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Money laundering myths explained by Datanomic.

Datanomic : 10 July, 2007  (Technical Article)
Datanomic details why UK financial services industry may be exposed due to the money laundering myths that surround existing legislation.
As many as fifty percent of UK financial services institutions may currently be in breach of major financial legislation, according to Data integrity specialists, Datanomic. Research from Datanomic's review of more than 300 million customer records, more than half of which are in the financial services arena, a surprising number of Compliance Officers, Risk Management Directors and Money Laundering Reporting Officers make assumptions about legislation and unknowingly infringe it, leaving themselves open to serious risk and exposure.

Most of these assumptions stem from seven myths about anti-money laundering measures. They include:.

1 UK companies are exempt from EU legislation relating to foreign Politically Exposed Persons (PEPs) - Put the EU 3rd Money Laundering Directive aside for a moment. A company's existing legal obligations under current UK legislation, such as the Prevention of Terrorism Act and the Proceeds of Crime Act, specifically state that it is a criminal offence for a firm to be involved in a transaction that involves the proceeds of crime, or a transaction that is funding terrorism. Companies must regularly screen their customer base to identify suspicious individuals and activity.

2 My company must be fine as we have never had any of our customers on the Bank of England sanctions list. The Bank of England, FSA and Home Office lists contain the barest minimum of names and fall considerably short of your legal obligations. For example, on all the regulatory lists globally there are some 857 unique terrorist / terrorism names. World-Check, for example, the leading supplier of consolidated lists, lists 15,500 unique terrorism entities. Without screening your client base against comprehensive lists you are operating blind because you simply do not know if you are dealing with these people. Anybody thinking of playing Russian Roulette with Watch & PEP lists should bear in mind that World-Check estimates their total file will contain in excess of 500,500 names by the end of this year.

3 All our customers are fine, upstanding UK citizens, so we're low risk - Several of the 7/7 London bombers were also all 'fine upstanding UK citizens' on paper, yet had direct links to Al Qaeda. How people present themselves is not necessarily who they really are, and it is naïve to operate your business on such an assumption.

4 We have a very low risk profile/We only deal in standard retail investments like ISAs etc - 'bad guys' don't want those products - Just because you provide 'low risk' retail financial products such as current or savings accounts, ISAs, PEPs and Pensions, doesn't mean your customer base is low risk. In screening more than 300 million customer records Datanomic has routinely discovered organised criminals, financial criminals, suspected terrorist financiers and other 'bad guys' as customers of leading UK retail banks, life & pensions providers, asset managers and investment companies. Also, contrary to popular opinion, your risk profile is far higher for UK mainland business than it is for offshore.

5 We check them on new account opening and once/twice per year thereafter - which is sufficient to meet regulatory requirements - There's an enormous difference between doing the absolute minimum - going through the motions of putting a tick in the box - versus taking pro-active, responsible steps to professionally mitigate risk for your institution. Exposure to risk, criminal prosecution of a bank's senior management, hefty financial fines and penalties and reputational damage don't just happen twice a year. Risk is an ongoing, ever increasing and escalating occurrence, which is why companies such as Datanomic make it easy to conduct regular, automated screening on the very latest intelligence. Screening individual customers two out of every 365 days leaves you completely exposed.

6 We have a small customer base of a few hundred thousand customers - and we know them all personally - Unsurprisingly, criminals do not wish to be easily identified. By their very nature, they do not want to be found. So, despite the growing number of names on the lists supplied by the likes of the Bank of England and OFAC (United States Office of Foreign Asset Control) they are becoming increasingly difficult to identify when hidden in a large corporate database. Whilst some resort to identity theft and forged passports to cover their tracks, others simply manipulate their own names and personal details to create multiple personae, opening accounts under aliases or spouses names.

7 We are a private bank dealing with wealthy individuals. Our account managers know clients well enough to determine if they are criminals or terrorists -Just because a customer is wealthy does not mean they don't have anything to hide or are above breaking the law. The assumption that the higher the wealth, the lower the risk is not only irresponsible, it is also untrue. Some of the wealthiest individuals in the country are wanted by the Serious Fraud Office for crimes ranging from insider trading to multi-million pound price fixing scams to name but a few.

"Whilst no respectable financial institution or employee wants to deliberately breach legislation, as any lawyer will tell you, ignorance of the law is not a defence - especially when it's a fundamental part of your job," said Dr Jonathan Pell, CEO of Datanomic. "In some cases, because of recent and pending legislations, many risk managers and money laundering officers are completely unaware that they are in breach of regulations, or are putting their company at risk."

Regulatory initiatives, such as Basel II, MiFID and the 3rd EU Money Laundering Directive, have placed stringent information management requirements on Financial Services organisations. Money Laundering Reporting Officers (MLROs) face increasing Know Your Customer challenges. The scale, complexity and cost of screening customers against published sanctions lists ('Watch Lists') and named Politically Exposed Persons (PEP) lists is becoming a major administrative burden for compliance departments. The legal requirement to continually and accurately screen their customer base presents organisations with new operational challenges. Traditional matching methods require a smarter, more sophisticated approach.

Datanomic's Watch & PEP List Management solution enables users to define how closely any two records match. Standard comparisons are pre-configured but can be edited, removed or new ones added in a risk-based approach. When the defined thresholds are met, the decision of Match, No Match or Review can be automated. Most importantly, Datanomic's match rules mean manual decisions made on reviewed records will automatically be remembered next time the data is processed, unless either record has changed.

Compromised data exposes organisations to both financial and reputational risk. Datanomic has templates for matching against a number of different lists, including World-Check and has worked with leading financial institutions to deliver a highly intelligent data matching solution that is designed for ease of use by non-technical users.

In addition to significantly reducing complexity and administrative overhead, Datanomic's Watch & PEP List Management solution delivers industry best practice, providing a base from which management can develop tailored policies and procedures appropriate to their business. By reducing the amount of manual matching required, Datanomic's solution frees up resources to focus manual effort on more complex tasks. Moreover, improving the effectiveness of enterprise data applications further enhances corporate performance and competitive advantage.

Datanomic's Watch & PEP List Management solution delivers a rapid return on investment and fast implementation. The solution can be purchased as a technology package that is owned in year one, rather than as a service commanding an annual fee.
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