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Outsmarting money launderers with data science

Scott Zoldi, Chief Analytics Officer, FICO | Oct. 3, 2016
With money laundering becoming not only an economic issue, but also a political one, it is imperative to fight against money laundering intelligently and effectively.

This vendor-written piece has been edited by Executive Networks Media to eliminate product promotion, but readers should note it will likely favour the submitter's approach.

It is easy to underestimate the scale of the challenge money laundering presents to businesses and the global economy. The amount of money banks have spent on financial crime compliance alone speaks for itself: In 2015, one global bank spent nearly $3 billion, which equates to almost 5 percent of the bank's total revenue for that year.

This is, however, just the tip of the iceberg. Overall, money laundering and compliance violations of know your customer (KYC) regulations cost the equivalent of 2.5 percent of global GDP, and fines are getting onerous. Governments are acting accordingly and in Singapore, the Monetary Authority of Singapore (MAS) has shut down BSI Bank's operations in the country and imposed penalties of about $10 million for breaching money-laundering rules.

The cost of combatting money laundering is on the rise too: Accenture estimates risk management and other costs associated with anti-money laundering (AML) compliance have risen by more than 50 percent in the last 3 years.

Money laundering is not only an economic issue - its connection to the financing of terrorist organisations gives it urgent, world-wide political importance. Indeed, Europe's five largest economies recently announced they were standing together to "track the complex offshore trails [left] by criminals."The horrific recent terror attacks in cities including Paris and Brussels have further focused the attention of world leaders on preventing terrorists from accessing capital to fund criminal activities.

The imperative fight against money laundering

Weeding out money laundering is like looking for a needle in a haystack. The AML challenge is detecting the relatively tiny number of illegitimate financial transactions without following up on false leads or negatively impacting customers. Banks and other organisations, such as insurance companies, also suffer damage to their reputations when they are victims of money laundering.

In 2015, the European Union took a step in the right direction when it enacted its Fourth Anti-Money Laundering Directive - a clear indication that it views money laundering as a top political priority. Its provisions include a further strengthening of the risk-based approach, an emphasis on enhanced customer due diligence and an expanded definition of politically exposed persons (PEPs) - those deemed more at risk of involvement in money laundering due to their position and connections. This includes not only heads of state and military leaders, but members of the judiciary and international sports committees and their immediate families.

Policy change on a European level is significant, but it is equally important that banks, insurers, and other financial institutions recognise that sticking with the status quo when it comes to AML is not enough. 


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