Anti-money laundering software (AML software) is

software Software is a set of computer programs and associated documentation and data. This is in contrast to hardware, from which the system is built and which actually performs the work. At the lowest programming level, executable code consist ...

used in the

finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of f ...

and

legal Law is a set of rules that are created and are law enforcement, enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. ...

industries to help companies comply with the legal requirements for

financial institution Financial institutions, sometimes called banking institutions, are business entities that provide services as intermediaries for different types of financial monetary transactions. Broadly speaking, there are three major types of financial inst ...

s and other regulated entities to prevent or report

money laundering Money laundering is the process of concealing the origin of money, obtained from illicit activities such as drug trafficking, corruption, embezzlement or gambling, by converting it into a legitimate source. It is a crime in many jurisdicti ...

activities. The digital design facilitates faster and more accurate compliance and investigations.

History

Anti-money laundering guidelines came into prominence globally after the

September 11, 2001 attacks The September 11 attacks, commonly known as 9/11, were four coordinated suicide terrorist attacks carried out by al-Qaeda against the United States on Tuesday, September 11, 2001. That morning, nineteen terrorists hijacked four commer ...

and the subsequent enactment of the

Patriot Act The USA PATRIOT Act (commonly known as the Patriot Act) was a landmark Act of the United States Congress, signed into law by President George W. Bush. The formal name of the statute is the Uniting and Strengthening America by Providing Appro ...

in the United States and the establishment of the

Financial Action Task Force on Money Laundering The Financial Action Task Force (on Money Laundering) (FATF), also known by its French name, ''Groupe d'action financière'' (GAFI), is an intergovernmental organisation founded in 1989 on the initiative of the G7 to develop policies to combat mo ...

(FATF). By 2010 many jurisdictions globally required

financial institutions Financial institutions, sometimes called banking institutions, are business entities that provide services as intermediaries for different types of financial monetary transactions. Broadly speaking, there are three major types of financial insti ...

to monitor, investigate and report transactions of a suspicious nature to the financial intelligence unit in their respective country. The UK introduced the Terrorism Act in 2000, subsequently amended by the Anti-terrorism, Crime and Security Act 2001, the

Prevention of Terrorism Act 2005 The Prevention of Terrorism Act 2005 (c 2) was an Act of the Parliament of the United Kingdom, intended to deal with the Law Lords' ruling of 16 December 2004 that the detention without trial of eight foreigners (known as the 'Belmarsh 8') at H ...

, and the

Terrorism Act 2006 The Terrorism Act 2006 is an Act of the Parliament of the United Kingdom that received royal assent on 30 March 2006, after being introduced on 12 October 2005. The Act creates new offences related to terrorism, and amends existing ones. Th ...

. The Terrorism Act imposes counter financing of terrorism obligations on banks and financial institutions, which also include customer due diligence, transaction monitoring and reporting obligations. The UK introduced the Proceeds of Crime Act (POCA) in 2002 as the UK's primary AML regulation focusing on money-laundering offenses. POCA defines the offenses that constitute

. Under POCA, banks and financial institutions must put appropriate AML controls in place to detect money laundering activities. The UK's Financial Conduct Authority (FCA), established in 2012, is the UK's main financial services regulator with authority over banks, building societies, credit unions and other regulated sectors. The FCA's purpose is to maintain the safety of the UK's financial system and its financial institutions. Financial institutions in the UK must register with the FCA who oversees compliance with AML regulations. Her Majesty's Revenue and Customs (HMRC) issues guidance on anti-money laundering in the UK, sharing money laundering offense investigative responsibilities with the FCA. AML guidance includes compliance requirements for customer due diligence, transaction monitoring, and issuing anti-money laundering policy. The UK instituted further AML Regulations in 2017. Beyond POCA and the Terrorism Act, the next most important AML/CFT legislation is the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. The MLR 2017 transposes the obligations set out in the EU's 5th AMLD, tightening controls in the private sector and introducing the need for firms to implement a written AML/CFT risk assessment. This led to an entire industry developed around providing AML software to analyze transactions in an attempt to identify transactions or patterns of transactions, called

structuring Structuring, also known as smurfing in banking jargon, is the practice of executing financial transactions such as making bank deposits in a specific pattern, calculated to avoid triggering financial institutions to file reports required by l ...

, which requires a SAR filing, or other suspicious patterns that qualify for SAR reporting. Financial institutions faced penalties for failing to properly file CTR and SAR reports, including heavy fines and regulatory restrictions, even to the point of charter revocation. Some jurisdictions, such as Singapore, require financial institutions to conduct an independent assessment of technology solutions used in anti-money laundering procedures, if such financial institutions allow for non-face-to-face onboarding of customers.

Types

There are four basic types of software addressing AML business requirements: * Transaction monitoring systems, which focus on identification of suspicious patterns of transactions which may result in the filing of

suspicious activity report In financial regulation, a Suspicious Activity Report (SAR) or Suspicious Transaction Report (STR) is a report made by a financial institution about suspicious or potentially suspicious activity. The criteria to decide when a report must be ma ...

s (SARs) or Suspicious Transaction Reports (STRs). Identification of suspicious (as opposed to normal) transactions is part of the KYC requirements. *

Currency transaction report A currency transaction report (CTR) is a report that U.S. financial institutions are required to file with FinCEN for each deposit, withdrawal, exchange of currency, or other payment or transfer, by, through, or to the financial institution which i ...

ing (CTR) systems, which deal with large cash transaction reporting requirements ($10,000 and over in the U.S.) * Customer identity management systems which check various negative lists (such as

OFAC The Office of Foreign Assets Control (OFAC) is a financial intelligence and enforcement agency of the U.S. Treasury Department. It administers and enforces economic and trade sanctions in support of U.S. national security and foreign policy ob ...

) and represent an initial and ongoing part of

Know your customer Know Your Customer (KYC) guidelines in financial services require that professionals make an effort to verify the identity, suitability, and risks involved with maintaining a business relationship. The procedures fit within the broader scope of a ...

(KYC) requirements. Electronic verification can also check against other databases to provide positive confirmation of ID such as (in the UK: electoral roll; the "share" database used by banks and credit agencies; telephone lists; electricity supplier lists; post office delivery database * Compliance software to help firms comply with AML regulatory requirements; retain the necessary evidence of compliance; and deliver and record appropriate training of relevant staff. In addition, it should have audit trails of compliance officers activities in particular pertaining to the handling of alerts raised against customer activity.

Transaction monitoring software

These software applications effectively monitor bank customer transactions on a daily basis and, using customer historical information and account profile, provide a "whole picture" to the bank management. Transaction monitoring can include cash deposits and withdrawals, wire transfers and ACH activity. In the bank circles, these applications are known as "AML software". Each vendor's software works somewhat differently. Some of the modules which should be present in an AML software are: *

Know Your Customer Know Your Customer (KYC) guidelines in financial services require that professionals make an effort to verify the identity, suitability, and risks involved with maintaining a business relationship. The procedures fit within the broader scope of a ...

(KYC) *Entity Resolution *Transaction Monitoring *Compliance Reporting *Alert based case management *Investigation Tools *Document management to hold the customer related documentation such as account opening package, customer identification documents, etc... *Delivery of AML Training *Customer due diligence checks, including electronic verification *Automated Standard operating procedures e.g. workflow engine/ *Dissemination of AML policies and procedures

Customer Identity Management Systems

The definition for Customer Identity Management Systems varies in different regions and jurisdictions. Most vendors include the following features in their solutions: *Sanction List Check *Politically Exposed Person (PEP) Check *Fraud Detection System *False Positive Recording *Single Scan and Batch Scanning *Auditing and Reporting

Machine learning for money laundering detection

There are solutions based on artificial intelligence, which are characterized by much better efficiency in detecting money laundering, comparing to rule-based approach. Especially, deep neural networks are able to discover complex interdependencies between various activities performed to launder money. This translates into fewer false alarms and more accurate detection. In the near future, transaction monitoring systems will be based on machine learning rather than on rules and scenarios.

References