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Anti-Money Laundering:
Challenges and Trends
Abstract
The inadvertent use of the banking system for
money laundering activities is a key challenge
facing the financial services industry. In response,
regulatory authorities have introduced
anti-money laundering (AML) regulations to
detect and prevent such activities. Complying
with these regulations requires banks and
financial institutions to implement an effective
compliance system, along with appropriate tools
and systems. This, in turn, requires companies
to build an effective business case for the right
compliance system equipped with requisite
capabilities and latest technology tools.

This paper discusses the challenges before banks

and financial institutions, prevailing industry
trends, and how emerging technologies can
be used to monitor transactions to identify
suspicious activities.
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Some Challenges that Exist Today

Banks and financial institutions are facing some serious
AML compliance challenges that can be typically attributed
to faulty mitigation approaches. Firms that fail to prevent
laundering tend to pay a heavy price in the form of declining
revenues, customer dissatisfaction, huge penalties, loss of
reputation, and fall in stock prices.

To comply with AML regulations, banks around the world use

various technology-based products and solutions.

The Financial Action Task Force (FATF), an inter-governmental

body with 37 members the world over, has framed a set of
regulations that is recognized as an international framework
of AML standards. These AML regulations help detect, report,
and prevent suspicious activities at financial institutions.

Banks face several challenges in managing risks involved

in assessing the current AML status and identifying
vulnerabilities. Disparate transactions and increasing
complexities of fraud and cybercrimes compound the
situation. To address these challenges, banks need to
ensure data protection, detect fraud in time, and prioritize
compliance with the FATF regulations.

Here are the other challenges banks face:

Increased governance: Banks and financial institutions can

find it difficult to manage cross-border and
multi-jurisdictional AML-compliance requirements and ever-
growing customer due diligence requirements. Identifying
beneficial ownership and initiating remedial measures to
address AML gaps uncovered by regulatory reviews also
come with their own set of challenges.

Lack of skilled personnel: Getting skilled resources with

in-depth knowledge of AML can be a challenge. Other issues
include high on-boarding timelines and costs, and attrition.
Organizations also need to invest considerable time and
effort in keeping personnel abreast with changing regulatory
requirements.
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Complicated processes and technology: AML compliance

requires banks to put in place a multiplicity of processes
and technology solutions that will consolidate KYC data and
systems in a single repository. They also need to create
infrastructure for cross-channel detection of suspicious
activities, improve data quality, and standardize data to
enable centralized analysis of fraud and financial crimes.

The risk level assigned during on-boarding varies according

to the transactions undertaken by the customer. This means
that banks have to assess the risks dynamically for each
customer, and change risk levels accordingly, to prevent false
positives. This necessitates continual transaction monitoring
for each customer, which is a mammoth task.

Emerging Trends in the AML Space

A new paradigm is emerging wherein principle-based AML
systems grounded in scientific disciplines are replacing
inflexible rules-based solutions. Some emerging trends in
AML compliance are:

Focus on digital payment-related issues: Regulatory

focus is currently centered on containing money-laundering
risks associated with new payment methods like mobile
wallets, e-payments, and e-money issuers. In addition,
top priority is being accorded to combating cybercrime and
curbing potential money-laundering risks associated with
virtual currencies.

Use of third-party utilities: Third-party services such

as the shared services utility model for KYC compliance,
managed services for transaction monitoring, and browser-
based delivery of commercial watch lists are being leveraged
by several banks. Financial institutions are using the
expertise of third-party providers for KYC verification and due
diligence, and to spot new AML risks and violation methods.

Adoption of enterprise-level approaches:

Enterprise-wide case management for an overall view of
risks at the enterprise level, and effective centralized control
is becoming the norm. Banks are also implementing AML
or fraud platform convergence capable of detecting both
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fraud and money-laundering activities to derive operational

synergies. Risk-based approaches are replacing traditional
rule-based approaches.

Adoption of analytics: Banks are adopting analytics for

their AML initiatives. Some areas where analytics can be
used successfully include:

„„ Fraud detection: Advanced filtering technologies and

analytics for real-time fraud detection and generation of
alerts based on changes in behavior patterns are gaining
ground. Banks are also using high-tech linkage analysis
(network visualization) to detect suspicious activities
and track money trails. They are using cross-channel
detection support to get an integrated view of suspicious
activities across all payment types and anti-stripping
technology to detect masking or manipulation of wire
transfer data.

„„ Screening: Banks are tapping social media as an

additional source of information to validate customer
identity, identify politically exposed persons (PEP), and
obtain default information for account reviews of a
customer. Banks are leveraging social media analytics
to support their enhanced due diligence (EDD) process,
which includes negative media screening efforts for
discovery of litigations, adverse orders, and other
potential risks. Banks are also using software for
sanctions screening, which results in benefits such as
reduced timelines for enhanced due diligence; faster and
informed decision making; quicker identification of key
risks associated with companies, management teams,
and other affiliates; and faster processing of transactions
and monitoring of alerts.

„„ Detection of rogue activities: Banks are using analytics

to detect anomalies and identify patterns indicative of
laundering, and detect and prevent suspicious activities
in real time. High speed streaming and computing to
handle transaction data in all formats, parallel processing
of transaction data and data from other channels, and
high-speed alert generation and processing are other
trends that are catching up.
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„„ Linkage detection: Banks and financial institutions

are using analytics to detect entity-level linkages,
and study the behavior of different linked accounts
colluding for a laundering activity. Some of the
linkages that can be tracked include:

„„ Linked customer: To identify IDs owned by the same

customer across lines of business.

„„ Linked accounts: To track customers having multiple

accounts under different names.

„„ Linked transactions: To track transactions linked to a

closed group of entities and performed with a clear
intention of routing money to destination accounts
„„ Linked access: To track transactions happening
through common cyber infrastructure.

„„ Similarity detection: This can be used to analyze data at

fixed intervals in order to find similarities in current and
past financial crimes, which helps eliminate redundant
investigation and create stronger cases.

„„ Trending analysis: This technique can help identify

behavioral trends using cognitive computing of non-
parametric statistics. With this, banks can identify
behaviors and bad actors associated with money-
laundering activities.

„„ Anomaly detection: This can help detect and study

unusual behavior of a single actor.

„„ Trusted pair identification: This technique can help banks

identify and ignore trusted pairs of parties through link
analyses patterns, thereby reducing false positives.
The Role of Machine Learning
Aided by rapid developments in data science, machine
learning, with its ability to help construct algorithms for
predictive data analysis, is revolutionizing the way financial
ecosystems work. Machine learning holds great promise
for the banking system, especially in the area of detecting
hidden patterns and suspicious money-laundering activities.

Machine learning helps identify money-laundering typologies,

strange and suspicious transactions, behavioral transitions
in customers, transactions of customers belonging to
same geography, age, groups and other identities; and
helps reduce false positives. It also helps analyze similar
transactions for focal entities and correlate alerts that were
flagged as suspicious in regulatory reports.

Conclusion
Money launderers will always find newer ways to use
banks for illegal activities. The timely detection of
laundering activities is the most challenging aspect in
the implementation of an efficient AML program. Several
innovative technology-based tools and products are currently
available to detect, track, and prevent money laundering.
Though these technology tools will not completely eliminate
money laundering, they will bring it under control to a large
extent, and financial institutions should proactively look at
adopting these sooner than later.
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About The Author

Vani Muppayyanamath

Vani Muppayyanamath is
a Domain Consultant with
the Banking and Financial
Services (BFS) business
unit of Tata Consultancy
Services (TCS). She has over
seven years of experience
in the implementation of
financial solutions such as
the Oracle Financial Services
Analytical Applications
(OFSAA) — Financial Crime
and Compliance Management
(FCCM), with special focus
on anti-money laundering,
fraud and crime detection, and
regulatory compliance.

Contact
Visit the Banking & Financial Services page on www.tcs.com
Email: bfs.marketing@tcs.com
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