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Fight money laundering with hi-tech tools

special report Recent shifts in the economic climate are forcing banks to use technology against money laundering.In 1998, as it was making a few tentative steps toward a free market system, the Russian economy went into meltdown.

special report Recent shifts in the economic climate are forcing banks to use technology against money laundering.

In 1998, as it was making a few tentative steps toward a free market system, the Russian economy went into meltdown. It is estimated between $200 billion and $500 billion was secreted out of the country over a ten-year period, forcing a liquidity crisis and total stagnation of the financial sector.

While the blame for the plunder has largely been laid at poor capital controls, exploited by the Russian Mafia, there can be no doubt that banks from around the world played a central role in quickly moving vast amounts of money out of the country.

Whether it's about hiding the proceeds from the trade in illegal drugs, or the pillaging of an economy, the motivation for money laundering is greed, and the method increasingly is the Internet. In May 2001 the ABC's Four Corners&nbsp screened a documentary that traced some of the funds to banks in Australia. One analyst featured in the film described the ease by which money can be moved using Internet technology as follows.

Layering is the biggest problem, this is where money is hidden and broken up.
-- Robert Montemorra, FBI
-The money is an electron somewhere on somebody's hard drive. It can bounce from here to there faster than any legal system can ever figure out where it went," he said.

Speaking at the 2003 Fraud Convention and Trade Show held in Sydney in late August, Robert Montemorra, chief of the asset forfeiture and money-laundering unit for the FBI, estimated anywhere between US$600 billion and US$1.8 trillion is laundered each year. And more than half of this laundering occurs in the United States.

Montemorra identifies three stages of money laundering:

  • Placement, where the ill-gotten funds are placed into the financial system.
  • Layering, where funds are moved around and broken up to hide their origin, and create for them a legitimate source.
  • Integration, where the now-clean and apparently legitimate funds are reintegrated into the economy.

    -Layering is the biggest problem, this is where money is hidden and broken up," Montemorra says.

    Layering is also a process conducted through the banking sector, while on the one hand it can be facilitated by technology, there are also technologies aimed at tracking and preventing ill-gotten gains from disappearing.

    In 1990, the Paris-based Financial Action Task Force on Money Laundering set forth 40 guidelines aimed at clamping down on money laundering globally. Revised in 1996, these were largely ignored until the events of September 11, 2001.

    This act, in turn precipitated the passing of the USA Patriot Act -- legislation which, in an attempt to strangle the sources of terrorist funding, also gave law enforcement agencies charged with chasing laundered funds real teeth for the first time.

    Traditionally in Australia bank tellers have formed an unlikely front line of defence against money laundering. However, on December 8, 2003, Federal Minister for Justice and Customs Chris Ellison announced that Australia was similarly to implement new global anti-money laundering and counter-terrorist financing standards.

    As the banking sector waited with baited breath the proposed legislation was repeatedly put back, but things may change with the Howard government returning to power.

    Nonetheless according to Stephen Sharp, senior manager anti-money laundering for St George Bank, Australian banks have a fairly good understanding of what will be required.

    -Thus far we've required staff at branches to be suspicious of certain kinds of transactions," Sharp says. -We've got some anti-money laundering systems already in place and we are looking at new systems anticipating what the new legislation will contain."

    Presently all cash transactions over $10,000 need to be reported to Austrac, a government agency created through the Financial Transaction Reports Act 1988. Tellers are also required to report suspicious transactions, such as repeated transactions for amounts just below $10,000, as well as international funds transfer instructions.

    Page II: Recent shifts in the economic climate are forcing banks to use technology against money laundering.

    It is the advent of multi-channel banking, and proposed account aggregation which is causing concern in the sector. This is because funds of dubious origin will be able to be quickly moved across different accounts in different banks, without so much as teller scrutiny.

    According to St George's Sharp the combined impulses of the US Patriot Act, and the proposed legislation in Australia has led banks to review anti-money laundering technologies with renewed interest.

    So what's on offer?
    When it comes to the technology proposed to track money laundering globally there are two main approaches: aggregation and analysis.

    In a perfect world, organisations such as Austrac would have access to the transactional database of all financial institutions in Australia. Given some powerful integration software the movement of money could be tracked as it moved in between institutions, rather than disappearing.

    In money laundering people are extremely inventive, they know of ways to duck and weave.
    -- David Entwistle, NetMap Analytics
    Some anti-money laundering houses such as US-based Gifts software and LexisNexis are using the aggregated database approach to integrate global funds transfer and telecommunication systems, as well as public and private sector information sources. Rather than identifying new data, such approaches provide better access to data that already exists.

    While sources within Austrac suggest it would be ideal, they are well aware that neither the banking sector nor privacy advocates would swallow a large-scale integration of transactional banking in Australia.

    The Australian banking sector has already taken some steps towards fraud prevention. In 2002, ANZ Bank, BankWest, Commonwealth Bank, National Australia Bank, St George, and Westpac installed Carreker's FraudLink software. This approach allowed for the creation of a centralised fraud data exchange for sharing of suspect information among participating banks. In 2003, Bendigo Bank joined the group.

    However, following the money trail from bank to bank is largely out of the question because it would require banks to share far more customer information than they are willing to. So it is up to the individual banks to implement software solutions which can identify suspicious transactions.

    This is where data analysis comes into the picture, and where mathematics takes on magical qualities.

    Largely used in the insurance sector to track fraud, NetMap is a data analysis tool, capable of finding patterns of fraud by trawling through large amounts of data using what it terms an -emergent algorithm". The data is organised into nodes; names, addresses, transaction types, accounts, and the algorithm then traces links between these nodes. If the linkages are abnormal, multiple claims made under different names from the one address, for example, they can be further investigated.

    According to David Entwistle, general manager of consulting at NetMap Analytics, most data analysis techniques stem from exception-based rules, which require the researcher to have some idea what they are looking for before they begin the search.

    -In money laundering people are extremely inventive, they know of ways to duck and weave," Entwistle says. -The layering of complex transactions to cover the trail makes it difficult to see where the money is moving from and to."

    The Financial Action Task Force on Money Laundering were largely ignored until the events of September 11, 2001.
    So while traditional tracking might lose track of suspect funds when they leave the bank, NetMap might be able to pick up on transactions of a similar amount coming back into the bank under a different name and account number.

    -The thing that most appeals to people is that money laundering requires a series of relationships of people and organisations, passing funds in between each other," says Entwistle. -NetMap can track and more importantly identify those relationships."

    Another approach to identifying and tracking money laundering is based on Benford's Law, which relates to the probability of the occurrence of certain numbers. For example, the number 1 occurs far more regularly that most other numbers 0 through 9. In fact whether it be an international transfer, or a house number, the number 1 is more likely than other numbers to feature in the overall figure.

    Using this idea at its core, US-based software house CaseWare designed an anti-fraud and anti-money laundering software called IDEA (integrated data extraction and analysis).

    Bill Shorrock, director of local distributors of the IDEA software Horwath Australia says the product is heavily used by the Auditor General's department, and for conducting internal audits.

    -Rather than search for problems on an exception basis, you can strata your data in a more organised way and perform sampling which will identify anomalies," Shorrock explains.

    Just as the NetMap approach seeks out abnormal relationships between data, IDEA seeks the abnormal occurrence of numbers, and can identify a potential problem based on the data alone.

    There are even more cogent reasons for shoring up financial transactions in an increasingly globalised economic sector. As Russian banks discovered at the end of last century, not only does money laundering have very real consequences at the macroeconomic level, it also has the capacity to taint a whole sector with the one brush.

    In Australia's case, if one local bank were to have its credentials questioned internationally, the credentials of all others would also be called into question, potentially costing vast amounts in international trade.

    For this reason, with or without legislation pushing them, the Australian banking sector is looking for a technological solution to a problem motivated by greed and facilitated by technology.