Pressure from all sides

Today, Jun 2003 by Stephens, Cliff, Crook, Tom

AS FRANK ABAGNALE WILL HIGHLIGHT IN HIS KEYNOTE AT THE TAWPI FORUM & EXPO, CHECK FRAUD, MONEY LAUNDERING AND KITING SCHEMES GROW MORE SOPHISTICATED ALL THE TIME. NEW LAWS ARE INCREASING THE PRESSURE ON BANKS TO DETECT SUCH CRIMES. FORTUNATELY, NEW TECHNOLOGY MAY HELP THEM DO THAT BETTER THAN EVER.

Banks have always exerted considerable effort in stemming check fraud and kiting schemes-after all, such activities can cost a bank millions of dollars. Today, money laundering is getting equal attention. New federal regulations intended to curb terrorist activities include anti-money laundering guidelines for banks, and considerable liabilities for those whose anti-money laundering efforts are deemed insufficient.

ENTER THE PATRIOT ACT

The Department of the Treasury recently announced regulations implementing the anti-money laundering and anti-terrorism provisions of the USA PATRIOT Act. The regulations take advantage of the existing communication resources of the DOT'S Financial Crimes Enforcement Network (FinCEN) to maintain communications between financial institutions, and between the institutions and federal law enforcement, on the subjects of accounts and transactions that may involve terrorist activity and/or money laundering. Another regulation states that certain financial institutions will be able to share information for the purpose of identifying and reporting suspected terrorism and money laundering, once they have notified FinCEN that they intend to share the information, and assuming they have taken adequate steps to maintain confidentiality.

"Banks and other financial institutions are facing an increasing need for better tools and technology to deter and detect check fraud and money laundering," said Breffni McGuire, Senior Analyst, Global Payments, for TowerGroup (a leading research and advisory firm specializing in the impact and direction of technology within the financial services industry). "Both the increasing sophistication of criminals, and regulations like the USA PATRIOT Act, have substantially increased the risks and financial impact for institutions of all sizes."

Two other pieces of federal legislation have had a major impact on the way banks conduct business and attempt to combat white collar crime. Under the Expedited Funds Availability Act, bank funds must be made available to account holders, before the bank knows whether the check which was deposited was good or not. Check fraud perpetrators have learned to make use of this time "window" to cash out on bad checks. And regulations which are part of the Bank Secrecy Act (BSA) require institutions to employ efforts to spot and deter money laundering. Penalties for violations of the BSA can be significant. This has led many banks to adopt a "know your customer" policy designed to help detect and prevent fraud losses, and guard against money laundering.

THE WASH CYCLE

Money laundering is the process by which illegally-obtained money (from drug trafficking, terrorist activity or other crimes) is given the appearance of having originated from a legitimate source. A 1993 United Nations report listed the significant characteristics of modern money laundering as its "global nature, the flexibility and adaptability of its operations, the use of the latest technological means and professional assistance, the ingenuity of its operators and the vast resources at their disposal." In fact, some experts rank money laundering as the world's third largest industry by value. Obviously, such activities can be notoriously difficult for banks to get a handle on.

The Office of the Comptroller of the Currency (OCC) has identified three independent money laundering steps:

Placement: physically placing bulk cash proceeds from criminal activity in an account.

Layering: separating the proceeds from their origins in illegal activity through layers of complex financial transactions.

Integration: providing an apparently-legitimate explanation for the illicit proceeds.

Money laundering often occurs in new accounts (24 months old or less). Money launderers are continually opening accounts while they make others dormant. The perpetrators typically conduct normal transactions on a new account for 90 days to six months, then the transaction patterns (both cash in and cash out) change. Funds are usually withdrawn from the account in the form of money orders or cashier's checks. Funds are often then filtered to another account-called a "secondary wash instrument." In fact, three or four such levels may exist, making it very easy for banks and law enforcement to "lose the trail."

If banks took their anti-money laundering efforts seriously before, they take on extreme significance now, in the wake of an astounding recent lawsuit.

The suit was filed July 31, 2002 in the Circuit Court of the First Judicial District, Hinds County, Mississippi. Insurance commissioners from five states (Arkansas, Mississippi, Missouri, Oklahoma and Tennessee) joined together to sue two financial institutions. They are seeking to recover money damages and compensation for losses the commissioners allege were due to inadequate anti-money laundering procedures by the two banks. The insurance commissioners are acting as receivers of seven insurance companies whose assets were stolen.