Poor reporting systems make bank fraud difficult to track in the UK but the industry can take steps to protect itself, including providing more reliable data on suspicious or anomalous transactions. Alex Foreman-Peck reports.
Some time before Osama Bin Laden became the US’s public enemy number one, legendary US mob boss Al Capone held this dubious title. Capone’s criminal success was due in part to his money-laundering activities in which he masqueraded illegally gained proceeds as revenue from his legitimate businesses. This money provided him with the power and influence to rule the underworld crime gangs and corrupt the forces of law and order. Among his means of cleaning money was a network of cash-based laundrettes, from which the phrase ‘money laundering’ was coined.
Once illegally acquired cash is introduced into the financial network, the subsequent steps are relatively easy. Through offshore centres, funds are transferred at a second’s notice, making them difficult to track between legal jurisdictions, which have secrecy laws. The funds then find their way back to the accounts of legitimate, but criminally run, businesses. These organisations exchange inflated invoices, from which they earn bumper profits for anonymous bearer shareholders. The money returns to the fraudsters’ accounts to be spent or invested freely.
Legislation efforts
Rafts of legislation have been passed to counter the money-laundering racket, prompted most recently by global terrorism threats. Internationally, the Financial Action Task Force and its associated blacklist have pushed for reforms in tax havens through ‘naming and shaming’ and the threat of punitive sanctions. In the UK, the Drug Trafficking Offences Act 1986 and money laundering regulations from 1993 were deemed insufficient enough to warrant the Proceeds of Crime Act 2002. This legislation, in turn, was judged inadequate by anti-corruption movement Transparency International in a recent report entitled Dirty Money, Clean Money.
The 2002 Act gives UK police and Customs greater powers, while increasing the regulatory burden, and the range of institutions and persons on whom that burden falls, across the UK financial sector. “Identification seems to have been pushed to one side,” says Doug Hopton of MHA Consulting and former head of group money laundering prevention at Barclays Bank Group. “We’re looking at reporting suspicions. We’re looking at reasonable grounds for suspicion.”
Staff face stiff penalties
While many of the imposed obligations are unclear (would investigating a suspect be tipping off? what are reasonable grounds for suspicion?), the penalties for non-compliance are not. Bank staff who are convicted of aiding in laundering scams can get up to 14 years’ imprisonment and tipping off a suspect can bring up to five years in prison.
Industry concerns about the new legislation were raised at the The Banker’s recent Combating Financial Crime conference sponsored by IBM and Searchspace. The Joint Money Laundering Steering Group, comprising UK financial industry trade associations, struggles to provide guidance on regulation, while banks fret about incurring the costs of compliance. But reluctance to invest in a project with few tangible returns needs to be overcome. “Suspicious transactions need not only to be identified, but also the organisation must be able to know what to do with them,” says Pat Geary, executive vice-president, marketing and business development at Searchspace.
Suspicious transactions must be reported to the National Criminal Intelligence Service (NCIS) but the organisation complains that it is often given poor quality reports and false leads. In 2000, the NCIS received 18,000 suspicious transaction reports, with the figure soaring to 60,000 in 2002. However, fewer than half of the 175 prosecutions in 2001 led to convictions. It is estimated that only 7% to 9% of reports are useful but feedback from the NCIS could improve this figure.
Assuming that the poor quality of reports to the NCIS is not a fault of legislative drafting, the likelihood is that banks’ detection systems and know-your-customer procedures need to be improved. In a bid to monitor the volume of per-minute transactions, banks typically use neural network or rules-based systems to detect suspicious customer activity. Neural-based systems allocate a risk score but provide no interpretation. Rules-based systems rely on blanket rules that often raise false alarms and are circumvented easily by criminals.
Software to combat fraud
A more promising approach is IBM Searchspace’s Sentinel, which compares clients’ behaviour against their normal transactional profiles and flags anomalies. It can be used on a “pay-per-use” basis, cutting implementation time and the need for capital expenditure.
While most large banks have vast swathes of controls in place, the financial sector at large does not. To provide the NCIS with more reliable data, smaller banks should adopt effective systems to safeguard operational risk and encourage staff to use judgment and ‘tick-box compliance’ to weed out shady clients. Staff training and encouragement will help them to develop a sixth sense, says Matthew Cooper, group money laundering reporting officer at Barclays Bank. “Staff often say, ‘I’m suspicious but I don’t know why,’ and that’s where adequate training can define those suspicions.”
