IIBF Seminar on Anti Money Laundering & Know Your CustomerLucknow14th September 2006

Vasant Godse

BackgroundThe process of transforming illicit funds into legal capital. Involves Placement /Layering/Integration Money laundered annually nearly 3 to 5 % of World GDP or USD 500 billion to 1.5 trillion.Organized crime groups becoming more global and carrying on their activities far away from their geographic regionNot only economically destabilizes a country but also exposes to terrorist attacks,threatening its integrity & sovereigntyResult: International organizations and regulators to developing international standards and best practices to address to money laundering issues in a collaborative manner

Players/DetectorsWho are involved?BankersLawyers, Car dealers,Real estates builders, Accountants andOthers, who allow their businesses to be used by someone to launder the proceeds of a crime.(23 industries covered in USA)

Who is watching?FATF/UNEuropean Union Directives Basel IIOFACUSA Patriot actBSAAPGMLWolfsburg Principles on Private Banking and Correspondent BankingAll countries regulators

RBI Guidelines KYC KYC guidelines to prevent banks from being used, intentionally or unintentionally, by criminal elements for money launderingComponentsCustomer Acceptance PolicyCustomer Identification ProceduresMonitoring of Transactions; andRisk managementTwo broad approaches to controlling money laundering:1. Know your customer and correspondent.2. Monitoring the transaction flows. (Correspondents yet to be covered in India)

Compliance expectationsBank must locate, extract, warehouse and assimilate data Solution that can evaluate transactions at more detailsSingle view on customer activityData/Informational needsData Acquisition from source system, transformation and loading capabilities.Data analysis enginesAnalysis and detection capable of revealing patternIdentify behavior changesSystem in place to document all findingsAd hoc research capabilities

Data Information requirements

Any solution for AML compliance has to address to thefollowing issues:-Monitoring of individual transaction Profiling of risk in respect of existing and new customersReferencing the transaction with regard to the watch list Marinating of records on customers, transactions, regulations and their up-datesAnalytics to assess and develop patterns of client behaviorFacilitating regulatory reporting and related requirementsProviding alerts and Generation of audit trailsTechnology Criteria

Technology OffersKYCManage customer account opening, acceptance & ongoing maintenance Risk based customer modeling Risk class based on risk factors and scores Links company wide customer acceptance documentation requirements Stores, manages and queries electronic documents

Risk AssessmentMaintains & monitors details for customer Profiling technique to evaluate customer & transactionCreates customer behavior pattern Tool for reviewing suspicious activity Real time transaction enquiry tools Automates creation and filing of suspicious activity Comprehensive audit trail

Technology OffersLegal/Regulatory compliance Electronic workflow from receipt of information to response backAutomated process to import the request for information Flexible search algorithmElectronic filing of responses back to inquiring partiesComprehensive security control to ensure confidentiality

Detection of Black listed customerDetects violations consistently across enterprise for a multitude of global sanctioning bodies Real time, intra-day interfaces to all at-risk business system Reduce expensive due diligenceProvide automatic sanctioned party updates Integrates with multiple disparate business systems

Technology Present StatusProduct vendors as well as solution framework providers like L&T InfotechMultiple approaches to AML implementation Basic transaction filtering and exceptions based reporting systems that give 'hits' and 'alerts' based on the violation of rules. Artificial intelligence based adaptive learning systems that monitor activity patterns in transactions and accounts to detect and prevent money laundering Integrating these solutions with the current architectures and developing multiple interfaces to existing systemsMore vendors and processes.Additional costs in maintaining multiple packages Security and database issues.

Technology TrendsBrowser-based interfaces, for enhanced usability and ease of deploymentVisualization tools, such as network diagrams to depict account relationshipsPeer profiling, network analysis, risk scoring and other analytic approaches currently being emphasized by regulatorsEnhanced case management functionality with rich workflow and investigation featuresCompliance dashboards, to integrate output from multiple regional and line of business systems, including the integration of AML with anti-fraud and other compliance systemsSource: Celent, Trends in Anti-Money Laundering 2006.

Technology TrendsAdditional modules to make a more comprehensive solution suite, including account opening due diligence and watch list filtering in addition to transaction monitoringIntegration with SWIFT and other payments networks to enable real time interdiction of wires Outsourced AML services, offered by major core banking processors such as Fiserv or Metavante, as well as new shared data center initiatives focused solely on AMLThe pursuit of scalability, to achieve greater competitiveness for business from large financial institutionsIntroduction by high end vendors of AML lite versions of their products, aimed at the emerging small and midsize FI market.

Commandments for ComplianceAML Compliance is a Board level and not only Branch level issueSize of the bank is immaterialLocations is redundantAML Compliance is NOT a local problemCompliance is a business challenge not MIS drillAddress to data needs and data consistencyTraining and its proper documentation for regulatory review NO OPTION BUT TO GO IN FOR TECHNOLOGY SOLUTION

Thank You

Vasant.godse@lntinfotech.com