neil katkov_ celent
TRANSCRIPT
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Anti-Money Laundering:Challenges and Solutions
Neil KatkovGroup Manager Asia Research
Celent
Finsight Risk and Compliance Summit 2007Mumbai, India9 March 2007
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About Celent
• Independent IT Strategy Research for Financial Services Firms– Banking– Securities & Investments– Insurance
• Syndicated Research– Overviews/Market Trends/Surveys– Case Studies– Vendor Comparisons
• Ongoing Advisory Services• Custom Research & Strategy Consulting
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A tidal wave of regulationsA tidal wave of regulations
Capital Adequacy / Capital Adequacy / Basel IIBasel II
Corporate GovernanceCorporate Governance
Anti-Money LaunderingAnti-Money Laundering
Financial Reporting / SOXFinancial Reporting / SOX
Accounting Standards / Accounting Standards / IASIAS
Consumer PrivacyConsumer Privacy
Record RetentionRecord Retention Business Continuity PlanningBusiness Continuity Planning
Information SecurityInformation Security
Source: Celent
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Pre-2001 2001 2002 2003 2004 2005 2006 2007 2008 2009
AML / US Patriot Act
Proposal Deadline (effective date)
IAS / IFRS
Sarbanes Oxley Size <$75m
Basel II – Mandatory Basic & Foundation Advanced
These forces have been building over the past three years…
Source: Regulatory Authorities, Celent
AML / EU Directives
1st EU Directive (1991)
2nd EU Directive
3rd EU Directive
?
Basel II – others ?
? ?
MiFID ?
Reg NMS (US)
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Regulation has resulted in compliance fatigue amongst institutions…
Structural Efficiency
Com
petit
ive
Impl
icat
ions
Market ObjectivesMarket Stability
Short-term
Long-term
‘FRICTION REMOVAL’
REGULATION HARMONIZATION
EFFICIENT MARKETS
MARKET INTEGRITY/ FAILURE PROTECTION But regulations that
drive inherent structural changes in the industry need to be heeded more closely
SEPA initiatives (Single European Payments Area)
MiFID (Europe)
Reg NMS (US)
International Accounting Standards (IAS)
AML/Patriot
SOX
Basel II
Solvency II
Privacy
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Chief Risk Officer
Compliance is now a board level Compliance is now a board level mandate…mandate…
Overall Risk Management Responsibility
11%
5%
3%
2%
16%
21%
38%
1%
2%1% Board of Directors
Board Level Risk Committee
Chief Risk Officer (CRO)
Management Level Risk Committee
CEO
Head of Business Units
Chief Financial Officer (CFO)
Internal Auditor
Independent Risk Oversight or Middle Office
Others
Board of Directors
Board Level Risk Committee
Source: Deloitte, 2005
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For financial institutions, the scope of financial crime is expanding
• Retail Finance
– Retail banking
– Online brokerage
– Private banking
– Cards
– Personal insurance
• Wholesale Finance
– Corporate banking
– Institutional securities
– Execution-only brokerage
– Commercial insurance
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Money laundering, then and now: continuity and evolution
1997• Wire transfers• Internet-based and e-money systems• Remittance services and money
exchange services• Assistance from lawyers• Hawala, hundi or other “underground
banking” systems• Bank-centered techniques: collection
accounts, loan back arrangements bank drafts, money orders and cashier’s cheques smurfing
• Cash smuggling• Accounts in relatives’ names, shell
companies
2004• Wire transfers• New electronic payment systems• Remittance services and money
exchange services• Assistance from “Gatekeepers” • Hawala, hundi or other
“underground banking” systems• Terrorist financing through non-profit
organizations• Insurance industry, particularly
through independent insurance agents
• Politically Exposed Persons (PEPs)
(from FATF Reports on Money Laundering Typologies)
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Tighter AML regulation in the US and Europe is pushing money laundering activity into Asia Pacific…
Source: Celent
Money Laundering by Region(Total = $950 billion in 2006)
Asia-Pacific31%
Americas38%
Europe26%
MiddleEast -Africa5%
Totally Funds Laundered Worldwide
$800
$900
$1,000
$1,100
$1,200
2004 2005 2006 2007 2008 2009
US
$ bi
llion
s
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The perpetrators: money laundering by criminal sector
• The usual suspects―drugs, smuggling, organized crime―account for over ¾ of all money laundering
• Terrorist financing is a drop in the bucket in real terms. Nevertheless it is driving today’s AML and KYC regulations
• White collar crime, including embezzlement and internal fraud, is a significant (and growing) problem.
Money Laundering by Activity
Terroristgroups
1% Drugs26%
OtherOrganized
Crime23%
Smuggling29%
Embezzle-ment/WhiteCollarCrime21%
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• The largest portion of laundered funds are processed through banks. This is largely due to the fact that banks are often the first stop in a multi-tiered laundering scheme.
• Investment firms—including brokerages, mutual fund companies, hedge funds—also see a significant amount of activity, attracting more than 1/4 of money laundering.
• Schemes targeting insurance companies are a growth sector, now accounting for close to 10% of activity.
The victims: money laundering by industry sector
Money Laundering by Industry SectorInsurance
Firms9%
CreditCards
5%
MoneyServices
4% Brokerage&
InvestmentFirms27%
Banks55%
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Regulatory intensification: the USA PATRIOT Act
• Within the US: expanded AML requirements beyond banking sector (regulated since 1970) to brokerages, insurance firms, money services, etc. etc.
• Globally: intensified AML policies of the US have produced a ripple effect on the international regulatory scene
• Many Asian countries have introduced or updated AML laws and regulations in PATRIOT’s wake:
– China, India, Japan, Philippines, Malaysia, Singapore, Vietnam
• Unlikely suspects such as FATF blacklist countries are also strengthening their AML efforts…
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Internal threats: insider fraud
Types of Insider Fraud• White collar crime• Misappropriation of funds• Forgery• Check Theft• Market abuse/broker fraud• Money laundering• Personal information leaks• ID Theft
Fighting Insider Fraud:• Security:
– Firewalls– Authorization and access
control and monitoring
• Behavior detection technology– Employee screening
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The tools: anti-money laundering programs
• Financial institutions in Asia, Europe and the US spent a total US$3.6 billion on AML programs in 2006
• US spending leads the way, spurred by the US PATRIOT Act and other regulatory scrutiny
• AML spending is still minimal in Asia—about US$535 million in 2006—due mainly to lack of regulatory driversSource: Celent
AML Spending by Region - 2006
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
Asia Europe US
US
$mill
ions
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Breakdown of AML spending
• People costs involved in training, reporting and other compliance-related activities make up the bulk of AML program spending
• Software and hardware account for only 12% of total spending on AML
• Rules development, system fine-tuning and other ongoing system maintenance activities are a significant cost—about one-fourth% of AML spending
Source: Celent
Anti-Money Laundering Spending Breakdown
ITMaintenance
24%
Software/Hardware
12%
Training,Compliance,
Reporting64%
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Elements of a comprehensive AML solution
• KYC/account set-up• Watch list filtering• Transaction
monitoring• Workflow/case
management• Reporting
Legacy Systems/Data Sources
ReportingData
Warehouse
AML SYSTEMS
TransactionMonitoring Data Analysis
Alerts RecordKeeping
Watch ListMonitoring
FINANCIAL INSTITUTION
GOVERNMENT AGENCIES
FinCen Other
OFAC Watch Lists
KYC/account set-up
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17Source: NetEconomy
Sample transaction monitoring interface
• Activity profiling• Transactions, with
drilldown• Visualization
tools (graphing)
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Source: FircoSoft
Sample watchlist filtering interface
• Message details• Suspicious entity ID
details• Synonyms• Match accuracy (%)
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19Source: Norkom Technologies
Sample case management interface
• Open cases• Drill down• Case status• Workflow/analyst
assignment
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AML technology adoption trends
• Europe will soon catch up with the US in AML software adoption
• Asia still has very low adoption; most countries have only recently got serious about AML
• In all regions, very small institutions are still getting by with largely manual approaches to AML
Transaction MonitoringTechnology Adoption, 2006
0%10%20%30%40%50%60%70%80%90%
Small FIs Mid-tier FIs Large FIsAsia Europe US
Source: Celent
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The state of AML in Asia…
Source: Celent
Low
High
Industry AwarenessLow
Prog
ress
(Impl
emen
tatio
n of
sys
tem
s)
High
Australia
Hong Kong
JapanIndia
ChinaTaiwan
Malaysia
Singapore
South Korea
ThailandIndonesia
Philippines
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Spending on anti-money laundering solutions in Asia will grow faster than in Europe or North America…
Global AML Software Spending
28.438.7
60.771.0
81.493.0
113.7122.7 129.2 133.0
146.0142.1 144.7 148.5 146.0 139.5142.1
139.5
020406080
100120140160
2004 2005 2006 2007 2008 2009
US
$ m
illio
ns
Asia EMEA Americas
Source: Celent
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Recent AML Deals…
• Bank Association of the Philippines establishing shared AML system NetEconomy and LogicaCMG
• Standard Chartered and HSBC: global roll-outs including Asia: Norkom Technologies
• Bank of China: Implementing TCS AML system together with new core banking system over next 5 years
• SMBC (Japan): real-time watchlist filtering using Fircosoft
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Vendor consolidation
• Large tech companies, and private equity firms in a few cases, are acquiring specialist AML vendors
• This does not mean the disappearance of these solutions
• Rather, the big firms are investing to enhance their usability, and integrate them with the new owners' extensive financial solutions offerings
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Regional distribution of incumbent AML vendors…
• Major incumbent vendors are concentrated in Europe and North America
• This leaves Asia open to competition from a new wave of AML vendors, particularly from Indian vendors– Infrasoft– TCS– 3i SDG
Regional Distribution of Financial Services Clients
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Wolters Kluw er/PCiTopSTBSideSAS
NorthlandNorkom
NetEconomyMetavante/Prime Associates
MantasLogicaCMG
Fortent/SearchspaceFircoSoft
Experian/Americas Softw areChoicePoint/Bridger Insight
ActimizeACIAce
Accuity
North America Europe Asia Pacific South America Rest of World
Source: Vendor RFIs
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A silver cloud to the compliance burden?The overlap between compliance and business IT challenges...
IT AreaCompliance Issue
Data Integrity
Record Retention & Accessibility
Operational & Financial
TransparencyPrivate and Secure Customer Information
■ ■
KYC ■ ■ ■
Transaction Monitoring/Analysis
■ ■
Reporting and Retention ■ ■ ■
Sarbanes-Oxley ■ ■ ■
Basel II/Risk Management ■ ■ ■
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Leveraging the technology investment across compliance and business uses...
ProfitabilityAnalysisAML Fraud Market
AbuseID
Theft
Financial Crime
RiskMgmnt
Financial Transparency
Compliance
Enterprise Risk Framework
CRM
Marketing
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...means, ideally, there is a virtuous cycle of compliance, IT and business value…
• Improving service levels• Business intelligence/strategic
planning• Multi-channel distribution• Customer profitability analytics• Targeted marketing Compliance
Provides support toIT business cases.
ITCan serve compliance
while servingbusiness and vice versa.
Compliance
IT
Business Value Business Value
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Action Items for banks: AML
• Risk-based approaches to AML– KYC and onboarding
• Need to combine AML, anti-fraud and security– To deal with enlarging scope of financial crime and internal fraud
• Need for multi-regional and cross-border diligence– The ability to monitor and relate activity in multiple jurisdictions
• Effective AML and anti-insider fraud technologies
• For smaller banks: AML Lite technology