with contributing author Venkatesh B
Globally, the number of monetary transactions is on the rise. Hidden within these transactions are movements of funds from illicit organizations often involved in drug trafficking and organized, transnational crime. This is dirty money — running into the hundreds of billions of dollars — that is being laundered. Such illegitimate funds are commonly used to finance corrupt practices, bribery-related crimes, even terrorist activities in some cases. Not surprisingly, the movement of these funds presents a great threat to the stability of nations, economies and industries; it has become a key area of concern for regulatory bodies around the world.
In response, anti-money laundering (AML) policies have been established and safeguards arranged to combat and ultimately decrease money-laundering efforts. Banking institutions not only risk their reputation when failing to comply with regulations, but also will be subject to substantial financial penalties. Conformance to requirements from bodies such as the 30-nation Financial Action Task Force (FATF) and 130-nation Egmont Group of Financial Intelligence Units helps secure the business of banks, but the resultant costs of compliance could be debilitating.
In which areas are AML products most effective?
Use of AML products is widespread across all banking and financial organizations and is also extended to corresponding business lines for both.
Suspicious transactions can commonly be identified within the following areas:
- Retail Banking – Loan foreclosures, loan payments, irregular payments, unusual policy withdrawals, cross transactions, short-term sale of long-term product, multiple ownership changes, cross-border/high-risk transfers, funds circulation by flow-of-accounts, excessive funds transfer
- Asset Management – complex layering of assets/funds, settlements involving high-risk destinations, suspicious surrenders
- Investment Banking – attempt to conceal identity, trading of low-priced securities, suspicious margin instructions, wash transactions, parked transactions, suspicious payment/settlement instructions, excessive movement of funds, investment banking account acting like a retail banking account, bursts in payment activities, beneficiary activities, originator activities
- Commercial Banking – suspicious margin payments, attempt to conceal location
Should an organization select and configure an AML product specific to needs?
AML products are complex by nature, with various sets of solutions aimed at addressing any variety of specific customer needs. For example, banks typically activate different sets of AML rules within a product that meets their requirements for monitoring, predicting, detecting and flagging deviant activities and criminal transactions. The AML rules help surface suspicious transactions that could be funding subversive or illegal activity.
This means AML products must be configured, calibrated and thoroughly tested and certified for compliance and risk monitoring processes.
Banks across the world are highly dependent on AML products to generate reliable suspicious activity reports. When AML products are not configured and integrated correctly, the banking institutions are laid open to business, financial and reputational risks.
Which factors contribute to the complexity of SIT testing related to AML products?
Environments that support the operations of banks and financial institutions are varied and present numerous testing challenges. However, the following key components/success factors for testing are common to both sets of enterprises:
- The test scenarios need to be comprehensive to ensure that all business rules are covered. Testing against the right set of risk scenarios with accurate threshold settings lowers risk. It also reduces testing time and costs. It is easy to see why coverage is key to successful AML testing.
- Identifying the types of data required to test each scenario. Often, a single scenario will demand multiple data combinations or configurations. Now add to this the fact that data could be in different source systems and the data must be flawlessly aggregated. Availability of the right data is certainly a prime challenge. Our experience from scores of global AML implementations suggests that it can take up to 35 percent of the total project time to extract and set up accurate test data. The quality and coverage of the data has an impact on the time required to operationalize the AML product.
- Engaging a domain expert with industry experience to assess the data being used. A domain expert goes a long way in creating the right solution because the expert is capable of understanding, appreciating and aligning the implementation of the AML solution to the organization’s environment and business requirements.
What are the critical success factors for AML testing?
The top three factors include:
- Comprehensive coverage
- Comprehensive suite/ library of ready-to-use test scenarios
- The right test data
These cost-saving factors not only reduce test cycle time by 20 to 30 percent, they also ensure quality implementation.
