Johannesburg, 18 Apr 2024
Three key trends have emerged in the financial crime compliance space, driving a need for closer integration between bank divisions and the use of technologies such as AI data processing and visualisation tools to identify money laundering. These new trends are sanctions circumvention, trade-based money laundering and money laundering using crypto-currency, according to Dr Sebastian Hetzler, co-CEO of IMTF, Bateleur’s Siron partner.
He says: “One key risk trend we see is sanctions evasion or sanctions circumvention. Owing to the Russian war against Ukraine, international legislative bodies have applied an unprecedented sanctions regime. Despite many challenges arising from this intensified scrutiny on sanctions, financial institutions (FIs) have learned to deal with sanctions effectively in the last 20 years. However, this is only one side of the coin. With each new sanction imposed, the illegal market for sanctions circumvention grows. This is a major challenge for banks.”
Sanctions evasion has always been a challenge, he notes, but the current geopolitical tensions are pushing sanctions circumvention to new heights.
“Sanctions circumvention may take place through new shell companies, or through diverting trades through other countries that are applying less rigid sanctions regimes. To understand sanctions evasion, FIs need to delve deeper into the data, encompassing all the KYC information collected during the onboarding process, including the various company structures, parent companies and ultimate beneficial owners. They have to apply a multifaceted approach to data analysis, enabling a comprehensive understanding of clients’ past behaviour, behavioural changes and the nature of their businesses.” To get this holistic view on clients, banks have to break down data silos and to integrate data.
Linked with this risk is the growth in trade-based money laundering. “More syndicates are using international trades to launder high volumes of money – it has increased dramatically,” Dr Hetzler says. International trades are complex constructs involving many different parties (trading companies, harbours, trading routes, vessels and the like) and convoluted legal and financial structures. Financial institutions play a critical role in international trades, either as financing parties or by offering guarantees and securities to one or the other party involved. By misrepresenting the value, the quantity or the quality of traded goods, criminals leverage this very complexity to obscure the illicit nature of the underlying transactions.
Another key trend is the use of crypto-currency in money laundering, he says. “In the US, about 10% of consumers hold or trade with crypto-currencies. In many countries in Asia, Africa and Latin America, the adoption of crypto-currencies is even higher. This presents a risk for traditional banks because customers can send money from a traditional bank account to a virtual asset service provider to convert it to crypto-currency and move it around the crypto world, buying and selling on the dark web anonymously before bringing back the illicit funds to a bank account. This association with money laundering can result in reputational damage, and no bank wants to be in the news for being part of a larger crypto-fraud or money laundering scandal,” he says.
Dr Hetzler says improved AML compliance starts with awareness. “Even if a bank is not engaged in crypto-currencies, its customers are. You first need to be aware of this risk, then think about mitigating actions.”
Dr Hetzler emphasises the necessity for departments to collaborate and to connect the dots to uncover networks and suspicious activities to combat the ever increasing complexity of international money laundering. Importantly, banks need rigorous KYC procedures to fully understand their clients, what their intentions are, who the ultimate beneficial owners are and which countries they reside in, he says. They must also monitor transaction patterns. “Banks need thorough risk assessment and proper research. A key element of compliance lies in way the departments are structured: traditionally, you might have one department focusing only on customer onboarding and KYC, another dealing with transaction monitoring and a third group specialised on sanctions. The problem is that with complex patterns of money laundering, these siloed models don’t work. Banks have to think holistically about the compliance function, using integrated data.” AI technology helps to aggregate data, detect patterns and identify unusual behaviour, he says.
“At IMTF, we've long recognised the significance of data integration. IMTF offers a one-stop shop approach covering all financial crime compliance use cases in one single platform – from transaction monitoring to trade-based money laundering detection. Through our SironOne platform, we seamlessly connect and integrate data. AI is an integral part of the platform and plays a vital role in enhancing efficiency and efficacy,” he concludes.
But besides the technological advances, the human factor in “know your customer” should not be discounted, says Lizette Sander, product manager at Bateleur Software. Human involvement adds contextual understanding, allowing for the interpretation of complex transactions and behaviours that may indicate money laundering.
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