 Lesson Learned – Commerzbank Commerzbank fined by OFAC in March 2015 The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced a $258.6 million settlement with Commerzbank AG (Commerzbank) to settle potential civil liability for apparent violations of U.S. sanctions. OFAC’s investigation into Commerzbank’s use of payment practices that interfered with the implementation of U.S. economic sanctions by financial institutions in the United States. Those practices included deleting or omitting references to Iranian financial institutions and replacing the originating bank information with Commerzbank’s name from payment messages sent to U.S. financial institutions. Commerzbank also created a process to route payments involving Iranian counterparties to a payment queue requiring manual processing by bank employees rather than routine, automated processing. Commerzbank utilized these practices in 1,596 financial transactions routed to or through banks in the United States between 2005 and 2010 in apparent violation of the Iranian Transactions and Sanctions Regulations. 38 Avoid Reputational Risk 39 Future State i TTU (Trade transparency unit) ii Information flow-structured - Between Banks, Between Countries and Regulator and Banks, LE to banks etc iii Automatic Work Flow/Case Management iv Exclusive Trade AML team as part of FCC v Tool to Detect fake and Documentary fraud vi Exclusive RIA Units within Bank’s FCC vii Subscription of Trade Bulletins eg ICC/IMB 40 Author Profile He had earlier worked with an International Bank based out of Dubai as Senior Financial Crime Compliance Advisory for MENAP and Africa Region covering 25 Countries Middle East, Pakistan and Africa. Before that, he was Head of Financial Intelligence Unit, Head of Detection Scenario & List Management and Vice President of Global KYC / CDD hub for Wholesale Banking Anandan M is a qualified Anti Money Laundering Specialist with two decades of experience in Banking with specialization in the areas of Financial Crime Compliance (FCC) - Anti-money laundering (AML) Advisory, KYC/ CDD/ Client on Boarding execution & Remediation, Sanctions Research, Compliance Assurance / Monitoring and other Regulatory Compliance (FATCA / CRS / AEOI / Dodd Frank) Domain. Currently working in a Consultancy firm in a Leadership role as General Manager /Practice Head to manage Regulatory Compliance Centre of Excellence providing strategic advisory and direction to Key regulations covering CDD/ KYC, AML, FATCA, DFA, EMIR, MiFID II, Basel etc., As a Head of Financial crime Intelligence Unit, Lead in design and implementation of the FIU function to address Financial Crime Compliance globally (Enhanced background screening for complex/High Risk clients, AML Country Risk Assessment, Regulatory Risk reporting/analytics, Reputational Risk analysis, Maintaining “Hot lists”, Media monitoring & Sanction researches) Accredited with 15+ International Certifications in AML (CAMS), Governance, Risk and Compliance, Anti-Bribery and Corruption (ABC) from various international agencies like ACAMS (USA), PRMIA (USA) and Basel II Compliance Professionals Association (USA) etc., Speaker at International AML conferences and Guiding PhD Students on Money Laundering/ compliance Research/Thesis 42
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