Detecting fraud within large financial institutions is an age-old problem that is becoming ever more difficult to manage as financial networks increase in size and complexity, and financial crime becomes more widespread. As traditional anti-money laundering (AML) techniques are not always effective, some believe the solution may lie in sophisticated network analysis.
"Analytics allow banks to validate their high-risk customers or high-risk geographies, which may not necessarily be reflected in more conventional risk assessments. It's very difficult to do this by simply piecing together information from disparate systems; it requires more sophisticated analysis," notes Laurie Gentz, global compliance product manager at BAE Systems Applied Intelligence in Boston.
BAE Systems Applied Intelligence wins this year's Operational Risk award for compliance product of the year, having recognised the value of advanced network analysis and pattern recognition in taking AML to the next level. Notably, the business has leveraged the network expertise of its parent, BAE Systems, in UK defence and applied it to the financial services sector.
"We use social network analytics to understand the data anomalies or social attribute networks that exist within an organisation that may not typically be uncovered by AML systems. Such analytics might identify a single customer tagged with many different customer identification numbers, for example," explains Gentz.
Another instance of suspicious activity might be an originator sending money to multiple beneficiaries in the same geographic area, or a single beneficiary receiving funds from multiple originators. While such activity could turn out to be legitimate, a sophisticated AML system would create an alert that it warrants investigation.
"Network visualisation can be particularly useful in correspondent banking, where AML is not just about knowing your customer, but knowing your customer's customer. Network analytics can help banks identify suspicious activity or a suspicious individual across many correspondent banking relationships," Gentz adds.
As banks have dealt with record fines for illicit transactions and growing regulatory pressure in recent years, AML technology and know-your-customer (KYC) processes have become much more important for many financial institutions.
But banks also increasingly recognise the value of having robust and consistent AML procedures in place to satisfy their own internal controls. That could mean streamlining disparate processes and systems that have been used in the past, or it might mean implementing an entirely new AML platform.
"With the increasing number of fines against financial institutions, many banks have been looking for an efficient suite of products to support their AML journeys, from customer due diligence and KYC, all the way through to disclosure reporting and suspicious activity monitoring," says Gentz.
The BAE Systems platform is delivered in a modular format, so that financial institutions with existing AML programmes in place can choose to plug any gaps with a single module rather than undertaking a wholesale replacement, while others can take on the whole system. Modules include transaction monitoring, customer due diligence, sanctions monitoring, case management and cash transaction reporting.
"Our BAE AML suite of products can be deployed individually or together with alerting and case management, and they can coexist with other systems, which allows a financial institution to keep its current AML programme in place while upgrading its functionality," says Gentz.
In one recent example, BAE Systems was chosen by a major consultancy to deliver an AML programme to a major global financial institution to help it meet local regulatory requirements, including transaction monitoring, customer due diligence and sanctions screening. The platform was delivered in a range of languages across the US, Europe, the UK and South America.
"There is a major focus on customer due diligence, KYC, beneficial ownership and sanctions screening at the moment, with regulators demanding more sophisticated analytics and this is driving banks to re-evaluate their technology. In many cases they're finding that the necessary nuts and bolts aren't there, and they need to find a vendor that can deliver an enterprise view of their customer across geographies," Gentz says.
As with other areas of operational risk management, the challenge of AML tends to vary depending on the size and structure of the bank concerned. For larger banks, the task is likely to centre on the difficulty of getting an enterprise view across geographies, while smaller banks must also meet AML obligations but may lack the internal resources to manage the analytics.
"It takes a certain type of investigator to be able to look through those networks and understand the patterns they reveal," says Gentz. "We are now providing more analytical tools so that more of our customers can use network analytics alongside traditional entity analytics to address their AML requirements."
The week on Risk.net, December 2–8, 2017Receive this by email