Publications & Resources

November/December 2010
Technology

 

Fraud Detection and AML: Perfect Together 

By Jamie King

Financial schemes are more complex and more intricate than ever before. The increasing volume and complexity of these financial crime schemes are further challenging the ability of banks to detect, investigate and report suspicious activity. In order to stop today’s criminal, banks must address financial crime and compliance in a coordinated fashion. Banks that fail to use an integrated process can suffer losses, regulatory censures and fines.

Despite these facts, many banks are not combining their fraud and anti-money (AML) processes. Consider the following scenario:

Lisa Stack and Mary Hunter work at the same bank and rarely have time to chat.

One Monday morning, Lisa, a compliance officer, digs into the latest pile of reports on her desk. Customer Fred Kiter’s weekend activity broke rules for Lisa’s excessive cash report. She begins to investigate and notices that Fred made several large ATM deposits. She needs to determine if they are check or cash. She makes a note to dig deeper and then moves on to the next case.

Meanwhile, Mary settles in for another day of fraud investigations. As she reviews the check kiting report, Fred Kiter jumps to the front of the pile. His multiple ATM deposits, combined with several check withdrawals, seem suspicious and she delves into an investigation.

This scenario happens in banks across the United States every day. Two talented and busy investigators working on the same case because their processes do not allow for an easy synchronization of compliance and fraud investigations.

Banks need to consolidate their AML and compliance processes with their anti-fraud measures, rather than relying on separate alerts and reports.  In order to implement a consolidated approach, banks need to be prepared for two primary obstacles:

  • Overcoming the legacy of using different approaches to achieve separate AML and anti-fraud goals

  • Removing the constraints imposed by the adoption of solutions that rely on first-generation (rules-based) technology 

These challenges require banks to move away from maintaining separate autonomous programs and unite their fraud and AML strategies at the organizational level. Fortunately, there are consolidated solutions built on second-generation (behavior-based) technology available.

Second-generation technology does more than just automate core banking system-type reports. It allows banks to move beyond a decentralized, siloed approach to fraud and AML. It consolidates efforts, leveraging investments across fraud, AML and other related compliance functions.

This second-generation, or FRAML, technology can consolidate large amounts of information about people, accounts and transactions from a variety of distinct data sources. This makes it easier to spot the criminals by increasing the transparency between customer behavior and the risk exposure to financial crimes schemes - items that fall outside the gray areas that plague first-generation rules-based systems.

Using FRAML technology on a daily basis allows banks to reach their consolidation goals and ensures the bank’s limited resources are used to investigate suspicious activity that is truly suspicious (true positives) – at the same time, reducing the number of investigations into legitimate (false positives) activity.

By focusing on the truly suspicious activity, banks reduce the potential costs associated with non-compliance and fraud losses, allowing its resources to be used in the most efficient and productive way.

In the scenario described earlier, a consolidated FRAML approach would work like this:

Mary and Lisa have changed their process. They’ve combined all alerts into a single system, which Mary reviews. She examines fraud alerts on her own, but when something looks like it might be money laundering she calls Lisa for help. This process allows Lisa to focus more on BSA training and customer due diligence. The end result is no more duplicate investigations, less time wasted and more money saved.

The early successes experienced by some banks combined with the availability of solutions that use behavior-based technology, prove that it is time for FRAML. Banks must be willing to re-examine their strategic approach to risk based financial crime and compliance management. While it should not be viewed as a panacea, a consolidated approach to compliance and anti-fraud initiatives can enable banks to respond with equal agility to these threats, while realizing significant benefits across the organization.

Jamie King is president & CEO and co-founder of Verafin, a leader in anti-money laundering and fraud detection solutions for financial institutions. He can be reached at 866-781-8433 or www.verafin.com.

Unauthorized reproduction of all or part of this material without the express written consent of the author is strictly prohibited. All rights reserved.