Looking for a Needle in a Stack of Needles: Anti-Money Laundering and How to Fix It

Experts Corner By Simon Moss, Chief Executive Officer for Pneuron Corporation

Money laundering is an enormous problem that’s proving very difficult to solve. The estimated amount of money laundered globally every year is between $800 billion and $2 trillion, according to the United Nations Office on Drugs and Crime. Financial institutions are throwing a lot of resources into AML and they’ve made progress with transaction monitoring systems. Yet 90 to 95 percent of all the alerts they generate are false positives.

The problem is that we’re not looking for a needle in a haystack, we’re looking for a needle in a stack of needles. Money launderers are making significant upfront investments to build innocuous profiles with months, or even years, of legal activity behind them. New transaction types, from online casinos to digital fundraising and charities to prepaid credit cards, are enabling funds to pass into the system in faster, more opaque ways that are challenging the traditional methods, technology and processes of scrutiny. Moreover, inconsistent onboarding and customer awareness enables jurisdictional abuse and leads to inconsistent risk assessment.

Money laundering is increasingly sophisticated and insidious. But we actually have access to all of the information we need to make AML more effective.

A new approach

We are expending huge amounts of effort on identifying, normalizing, moving, storing, and optimizing data prior to any analysis. About 80 percent of the total effort in AML is spent accessing and calibrating data, understanding the customer and performing enhanced due diligence and other standard mitigation efforts, collecting risk model information, transaction history, and social media data.

That only leaves 20 percent of the BSA and AML unit’s time and knowledge for the actual detection, investigation and interdiction. It takes anywhere from 45 minutes to two and half days to analyze an alert. If 95 percent of the alerts flag false positives or are automatically closed without any review, there’s clearly an efficiency and focus problem.

If I were a money launderer it would be in this noise of false positives that I would hide. After all, I have a 95% chance of never, ever being caught.

In finding a fresh approach, we have to make sure that we leverage existing investments – in data, in models, in organizational horsepower. The simplest path to reducing false positives is to access more data sources and plug them into our risk and investigation models. The challenge is finding a way to efficiently and effectively bring transaction alerts, customer history, internal records, external news and any number of other data sources together without the effort of the manually and technology intensive approaches of the past.

The goal of course is to maximize analysis and decision-making time, and remove the data gathering and integration time. Ideally, we need to be able to access different data sources in real time so that investigations can be completed as soon as the case comes up, with the best data available, for the type of alert or case that has been targeted.

The answer is not a monolithic solution that will sweep the current system away but rather a fabric that we can lay on top of your diverse internal and accessible external assets to bring together the data we need automatically and to filter it according to specific investigative requirements.

Data should be collected and processed closer to the source, so that analysts can focus on the actual analysis. Post-decision evidence collection and archiving can also be automated, but we mitigate risk by building in an investigative audit trail for program refinement and regulatory review.

Finding consistency

The potential data sources that could be used to enrich and improve our quantitative model analysis are not being consistently leveraged. This is the information age. We should be stirring negative news information, associations and corporate actions, organizational structures, peer analysis, social behavior, career path, contacts, and a host of other data sources into the mix. And we should be doing it consistently to form a true, 360-degree view of the client, their activities and the risks of those activities against changes in the market, in the relationship and over time.

We’re making it easy for money launderers by separating our projects into siloes and then spending our effort on technology and processes to deal with the structure we’ve created.

As we focus on harvesting and creating heterogeneous data from diverse systems and customer relationships, and rely on time-consuming and repetitive manual processes, money launderers have a high probability of never being caught and they know it. What’s more, we have institutionalized unnecessary cost and risk into the AML, and into compliance as a whole, because of the mindset that forces diverse data sources into some central repository. Money laundering, risk and operations have changed radically over the last 30 years. The way we try to find and report it has not.

By prescriptively inserting intelligence into the data-gathering and analytical processes and making all these disparate data sources work for us in concert, we can cut out the redundancy and the repetitive parallel projects. The truth is we’ve been approaching this problem and trying to integrate all this diversity in exactly the same way for more than three decades and it isn’t working. Let’s try something different. All the dots we need to form the big picture are already there, we just need to connect them.

Simon Moss, CEO for Pneuron Corporation

Simon Moss, CEO for Pneuron Corporation

About the Author

Simon Moss is Chief Executive Officer for Pneuron Corporation, a business orchestration software provider. He was previously CEO of Avistar and CEO at Mantas, later acquired by Oracle. He served as Partner at Price Waterhouse Coopers, and was co-Founder of the Risk Management Services Practice at IBM. Moss is also on the Board of Directors for C6 Intelligence. Contact him at simon@pneuron.com.

For more AML commentary from the Author visit http://info.pneuron.com/how-to-launder-money-after-a-few-billion-dollars-in-aml-investments/

For a perspective on the Panama Papers visit  http://info.pneuron.com/aml-regulatory-update-panama-fatca-and-the-next-year-in-regulations/