According to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), “Money laundering is the process of making illegally gained proceeds (i.e., ‘dirty money’) appear legal (i.e., ‘clean’). Typically, it involves three steps: placement, layering and integration. First, the illegitimate funds are furtively introduced into the legitimate financial system. Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts. Finally, it is integrated into the financial system through additional transactions until the ‘dirty money’ appears ‘clean.’ Money laundering can facilitate crimes such as drug trafficking and terrorism, and can adversely impact the global economy.”
Financial crimes are not new to companies in the financial services industry. Banks have been trying to fight them from the beginning of their existence and regulations have been around for decades to ensure that firms are doing what they can to safeguard the financial system. However, what’s different today is the business climate. The sheer number of products and services each company offers is vastly greater than it was years ago.
Consider online and mobile banking, for example. A recent survey conducted by Kaspersky Lab revealed that one in four banks have trouble verifying the identities of digital and online banking customers, allowing an influx of financial fraud. According to the global cybersecurity company, in 2016 30% of banks experienced security incidents such as criminals using customer credentials for fraudulent activities. In the next three years, 59% of banks expect even more financial losses due to fraud. The proliferation of two-factor authentication and other security measures (i.e., biometrics) used by banks, are a direct result of the attacks on banks and customers.
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The pace at which financial institutions have merged or been acquired has also made knowing who your customer is more complex. Lastly, the increased frequency and sophistication of the criminal activity carried out today makes fighting money laundering that much more difficult. The accessibility and simplicity of today’s technology have made it much easier for individuals with little or no training to commit financial crimes.
Naturally, the regulatory environment has had to keep pace with the increase in money laundering. As a result, banks understand the need to protect the financial system and comply with strict regulations, such as the USA PATRIOT Act, the Bank Secrecy Act (BSA), the Office of Foreign Assets Control (OFAC) reporting requirements, and the FINRA Anti-Money Laundering (AML) rule. They must also comply with global standards and guidelines produced by groups like the Basel Committee and the Financial Action Task Force (FATF) to prevent money laundering and terrorist financing.
According to PWCGlobal’s 2016 Global Economic Crime Survey, “Money laundering transactions are estimated at 2 to 5% of global GDP, or roughly U.S. $1 to 2 trillion annually. Yet according to the United Nations Office on Drugs and Crime (UNODC), less than 1% of global illicit financial flows are currently seized by authorities.”
Because of the widespread nature and increased number of financial crimes committed, the high cost of fighting them, and the overall ineffectiveness of identifying cases, financial institutions, more than ever before, are investing in their capabilities to detect, evaluate, and prevent money laundering. While companies have always had processes and procedures to help manage the problem, the introduction, proliferation, and accessibility of highly sophisticated technology has enabled and encouraged companies to evaluate and implement new innovative strategies to deal with money laundering.
In our new guide, we explore the basic tenets of AML and KYC, as well as how you can leverage the power of machine learning technologies to enhance your firm’s compliance programs. You can download it here.