Whatever happened to anti-money laundering transaction software?

New York regulators are investigating whether several major U.S. banks failed to monitor transactions properly, allowing criminals to launder money, according to a New York Times story. The newspaper cited officials who it said spoke on the condition of anonymity. The Office of the Comptroller of the Currency, the federal agency that oversees the biggest banks, is leading the money-laundering investigation, according to the Times. The report said the OCC could soon take action against JPMorgan Chase & Co. and that it is also investigating Bank of America Corp. 

When the money laundering regulations first started to make themselves felt in the global banking sphere, the first thing the banks did was to set up a howl of protest (par for the course), whingeing about how impossible it would be to monitor their client accounts for the purposes of identifying suspicious financial transactions.

Lest there be any doubt about it, the requirement to monitor financial transactions in order to be able to identify suspicious payments was something that no bank wanted to do. Banks don't make money by playing at being adjunct agents of the law enforcement community, they make profits by attracting as much money as they can get their dirty hands on, from what ever source, and providing discreet and confidential banking services to the beneficial owner.

Bankers are morally blind when it comes to the provenance of money, because like Bernie Cornfeld once said, '...money has no smell...' Well, alright Bernie didn't say it originally, the Roman Emperor Vespasian did, but it has the same meaning whoever said it!

Banks are adept at ignoring those rules and regulations which either damage their ability to make money or which get in the way of profit. When it doesn't suit them, they will ignore a rule, and it requires a very strong regulator to make them toe the line. Sadly we have not been blessed with such an agency in the UK for too many years.

There has been a considerable volume of technology available for many years to enable banks to apply strong measures to identify suspicious financial transactions.

One of the biggest mistakes that the makers of this software made when developing its capability was that the banks would actually want to use it. Nothing could have been further from the truth. However, they were faced with a problem. Once the regulators were aware of the existence of anti-money laundering transaction software, they started factoring that into their inspection checklists.

There should be no reason why, in theory, that transaction monitoring software should not be a significant support mechanism for the compliance function.

Most systems rely on the development of complex algorithms to determine the likelihood of a transaction being suspicious or otherwise.

I do not necessarily think that these systems are as helpful as the systems that examine a bank's accounts as a whole on a daily basis and analyse changes in account values, volumes and transaction velocities, to determine potential suspicious transactions.

Such systems work by being closely mapped to the individual institution's risk-based policy, (this always assumes that the bank has bothered to calculate such a document), and by tailoring the sensitivity of the different risk rules as closely to the risk policy, to ensure the minimisation of too many false positives, which are the bug-bear of any monitoring system.

Part of the problem was that banks simply were not prepared to spend any money on hiring staff who could or would take the time and the trouble to analyse the transaction alerts properly. Some banks merely disclosed every alert the system identified, on the basis that by disclosing everything, they could not be accused of failing to comply, and that the sheer volume of alerts reported to the law enforcement authorities would so clog up their work-flows, that they would never have the time to get round to actually analysing much of the disclosed material.

So banks began by hiring lots of young kids to become transaction 'analysts', on the basis that by providing the appearance of compliance, would keep the regulators happy. It became a cost of doing business to install a transaction monitoring system, but once it was implemented, very few institutions bothered to take the trouble to make sure it worked efficiently.

Money laundering compliance works because regulators are prepared and willing to take the necessary steps to ensure that the underlying regulations are being complied with.

In the UK, the regulator has published two major reports in which it has reviewed the willingness of banks to comply with the Money Laundering Regulations. Its findings, on both occasions, demonstrated that banks were simply ignoring the letter and the spirit of the laws, in return for grabbing as big a chunk of the world's criminal money as possible.

The US authorities can not complain if they find that major US banks have been ignoring the money laundering regulations and failing to use transaction monitoring software properly, because why should US banks behave any differently from their UK counterparts?  

Now, with the findings against HSBC for the handling of billions of Mexican drug dollars, and the way in which other banks such as Standard Chartered were willing to flout the laws on US sanctions, thus laundering other criminal money, (other banks including RBS are in the pipeline for criminal sanctions for this offence), it is about time that the US regulators started to take a closer look at the level to which these regulations are being enforced, and where necessary, come down heavily on the banks who are playing fast and loose.

The only thing that will bring the world's banking community into line are criminal convictions aimed at the leading practitioners, chief executives, chief operating officers, chief financial directors and above all, the Chairmen of these criminal organisations. A few doses of strong porridge will have a salutary effect!