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www.celent.com 1 Anti-Money Laundering: Challenges and Solutions Neil Katkov Group Manager Asia Research Celent Finsight Risk and Compliance Summit 2007 Mumbai, India 9 March 2007

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Page 1: Neil Katkov_ Celent

www.celent.com

1

Anti-Money Laundering:Challenges and Solutions

Neil KatkovGroup Manager Asia Research

Celent

Finsight Risk and Compliance Summit 2007Mumbai, India9 March 2007

Page 2: Neil Katkov_ Celent

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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

Page 7: Neil Katkov_ Celent

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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

Page 8: Neil Katkov_ Celent

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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)

Page 9: Neil Katkov_ Celent

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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

Page 10: Neil Katkov_ Celent

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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%

Page 12: Neil Katkov_ Celent

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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…

Page 13: Neil Katkov_ Celent

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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

Page 14: Neil Katkov_ Celent

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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%

Page 16: Neil Katkov_ Celent

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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

Page 17: Neil Katkov_ Celent

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17Source: NetEconomy

Sample transaction monitoring interface

• Activity profiling• Transactions, with

drilldown• Visualization

tools (graphing)

Page 18: Neil Katkov_ Celent

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Source: FircoSoft

Sample watchlist filtering interface

• Message details• Suspicious entity ID

details• Synonyms• Match accuracy (%)

Page 19: Neil Katkov_ Celent

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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

Page 22: Neil Katkov_ Celent

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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

Page 25: Neil Katkov_ Celent

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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

Page 29: Neil Katkov_ Celent

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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

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Thank you.

Neil [email protected]

[email protected]