Fraud Detection & Prevention: Contextual Monitoring for Investigators

The leak of confidential suspicious activity reports (SARs) submitted to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) and subsequent reports published by the International Consortium of Investigative Journalists point to failings of financial institutions in preventing the flow of dirty money. Questions also persist around what law enforcement did with the information provided in those SARs. 

Financial institutions do not want to do business with criminals. Yet there’s definitely room for improvement, particularly when it comes to the anti-money laundering (AML) systems banks use to uncover money laundering. A joint effort between banks and law enforcement remains critical to combatting financial crime.

While some may look to determine where the blame lies, we cannot lose sight of the fact that many banks are very risk-averse and usually follow an ‘if in doubt, file a SAR’ mentality (sometimes called defensive filing). This often generates too many SARs – at great cost to the banks and law enforcement. New and emerging technologies help banks and law enforcement to combat financial crime by increasing the confidence levels, timeliness, and relevance of SARs.

Even though some financial institutions may struggle to uncover suspicious activity, there are hundreds of thousands of anti-money laundering professionals who remain dedicated to stopping the movement of illicit funds. To avoid compromising their methods as well as law enforcement’s AML investigations, news of these countless positive impacts rarely appear in the business press, but they happen nonetheless. Banks aren’t the problem; they are, in fact, a critical part of the solution.

Despite banks’ best efforts, money launderers continue to exploit the global financial system. Understanding why money launderers sometimes succeed in their efforts requires a willingness to consider the complexity of the challenge. It also requires an understanding of the critical role governments play in preventing such activity.

Technology and Data: The Cornerstones of an AML Program 

At the heart of every AML investigation program is the need to develop an understanding of the originator and beneficiary of a transaction, and to whom these entities might be connected. To undertake such analysis, financial institutions need access to data, including information gathered at account opening and over the life of the relationship. They need transaction-related data and open-source data. Just as importantly, they need to enhance this internal data with information from external sources such as watchlists, corporate registries, beneficial ownership databases, etc. 

While the financial sector certainly wants to uncover money laundering, some banks continue to rely on outdated legacy transaction monitoring approaches that focus on anomalies, such as transactions that exceed a given figure based on the average value or volume, for example. Using this approach, the technology often flags lifetime events, such as the sale of a home or an inheritance. Multiply this across a bank’s entire customer base, and it’s easy to see how AML investigations teams are overwhelmed by false–positive alerts from routine transactions.  

Furthermore, criminals continually change their behavior to avoid breaching the simplistic transaction monitoring systems. Since their transactions don’t generate a red flag, and the bank lacks context regarding the entities involved, the money moves freely. Having perfected their approach, criminals scale their operations and launder money with impunity. 

Critically, legacy transaction monitoring approaches do not help banks to learn more about the originator or beneficiary, as they focus on transaction value and volume. This lack of information about the parties to a suspicious transaction forces investigators to fill in the gaps by conducting internet searches and research, much like the journalist teams did during their investigations. 

It’s Time for a New Approach 

To avoid falling behind well-funded and innovative criminals, banks and law enforcement must adopt new technology quickly. Thankfully, technology has evolved significantly in the last five years. Today’s solutions can catapult AML investigations to a previously unattainable level of efficiency and performance. Using such technology, banks can develop a nuanced view of an entity as well as its transactions and connections. As a result, it can support contextual decision making by automatically analyzing critical data.  

Rather than merely flagging transactions due to unusual value or volume, or because they breach certain scenario thresholds, a contextual system asks questions such as whether it makes sense for the parties to be transacting with each other based on their respective industry codes. It can also consider the size of the payment relative to each company’s turnover and total assets. A contextual monitoring system can even ask questions of the ownership related to the corporate structure, directors, and Ultimate Beneficial Owner to determine if there is any connection to risk. 

For example, before flagging suspicious behavior, a solution can automatically pre-analyze entities and transactions using every available data source. Investigators no longer need to bounce around between internal and external systems to do the same. Instead of investigators spending days conducting their analysis, technology can accomplish the same tasks in seconds. The right technology platform can also scale to scrutinize vast volumes of transactions, again in a fraction of the time it would take a human. 

While financial institutions and law enforcement must upgrade their technology platforms, governments must also ensure that their corporate registries and beneficial ownership databases are up to date and made available to banks to support their anti-money laundering efforts. And since money laundering schemes continue to take advantage of tax havens, those jurisdictions should rethink their stance, share relevant data, and join the fight against money laundering, leaving criminals with one less place to hide. 

What are the immediate ramifications of the leak? Given the amount of information now in the public domain, banks must use the data to ascertain their connection to the named entities and the extent of any existing relationships. Finally, the compliance team should determine the magnitude of their exposure and how to best mitigate the impact. Law enforcement must also harness the power of data to enhance AML investigations with additional intelligence.        

Criminals target multiple banks across several jurisdictions, creating complex money flows. To overcome this challenge, data must be connected in a single view across banking, law enforcement, and other sectors. The FinCEN leak creates a compelling case for banks to employ the latest technology and for governments to honor their commitments to provide data that the financial sector needs to target launderers. Information sharing between the public and private sectors is key to identifying and preventing financial crime and bringing criminals to justice.