Increasing government pressure on the financial industry to devote its resources in battling terrorists financing schemes will drive worldwide spending on anti-money laundering (AML) software products, according to two separate studies.
Global expenditure on AML systems and staff training grew by an average of 58 per cent over the last three years an as much as 70 per cent in North America, results of a study of 224 banks in 55 countries by audit firm KPMG LLP.
Overall spending on AML technology alone is expected to reach US$375 million in 2009, up from US$335.4 million 2006, according to Celent Communications, a Boston-based analysts firm.
“Governments and regulators are only going to increase the pressure on banks and other financial intermediaries in Canada and elsewhere to devote resources, technology and people in the fight against money laundering,” said James Hunter, Toronto-based KPMG partner and head of the firms forensic practice in Canada.
“Formerly tech- unaware, regulators in the U.S. and European Union (E.U.) are now emphasizing the importance of effective AML analytics as a cornerstone of compliance,” says Neil Katkov, Celent analyst and author of the report Evaluating the Vendors of Anti-Money Laundering Solutions 2006.
More than $4.75 billion was slipped into the legitimate financial system by international terrorists and crime syndicates last year in 134 suspected laundering cases, according to estimates by the Financial Transactions and Report Analyst Centre (Fintrac).
Fintrac, a federal agency that Canadian banks report suspected criminal transactions to, said it detected 33 cases of suspected terrorist activity financing worth $256 million and at least one case deemed a threat to national security.
The Canadian Bankers Association (CBA) did not release any figures on how much Canadian banks were spending on AML systems or how much the battle against money laundering is costing financial institutions.
A statement from the CBA, however, said local banks are fully in support of government efforts and legislation to stamp out the crime.
The need for more stringent AML process will continue to grow, according to Hunter.
For example, the Proceeds of Crime and Terrorist Financing Act was recently beefed up to require Canadian banks to improve due diligence enquiries surrounding correspondent banking relationship. The government has also required financial institutions to enhance its background checks on clients who are considered politically exposed persons (PEP), said Hunter.
Hunter added that while half of the survey respondents agreed that legislations were “acceptable” the businesses “wanted improved focus” on regulations.
“Rather than rule-based regulations, banks want risk-targeted regulations,” he said.
Hunter said an example of this would be the call for greater scrutiny of PEP clients.
Regulations invariably add to the financial burden shouldered by banks and financial firms according to Michel Picard, director of a maters degree program in financial crime at the Sherbrooke University in Quebec.
Picard characterized money laundering as a “grey area” where the suspect bank transactions are legal in themselves.
“The transactions in general are legal. The challenge is to link these transactions to illegal activities, terrorists or crime rings,” said Picard.
Anti-money laundering software fall in two general categories according to Gary Love head of operations, risk management, for the Canadian arm of SAS Institute.
The most rudimentary software products enable businesses to match the name of a person or organization with a watch list of suspected individuals or groups. The watch list can either be generated by the bank, a regulatory body, enforcement agency or government.
More sophisticated AML systems are able use business information features that are able to analyze transactions. “These products draw associations between separate transactions, identify suspicious trends based on set parameters and can cross reference and identify accounts and network relationships.”
Top of the line AML system for enterprise companies cost anywhere from US$300,000 to US$1 million; products targeted for mid-market sell for US$100,000 or more and low-end systems for small credit unions and community banks can be had for US$1,000 to US$20,000, according to Celent Communications.
The consultancy firm thinks that while the North American market has been heading towards maturity ever since 2001, markets in Europe and Asia appear to have lots of opportunity for AML vendors.
The features sought by AML system shoppers around the world, according to Celent, include:
- Browser based interface – for enhance usability and ease of deployment;
- Visualization tools – features that show diagrams that depict account relationships;
- Peer profiling – enables network analysis, risk scoring, and other analytics;
- Compliance dashboard – integrates reports and outputs for multiple regional and line of business regulations;
- Account opening due diligence and watch list filtering – sets rules for accepting accounts and raising red flags;
- Real-time interdiction of wire transfers and;
Among the top transaction monitors in the market according to Celent are: SAS AML Solution; Intelligent Enterprise Framework AML Sentinel from Fortent/Searchspace of London and: ACI Proactive Risk Manager from ACI Worldwide of Omaha.
Popular composite transaction monitors and watch list filters include: Compliance Manager from Metavante of Milwaukee; ERASE Financial Crime Suite from NetEconomy of The Hague, Neatherlands and; Anti-Money Lunadering from Norkom Technologies of Dublin.
Top watch list filters include: Bridger Insight from ChoicePoint in Alpharetha, Gal; Accuity Interdiction Screening from Accuity Inc of Skokie, Ill; and OFAC Agent from FircoSoft of Paris.