The Hindu Business Line : A nose to sniff out crime

THE world changed on September 11, 2001. As investigators picked up the clues from the debris of the most devastating terrorist act on American soil, one thing became apparent: millions of dollars had exchanged hands across many countries to finance the men who crashed the planes into the twin towers.

In the following months, America came out with its Patriot Act, and the UK followed-up with its own Anti Money Laundering (AML) Act.

But the anti-money laundering story dates back to 1989 when the Financial Action Task Force (FATF) was created.

FATF is an inter-governmental body that develops and promotes policies at national and international level to combat money-laundering and terrorist financing. It has 31 members.

Money laundering involves processing of criminal proceeds to disguise their illegal origin. Criminals try to do this by disguising the sources, changing the form of the funds, or moving the funds to a discreet place.

After 9\11 there is a sense of urgency about tackling money laundering and its sinister cousin, terrorist financing. "Considering the fact that searching for money laundering activity in millions of transactions is like searching for a needle in a hay stack, banks are not left with any choice but to use an IT solution to achieve AML compliance," says N.G. Subramaniam, Global Head, Banking and Financial Services, TCS.

Most banks have some kind of security systems in place, but few banks have a complete AML solution. That may soon change, as the RBI deadline comes into effect.

The RBI has asked all banks to put their `Know Your Customer ' (KYC) guidelines and AML measures in place in the next three months and be AML-compliant by December 2005.

KPMG recently released a survey on AML, which put the estimated amount of money laundered through the global economy at about $590 billion-$1.5 trillion. This is equivalent to around 2-5 per cent of the global GDP.

According to P.K. Vohra, General Manager, ICICI Bank, AML is a philosophy, more than just a particular kind of software. He says, "It essentially means detecting transactions that side-step the system. It requires not one kind of software, but a collection of software solutions."

Hanuman Tripathi, Managing Director, Infrasoft Technologies Ltd, says, "Banks need to do a comprehensive KYC."

"Risk assessment is divided into high, medium and low, but there is no standard procedure for risk assessment — each bank has its own system," he adds.

Infrasoft Tech provides an AML solution called Omni Enterprise. "If an account remains dormant for six months and then there is suddenly a flurry of big transactions, the software will alert the bank," says Tripathi.

Ideally, good AML software should offer the following functions, according to V.K. Ramani, President, Information Technology, UTI Bank: Collection of data, organisation and analysis of data and prediction of future trends based on it.TCS's finDNA is an AML solution that helps bank achieve Know Your Customer compliance and monitor transactions to detect and report suspicious activities.

Explaining how the solution identifies a risky customer, Subramaniam says, "It segments customers into peer groups and computes a numeric risk score for each customer, thus identifying the risk associated with each customer."

For banks, a practical problem is how to define the filter or the amount limit by which to term a particular transaction irregular.

This `client level-monitoring amount' will differ from account to account and from customer to customer.

For instance, the amount will be small for an individual deposit holder, while for a corporate client it will be much larger.

Some banks, like ICICI Bank, have an AML compliance officer. Once the information about the customer is collected, the existing system runs queries and relates matches to see if a customer is doing transactions that he/she is not usually accustomed to do. The system identifies such transactions and reports to the AML compliance officer who then matches it with the customer data, which is already in the data warehouse.

UTI Bank has a monitoring officer who goes through abnormal transactions and takes action. The data is collected through a centralised database, says Ramani. The only hitch is the time taken.

"We need to reduce the time taken to go through the data. Also, as the decision to report a transaction is based on the judgement of the monitoring officer, there is some amount of risk involved," he says.

The investment that banks will have to make to become AML-complaint will depend on factors such as the size of the database of their customers and transactions and the number of databases from which information is culled.

The laws governing AML too need to be more stringent and need international co-operation. Vohra points out, "The laws are strong, but there is scope for improvement. Implementation is a bigger challenge. Crime is becoming international, so we need co-operation on that front."

India has fairly strict laws, agrees Subramaniam. "The foreign-exchange laws, transaction-reporting requirements, and banking industry's KYC policy do make it difficult for criminals to use banks or other financial institutions to launder money."

Lately, large portions of illegal proceeds are being laundered through the alternative remittance system, `hawala' or `hundi.'

Under this system, individuals transfer funds or other items of value from one country to another, often without the actual movement of currency, he says.

The challenge for the AML system is to capture as many of the suspicious transactions and as few of the genuine transactions.

Vohra, giving an example of an abnormal or a suspicious transaction, says if a large-value transaction is debited immediately after an account is opened, it could be suspicious.

So, an AML solution acts like eyes and ears for banks to check money laundering. Or, as Tripathi puts it: a nose.

"It acts like a sniffer, which can detect anomalies based on analysis of transaction patterns of a customer and customer profiling."

sumeetkaul@thehindu.co.in

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