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The Improvised Platform of Fraud and Financial Crime: Money Laundering

Financial organizations are particularly concerned with money laundering that presents its own set of processes and challenges. Transaction monitoring software developed for anti-money laundering (AML) purposes, designed to identify low use of cash, high levels of transaction activity, and other abnormalities, can be used for fraud detection and prevention. Data collected about a client during Know Your Customer (KYC) due diligence is vital to the effectiveness of money laundering or fraud detection. Anticipated client behaviour can also be captured and monitored for unexpected activity. Money laundering is a severe problem around the globe, estimated volume being approximately 2-5% of global GDP, or $800 billion – $2 trillion in current US dollars. Increased regulatory scrutiny and compliance demands have made developing and maintaining an effective AML program more critical and difficult than ever. The risks of non-compliance include civil, monetary and criminal penalties, increased regulatory criticism and public disgrace.

First & Second Generations AML Solutions

First Generation AML solutions, which have been a part of financial community for a long time now, work by establishing a fixed rule based threshold by virtue of analyzing how a certain established usage scenario complies against these boundaries. A paradigm of this threshold is the famous monetary level of $10,000 for transactions.

There are three areas where first generation AML solutions fail:

  • Transactions Below Defined Threshold: First generation solutions have an inherent inability to detect money laundering schemes involving smaller amounts, e.g., making smaller deposits in several different accounts and later slowly aggregating them
  • False Positives: Some legitimate transactions may be red-flagged if they are above the set threshold, triggering false alarms. One such example is mortgage, False positives not only overwhelm financial organizations with increased resource costs, but also impacts customer experience negatively
  • Behaviour Profiling: This is defined as the process by virtue of which a market trend is leveraged to analyze and confirm a certain suspicious pattern. For example, a certain business may have consistent high sales throughout the year, even during the period when the peer organizations experience dip. Due to the lack of adaptive profiling, first generation ALM solutions often fail to flag these suspicious trends

The second generation AML solutions provide superior means of detecting new money laundering schemes. These ‘intelligent enterprise solutions’ go beyond their predecessors and perform a complete analysis of all related financial data in greater detail by scrutinizing smaller transactions, profiling and detecting account behaviours. This minimizes transaction risks and ensures full compliance with federal money laundering regulations.

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