Several large banks including HSBC and Standard Chartered have made headlines over the past couple of years for anti-money laundering violations. But many smaller institutions have also faced regulatory penalties for failing to meet AML standards as criminals have started targeting smaller institutions that don't have the compliance resources that larger banks possess.
Much of the increased money laundering going through U.S. community banks can be traced back to Mexico, says Robert Kim, chief relationship officer at Banker's Toolbox, an anti-money laundering solutions provider. A law passed in 2010 limited the amount of U.S. dollars that any individual in Mexico could deposit in a bank, forcing criminals looking to launder money to move those efforts to U.S. banks, Kim explains.
The result has been an increase in money laundering efforts by criminals and heightened scrutiny from regulators. "We've heard from a number of community banks that regulators are now expecting any bank with more than $100 million in assets to have an anti-money laundering monitoring solution in place," Kim shares.
However, about half of U.S. community banks are still doing their AML monitoring manually, according to research by Banker's Toolbox. Those banks that rely on manual monitoring leave themselves vulnerable to the more sophisticated money laundering efforts that criminals are now using, Kim notes. For example, one Texas bank faced regulatory action after it was discovered that a Mexican cartel member had been laundering money through the institution by reinvesting U.S. dollars in race horses, a commodity that could easily be resold, he adds.
Community banks also make themselves vulnerable at times by putting too much trust in the relationships that they build their reputations on, says Debra Eshbaugh, a product manager at BAnker's Toolbox and former community banker.
"Community banks can get rolled into this false sense of security. They don't believe their customers could be doing something wrong because they believe in their customer relationships," she explains.
Unfortunately for many institutions simply implementing a monitoring solution doesn't solve the problem. Many monitoring solutions produce false hits that can be difficult for a small bank with limited staff to sift through, says Saira Ali, marketing director at Banker's Toolbox. "They trade the inefficiencies of manual monitoring for now having to comb through every false alert," she explains.
Banker's Toolbox launched an upgrade to its BAM AML monitoring solution earlier this year called BAM+ that aimed to help community banks cut down on those false alerts. The new solution uses Banker's Toolbox's SmartScenarios technology, that pattern recognition and analytics tools to help reduce false positives in AML monitoring. The technology takes customer behavior, typical criminal patterns and parameters set by the bank into account to determine outliers. One of the solution's beta testers, Union First Market Bankshares, reported a 40% drop in false alerts with the new solution.
Community banks have to walk a tight line in AML monitoring, and reducing the false positives can help, Saira Ali notes. "Banks are caught because they don't want to miss anything, but they also don't want to be overburdened by noise."