The International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (IMLA-FATA) places new responsibilities on U.S. banks to detect and trace funds either held by criminals or intended for use by terrorists.
That's no small task-the International Monetary Fund estimates that laundered funds comprise 2% to 5% of global GDP, or at least $600 billion annually. Stopping clean money from harming others may prove even more challenging.
"Whatever approaches are taken, they've got to have at the core of them the principle of 'know your customer,'" said Ian Horobin, global product offering manager at Searchspace, a New York-based artificial intelligence software firm, at last month's Financial Technology Expo in New York.
But "know your customer" isn't just about capturing up-front information or conducting background research. Banks also should monitor transactions and understand how clients use banking services, said Horobin. "You've got to identify transactions that are unusual, irregular and unexpected, and therefore high-risk."
The risk of a particular transaction depends mostly on the customer. "What's suspicious for one customer is not for another," said Don Temple, a money laundering and bank secrecy act (BSA) expert at Mantas, a Fairfax, Va., software firm. "In order to understand what truly are suspicious transactions, you have to understand all of the currency reporting requirements of the BSA and the IRS, and the money laundering strategies."
"To do that manually is pretty much impossible," added Temple. "You really need a software solution."
In some respects, the task of providing government agencies and law enforcement with customer information falls under the heading of CRM. "Customer relationship management software now has to track the relationship between accounts and between clients in different areas of the institution," said Tom Obermaier, head of risk management at Deutsche Bank's global cash services division. "Those software systems really need to be put in place quickly."
In practice, however, there are limitations to the ability of a single financial institution to gather knowledge about its customers. "You are not really going to know all of the transactions that a client does, especially post-September 11th," said Obermaier. "You're going to see diversification of providers of financial services."
Despite their lacking complete information, banks will still have to answer for the activity that takes place on their watch. "You'll only see that which goes through your institution, so it's critical that you at least know that aspect of your clients' business that goes through your four walls," said Obermaier.
In theory, the government could create a clearinghouse for all transactions that would create a comprehensive information exchange between law enforcement and financial institutions. But enormous systems hurdles exist, not to mention legal ones. "A clearinghouse would be very, very helpful, but it would require significant changes to existing systems, with significant safeguards," said Obermaier.
The Key Provisions To IMLA-FATA
The new law affects the way banks deal with their customers and the U.S. Treasury and other government agencies. Among its key provisions, financial institutions will be required to: designate a bank officer to monitor named persons and entities; block named persons and entities from access to accounts; block unaffiliated shell banks from access to accounts; disclose customer and account information within 120 hours of initial request by government agency, without notifying the accountholder; terminate correspondent relationships upon government request; increase supervision of "concentration" accounts that mask the originator and beneficiary of a transfer; and use the highly-secure network of FinCEN (Financial Crimes Enforcement Network) to file reports and receive alerts on suspicious activities.
Other key provisions of the anti-money laundering law include: securities broker-dealers must file suspicious activity reports; nonfinancial businesses must meet currency reporting requirements; government can seize laundered funds deposited in a foreign bank by going after interbank accounts located in this country; the U.S. Treasury or Attorney General may subpoena foreign banks with U.S. correspondent accounts; foreign governments will be encouraged to require wire transfers to include name of originator, and carry that information all the way through to final disbursement.