AN EVOLUTIONARY ALLIANCE

Money Laundering: An Integrated Collaborative Framework and Compliance Strategy.

Todd Price, Jake Riggs, Shantell Goodwin, and Jason Piazza

March 20, 2019

 AN EVOLUTIONARY ALLIANCE

Money Laundering: An Integrated Collaborative Framework and Compliance Strategy.

Authors:
Todd Price
Jake Rigg
Shantell Goodwin
Jason Piazza

Southern Oregon University

School of Business: MBA Program:

MBA 520 Economic Analysis

February 21, 2019

Word Count: 39,521

Abstract

1
 First and foremost, change is inevitable, and firms are responsible for keeping up to date

with policy and rule changes in the current monetary system. There is a compilation of key Anti-

Money Laundering (AML) rules, orders, and guidance in place and wealth of guidance material

and in order to aid our research efforts and in this paper we will look to the ones most relied and

used. Subsequently, there is a current toolbox available to guide AML requirements for agencies

to use. In this paper, we look at strategies to improve AML compliance. We will look into

several US agencies and programs that are already helping to oversee and help to enforce AML

strategies and compliance. Next, we will review and identify other international agencies and

programs to aid in the multinational system. Multiple agencies and countries have adopted

requirements for reporting, yet many countries have not adopted or overlook these programs and

undermine the effectiveness of the program. Despite the rising cost in compliance, firms are

complying with requests by regulators. If left unrestricted, money laundering may eliminate the

operational integrity and financial stability to financial institutions.

Table of Contents

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i. Title Page……………………………………………………………………….Page 1
ii. Abstract……………………………………………………………….………..Page 2
iii. Table of Contents………………………………………………………...........Page 3
iv. Introduction………………………………………………………….…...........Page 4
v. References...…………………………………………………………………..Page 30

Chapter 1: Strategies to Improve Anti-Money Laundering………………….…....Page 7

Chapter 2: De-risking the Risk…………………………………………...………Page 11

Chapter 3: Operational Integrity and Financial Stability as an Effect of ML…....Page 14

Chapter 4: Communication channels and cooperation with other banks………...Page 20

Chapter 5: Software Detection…………………………………………………...Page 22

Chapter 6: Factors that hinder the effective implementation…………………….Page 26

Conclusion…………………………………………………......................Page 28

Introduction

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 The purpose and focus of this paper are to show that with an evolutionary alliance to

combat money laundering and an operational approach to build a collaborative framework

Investigators can illuminate the gaps, reform policy, and by the rule of law hold egregious

violations accountable. This phenomenon is happening Globally with minimal oversight for

years and has gone unchallenged. We will clarify some of the best-known strategies to improve

Anti-Money Laundering (AML) compliance in the multinational banking system. Collaboration

is key to identify abnormalities and analyze data trends in transactions. Follow the Money! Our

Introduction will go over a brief description of how this happens to clarify the basics of money

laundering. We will address the economic consequences of an inadequate AML program and

address employees reporting and the hesitation to do so. The burden of an efficient report system

cannot fall entirely on financial institutions since they may face legal schemes that create

incentives not to report suspicious activities. Variables here can be related to compliance costs,

the probability of being caught, and the fine to be paid in case of being caught. Next, we will

delineate and look at the loss of banks’ operational integrity and financial stability as an effect of

money laundering. If the expected loss due to punishment is higher than the compliance costs

than banks may decide to deal with money laundering prevention. We will illuminate the

establishment of communication channels and cooperation, hesitation and requirements with

other banks to reduce money laundering. Lastly, we will address, Improved technological

software hastens the detection of unusual financial transactions and Factors that hinder the

effective implementation of the anti-money laundering program.

Money laundering is the process of concealing the origins of money obtained illegally by

passing it through a complex sequence of banking transfers. One problem of criminal activities is

accounting for the proceeds without raising the suspicion of law enforcement agencies. There are

4
three stages involved in money laundering; placement, layering, and integration. Placement –is

the movement of cash from its source. On occasion, the source is easily disguised or

misrepresented. This is followed by putting it into circulation through other institutions, casinos,

shops, bureau de change and other businesses, both local and abroad. By the Layering – The

purpose of this stage makes it more difficult to detect and uncover a laundering activity.

Layering is meant to make the trailing of illegal proceeds difficult for law enforcement agencies.

The known methods are Cash converted into Monetary Instruments – Once the placement is

thriving within the financial system of a bank or financial institution, the proceeds can then be

converted into monetary instruments. This involves the use of banker’s drafts and money orders.

Material assets bought with cash then sold – Assets that are bought through illicit funds can be

resold locally or abroad, and in such a case the assets become more difficult to trace and thus

seize. Integration – This is the movement of previously laundered money into the economy

mainly through the banking system. This is dissimilar to layering, for in the integration process

detection and identification of laundered funds is provided through informants. The known

methods used are Property dealing – The sale of the property to integrate laundered money back

into the economy is common amongst criminals. For instance, many criminal groups use shell

companies to buy property; hence proceeds from the sale would be considered legitimate. Using

front companies and false loans – Front companies that are incorporated in countries with

corporate secrecy laws, in which criminals lend themselves their own laundered proceeds in an

apparently legitimate transaction. Foreign Bank Complicity – Money laundering using known

foreign banks represents a higher order of sophistication and presents a very difficult target for

law enforcement. The willing assistance of foreign banks is frequently protected against law

enforcement scrutiny. This is not only through criminals but also by banking laws and

5
regulations of other sovereign countries. False Import/Export Invoices – The use of false

invoices by import/export companies has proven to be a very effective way of integrating illicit

proceeds back into the economy. This involves the overvaluation of entry documents to justify

the funds later deposited in domestic banks and/or the value of funds received from exports.

Compliance programs with clear and precise policies with dedicated training resources is the best

case practice. Executive and board managed oversight with effective Risk-Based Assessments

with documented evaluations of programs will see the organization to compliance in Ultimate

Business Organizations (UBO). We will begin our paper with a literary review of current

research to identify with some of the best-known strategies to improve Anti-Money Laundering

(AML) compliance in the multinational banking system. The economic consequences of an

inadequate AML program and address employees reporting and the hesitation to do so. The

burden of an efficient report system cannot fall entirely on financial institutions. They may face

legal schemes that create incentives to not report suspicious activities. Crucial variables here are

related to compliance costs, the probability of being caught and the fine to be paid in case of

being caught in the illegal operation. Next, we will delineate and look at the loss of banks’

operational integrity and financial stability as an effect of money laundering. If the expected

loss due to punishment is higher than the compliance costs than banks decide to cope with

money laundering prevention. We will illuminate the establishment of communication channels

and cooperation, hesitation and requirements with other banks to reduce money laundering and

the. Lastly, we will address, Improved technological software hastens the detection of unusual

financial transactions and Factors that hinder the effective implementation of the anti-money

laundering program.

Chapter 1

6
Strategies to Improve Anti-Money Laundering

In this review, we will look at some of the best-known strategies to improve Anti-Money

Laundering (AML) compliance in the multinational banking system. However, before we do

this, we need to define the guidance in place currently that oversees statutory and regulatory

provision and rules. First and foremost change is inevitable, and firms are responsible for

keeping up to date with policy and rule changes in the current system. There is a compilation of

key AML rules, orders, and guidance in place and wealth of guidance material and in order to aid

our research efforts and this literary review we will look to the ones most relied and used.

Subsequently, there is a current toolbox available to guide AML requirements for agencies to

use. In this review, we are looking at strategies to improve AML compliance. In this section, we

will look into several US agencies and programs that are already helping to oversee and help to

enforce AML strategies and compliance. Next, we will review and identify other international

agencies and programs to aid in the multinational system. Multiple agencies and countries have

adopted requirements for reporting yet many countries have not adopted or overlook these

programs and undermine the effectiveness of the program.

7
The Financial Crimes Enforcement Network (FinCEN), a bureau within Treasury, has regulatory

responsibilities for administering the Banking Secrecy Act (BSA)(United States Security and

Exchange Commission, 2018). Some of the programs and strategies efforts used begin in the

BSA of 1970. BSA sets the framework for banking and compliance with specific requirements.

The Framework consists of requirements for reports and record keeping that will be useful in

investigations in to protect against international terrorism. Records that will be useful for

analysis and court proceedings to “follow the money.” One other ACT we will look at is the

Patriot Act which stemmed from the 9/11 terrorist Attacks which hardened and strengthened the

BSA act. The USA Patriot Act is an acronym which stands for the “Uniting and Strengthening

America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism”

(H.R.3162 — 107th Congress (2001-2002).

The Patriot Act is where many new AML programs strategies originated. Strategies in

AML programs were designed to not only improve anti-money laundering they were designed to

curtail the counter -financing of terrorism (CFT) and required institutions to develop and perform

testing with a yearly requirement for reporting. These reports also consisted of electronic filing

of suspicious activity and currency transaction reports of foreign banks and financial accounts

with international transactions.

Internal controls were designed to achieve compliance with the AML requirements. First,

these internal controls consist of a customer identification program (CIP) with a requirement for

knowledge of firms in regards to broker-dealers programs. These smaller firms are required to

fill out a template for establishing AML programs. (The template is located at

http://www.finra.org/industry/anti-money-laundering-template-small-firms.) One issue in

internal controls is the ability to use dual controls with segregation of duties. Meaning,

8
employees that complete the reporting forms should not also be responsible for the decision to

file the reports or grant the exemptions.

We have a looked at a couple of established Acts for firms with basics programs, a

template and identifying the need for there program requirements and designed. Next, we will

look into AML programs for private Banking and new strategies in requirements in real estate.

The Banking industry in the last few years has transformed when it comes to money laundering.

The BSA act ensured that employees and educated on the various aspects and regulatory

requirements. The banks training program consists of not only the knowledge of AML but

reporting requirements.

One area that is not focused much on is the oversight of a Board of Directors or

Management is not only small firms but larger corporations. We often suspect and read about

the times the issue of integrity, and non-compliance or complicity in criminal activities goes

hand in hand at these levels with indictments. More often than not oversight is lacking and can

go unnoticed or covered up. Transparency at this level is a must if AML or CFT programs will

deter, detect and disrupt the illicit flow of money to aid or support terrorism. Many issues that

have shaped the AML compliance and are new for 2019 is the increased proposed information

sharing between institutions.

Headlines of substantial financial losses to fraud schemes and defunct cryptocurrencies

tokens have led the way for more financial regulations. Even as the US has banned or already

regulated many of the issues of cryptocurrency. Many start-up companies in other coutries use

this as a venue to raise funds for innovation like blockchain technology, and funding terrorism-

related activities and resources. Together with many underdeveloped countries, financial

9
agencies are announcing requirements to force compliance of alternate currencies. An

underground culture of activist called cypher-punks brought the crypto-industry to light with

complaints of financial institutions and fees that this future vision is to deregulate the banking

industry. Money laundering has happened more in underdeveloped areas with less access to

banks like South Africa or in the Middle East. International is the focus of AML/CFT now and

information sharing collectively and collaborating is where we must all strive to stop the illicit

flow of illegal activities that support areas of human rights violations and war with terrorist

activities.

An Ultimate Beneficial Owner (UBO) or overall commitment of ownership has been

designed and must be defined in order for AML/CFT to exist and be successful. One way to

achieve this is through what the US has developed by a Geographic Targeting Order (GTO).

The UBO transparency combined with a Financial Final Rule on Customer Due Diligence

(CDD) and directives from other countries participating in the Financial Crimes Enforcement

Network (FinCEN) will help companies with compliance. One example of this UBO to counter

AML was the recent exposure of offshore accounts in the Panama papers. Criminals or

participants will hide there cash in these offshore accounts to avoid filing taxes, reporting and

paying their due diligence. There have been US policymaker discussions and a recent G20

summit meeting with the topic for the world where all leaders must make an apparent and

distinct desire to implement AML/CFT and share information. We doubt that terrorist or those

who support the financing of terrorism attended this meeting. The UK leads the way for making

registries on ownership and expects overseas territories to be compliant by 2020. Much more

focus internationally is happening as a result of collaboration.

10
 Chapter 2

De-Risking the Risk

As more countries noticed a large amount of criminal activity through money laundering,

the Financial Action Task Force on money laundering (FATF) was established by the G-7

Summit in Paris in 1989 (Financial Action Task Force, 20170. As the task force set regulations

in place to deter criminal activities anti-money laundering prevention was introduced into

banking systems throughout the world. One of the unexpected consequences of the AML

program was reducing business with countries that lack regulations that meet FATF

requirements. As more and more fines seen below in figure 1 are being assessed to a bank who

does not comply with the regulations set forth by the AML program, banks started to reduce

operational risk by removing those countries out of their operations altogether. FATF sees these

13 countries as jurisdictions with AML deficiencies: Bahamas, Botswana, Democratic People’s

11
Republic of Korea, Ethiopia, Ghana, Iran, Pakistan, Serbia, Sri Lanka, Syria, Trinidad and

Tobago, Tunisia, and Yemen (Financial Action Task Force, n.d.).

Due to these regulations’ banks have led to adopt an understandably conservative

position, including exiting from providing services to firms, market segments and countries seen

as high risk (Lowery & Ramachandran, 2015). Actions to continue this “de-risking” process

includes ceasing to engage in types of activities that are seen to be a much higher risk, instead of

reviewing client’s case-by-case banks are terminating accounts in lots (Lowery &

Ramachandran, 2015). In 2013, more than 140 UK-based remittance companies were informed

by Barclays Bank that their accounts would be terminated, these actions based off money

transfer organization sector seeing services downgraded or denied (Lowery & Ramachandran,

2015). To resolve these issues MTO’s were pushed to banks charging higher fees or moved to

jurisdictions with less transparency, increasing the difficulty for migrant workers to send money

home to their families who rely on those funds. Following these actions by the UK similar

actions through the US and Australia citing “de-risking” causing for many smaller businesses to

close, merger, or disguise their true nature to remain banked through the MTO industry. At the

time the remittances from migrant workers totaled $440bn a year (more than three times foreign

aid), emerging countries’ economies might be affected (Lowery & Ramachandran, 2015).

Regulations throughout the financial industry regarding the AML have become very costly for

some banks, not only in enforcing the regulations but removing high-risk business, and potential

fines for not correcting operational policy and procedures.

Fines assessed increased to a staggering high in 2015, and while the number of fines was

relatively higher in 2015 the value of fines in 2014 increased to over 15 billion in 2014 as seen in

Figure 2 below.

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As these fines accumulate, more and more banks are restricting their “questionable” business to

avoid any further complications. As correspondent banking has become the concerning factor

with regulators a survey carried out by World Bank in 2015 found that 75% of large global banks

are withdrawing from correspondent banking relationships (Lowery & Ramachandran, n.d.). As

a desire to banks to further reduce regulatory risk and compliance cost, many regulators are

asking that banks give these accounts special scrutiny as in the US with the introductions of the

USA Patriot Act (Lowery & Ramachandran, n.d.). “The ECB report specifically mentions

compliance costs as a driver of this behavior: “KPMG estimates that global annual expenditure is

likely to exceed $10 billion US dollars in the next two years, as billions of more pounds, US

13
dollars and euros are been spent building ever-more extensive risk and compliance departments.”

(Lowery & Ramachandran, n.d. P. 16). As this cost rises more and more business is turned away

by banks to avoid complications with AML regulations, while 31% reported terminating whole

relationships in the past year due to declined transactions and further AML concerns (Lowery &

Ramachandran, n.d.).

To spite the rising cost in compliance costs, firms are complying with requests by

regulators. In a recent survey, the cost of AML compliance across the U.S. financial service

firms reached $25.3 billion based on responses from more than 150 decision-makers at banks,

investment, asset management and insurance firms (Monroe, 2018). As compliance is key firms

on a smaller scale are paying up to .83 percent of their total assets compared to larger firms

whose cost only reach about .08 percent of their total assets. Firms with less technology are

experiencing troubles meeting AML compliance benchmarks in regulatory reporting, customer

risk profiling, and sanctions screening (Monroe, 2018).

Chapter 3

Loss of Banks’ Operational Integrity and Financial Stability

The banking industry has experienced critical changes in the business world due to

internal and external factors. Internal factors vary but are influenced by the risk culture within an

organization. These factors include the expectations from the tone at the top, the governance

structure within the business, and the availability and quality of data and resources for internal

personal use. External factors may include known and emerging trends, industry regulations,

expectations from external parties, and unexpected events. In ever-growing complexity of the

law, as well as changing market behavior, results in significant monies to address occurring

14
risks. For the financial services industry, new challenges arise, requiring an adjustment in risk

management systems and procedures, including that of the institution’s anti-money laundering

program (Sultania, 2018).

A risk is defined as the uncertainty of an event to occur in the future, and in the banking

industry, it is the position a bank decides to take in the market with the possibility of a positive

outcome (Sultania, 2018). Banks have taken on billions of dollars in losses due to inadequate

risk-taking. It is thus essential to have a basic understanding of some of the risks that financial

institutions have faced and may continue to suffer, individually as a result of poor anti-money

laundering programs (Sultania, 2018).

Strategic risk is the present and potential threat to earnings arising from opposing

business decisions, improper engagement of selections, or lack of responsiveness to industry

changes (NCUA, n.d). This risk is a function of the similarity of an institution’s strategic goals,

the business strategies, the resources arranged, and the quality of implementing the goals.

Compliance risk is the current and potential risk to earnings arising from violations of or non-

compliance with laws, rules, regulations, internal policies and procedures, or ethical standards

(NCUA, n.d). This risk exposes financial institutions to fines, civil money penalties, payment of

damages, and the voiding of contracts. Compliance risk can lead to a decrease in reputation,

limited opportunities for the organization to expand into new markets, and lack of contract

flexibility (NCUA, n.d). Reputational risk is the risk to capital arising from negative public

opinion on perception (NCUA, n.d). This risk affects the institution’s ability to establish new

relationships or to continue serving its current market and can expose the organization to

litigation, financial loss, or a decline in the customer base.

15
 Operational risk is the risk to capital arising from fraud or error that results in the

inability to deliver products or services to the market, maintain a promising position, and

management of information. This risk is often referred to as fraud risk, is a function of processes,

people, systems, and external events. This risk exists daily in all financial institutions as the

processing of transactions occurs. Although institutions have always been exposed to operational

risk, in the last few decades, due to a combination of economic and regulatory drives, operational

risk has attracted attention and resources more proportionate with its importance (“Operational

risk,” 2018). The operational risk includes specific sub-categories that are further separately

defined, such as compliance risk, as described above. On the other hand, strategic and

reputational risks are considered distinct categories but often are included with operational risk

(“Operational risk,” 2018).

Money laundering generally involves a series of transactions used to mask the source of

financial monies. As mentioned in a prior section, these transactions typically fall into stages

such as placement, layering, and integration. Through these processes, an individual attempts to

alter the monetary proceeds obtained from an illegal activity into funds with a seemingly legal

source. If left unchecked, money laundering may eliminate the operational integrity and financial

stability to financial institutions (McDowell and Novis, 2001).

Financial institutions that depend on the proceeds of criminal activity have additional

challenges when managing their assets, liabilities, and operations (McDowell and Novis, 2001).

Money laundering can also affect currencies, and interest rates as the individuals conducting the

transactions reinvest funds where their activity is less likely to be detected. Therefore,

individuals who launder money are not interested in profit generations from their investments but

rather in protecting their proceeds (McDowell and Novis, 2001). They reinvest the funds in the

16
activities that are not necessarily beneficial for the overall economy. Money laundering can also

increase the potential of financial uncertainty due to the misallocation of resources from the

falsification of assets (McDowell and Novis, 2001). Money laundering also has the potential for

economic growth to suffer if the funds are redirected from high to low-quality investments to

hide the proceeds. When the industries that are used to launder money no longer suit the

individuals, the trades are abandoned resulting in a collapse of businesses that could potentially

lead to damage and an economic loss in that sector (McDowell and Novis, 2001).

Criminal activity has been linked with many bank failures around the world and has also

lead to increased fines for financial institutions who are not in compliance. The consequences of

noncompliance with anti-money laundering laws and regulations may include regulatory

enforcement actions, penalties, seizure of funds, and imprisonment of the individuals involved

with the activity (McDowell and Novis, 2001). Financial institutions may also be at risk to

restrictions on expanding and may have their licenses withdrawn depending on the severity of

the situation (McDowell and Novis, 2001).

In February 2018, U.S. Bank failed to guard against illegal activity. The Justice

Department accused the bank of neglecting to meet several anti-money laundering rules, helping

a lender operate an unlawful business, and being dishonest to a regulator about their plans for

tracking potential customer criminal activity (Flitter, 2018). Federal prosecutors reached an

agreement with U.S. Bank to defer prosecution as long as the bank could show it had improved

the monitoring of their customer transactions. To settle the Department of Justice charges and

cases brought forward by regulators, U.S. Bank agreed to pay several fines and penalties totaling

$613 million (Flitter, 2018). The allegations involving U.S. Bank focused mainly on warning

signs that bank employees were ignoring the bank’s anti-money laundering program. For about

17
five years, senior bank employees attempted to balance the bank’s security system alerts about

suspicious customer activity against internal staffing limitations. However, senior bank officials

knew that they should not be restraining money laundering queries just because of the limited

personnel investigating the inquiries, so they attempted to hide the practice from federal bank

examiners (Flitter, 2018).

The charge against U.S. Bank was weak compared to cases involving large financial

institutions such as HSBC’s (Hong Kong and Shanghai Banking Corporation) non-compliance

with anti-money laundering program regulations. In December 2012, state and federal authorities

decided against charging HSBC in a money-laundering case over concerns that criminal charges

could risk one of the world’s largest banks and ultimately weaken the global financial system

(Silver-Greenberg, 2012). Instead, the bank agreed to a $1.92 billion settlement with authorities

due to facing allegations that it moved billions of dollars for nations like Iran and allowed

Mexican drug cartels to move money illegally through the bank’s American affiliates (Silver-

Greenberg, 2012). Regulators also vowed to improve from this incident. Through research and

inquiries, weaknesses were also exposed at the Office of Comptroller of the Currency, the

national bank regulator level. In 2010, regulators identified that HSBC had several

insufficiencies in the anti-money laundering controls, including $60 trillion in transactions and

17,000 accounts flagged as possibly suspicious (Silver-Greenberg, 2012). However, while these

activities went unviewed and despite these findings, the regulator did not penalize the bank.

Although, these situations occurred these financial institutions are not the only ones, in

fact, they are two of many throughout the country and the world. While noncompliance with

money laundering programs occurs, these situations may have been avoided with proper

understanding and a useful anti-money laundering governance framework (Protiviti, 2015).

18
Establishing a culture of compliance is imperative when creating an effective governance

structure (Protiviti, 2015). The culture of compliance is when management and staff of an

organization do the right thing because they know it is what is expected of them and the

organization will support them. The company’s personnel are not afraid to bring up compliance

issues and have no fear of retribution or retaliation when problems are brought to light (Protiviti,

2015). Once this culture is established, it is crucial to develop the policies and procedures for

staff to understand and follow (SCCE, 2016). To fully benefit from this framework, it is

imperative that training and adequate use of resources are utilized, such as technological

advancements and utilizing the resources of trained and educated personnel. Once these are

established, metrics should be outlined, and ongoing monitoring should be performed to ensure

that the framework is useful as initially planned (SCCE, 2016). It is vital that an independent

review is conducted to ensure the effectiveness of the program and that it meets the risk

associated with what the financial institution is willing to take.

Chapter 4
Communication Strategies
Utilizing effective communication to prevent ML

One of the questions that always breaks out in financial institutions after a money-

laundering related scandal is whether or not, “such a thing could occur in their organization”.

Often, the answer is a sobering yes. This is in no small part due to lapses in communication that

occur. At the heart of almost every money laundering case is a single moment of poor

communication, be it internal or external that enables the perpetrators to commit the crime. This

raises the question of how a financial institution can utilize effective communication to prevent

19
the occurrence of money laundering. To have the best chance of stopping money laundering

before it happens, financial institutions must have clear, consistent lines of communication both

internally and externally.

Internal Communication Strategies

To establish and maintain clear lines of communication, the first step is to determine who

will be doing the bulk of the communication. This task should not be left to any single

department within the financial institution, and for best communication results there should be

cross-communication between multiple departments (Beemer, 2013). Some examples of

potential communicators are:

· AML and anti-fraud teams,

· IT representatives, for efficient communication,

· Marketing/sales, as products and services will be at the epicenter of any issues that arise,

· Legal team, to provide an accurate legal opinion in a timely fashion to guarantee

compliance with the law,

· Senior management, to involve and inform company leadership and help lower level

employees see how their AML procedures and efforts are viewed by company leadership,

· Middle management, who will be spearheading any AML procedures that are

implemented.

In order to maintain a cohesive group dynamic, the organization of the group should be

thoroughly defined. This will eliminate any potential questions about communication pathways,

as they will already be established. Furthermore, to have the best possible communication these

groups should meet regularly. This serves the purpose of keeping the group up to date on new

20
practices that may be mandated by upper management, as well as maintaining vigilance in the

event that potential money launderers attempt to launder money through the bank.

In addition to regular group meetings and pre-established organizational hierarchies

within the group, working groups should also bring in outside experts when possible. These

external experts will possess insights that are invaluable to the task of the working group, and

will most likely provide information that will ultimately increase the likelihood of a firm

maintaining compliance with the law. Ultimately, the most important element of a working

group is their ability to maintain both internal and external relationships (Beemer, 2013).

Establishing credibility with their colleagues in the firm will enhance internal communications,

but it is just as important for working groups to maintain external relationships as well.

Maintaining relationships with compliance officers can be crucial for a timely response to

prevent money laundering from occurring.

External Communication Strategies

In an effort to better combat financial crime and bank fraud, many regulators now expect

AML functions to be standardized across international lines (Culp, 2015). The first step in this

standardization process is to create internal working groups, as mentioned in the previous

section. However, these groups must in turn branch out from their institutions and maintain

communications with groups in other banks, thus creating a collaborative network dedicated to

fighting money laundering. To achieve this aim, firms must strive for the long term goals of

standardization, centralization, and optimization in order to fight money laundering in the most

efficient way possible.

21
 The achievement of these goals is not possible overnight and requires a long term

commitment to the implementation of AML procedures. A management induced culture of

compliance will go a long way to standardizing AML practices as proactive measures, rather

than reactive. More importantly, if financial institutions can successfully implement digitized

security measures such as more advanced screening software in their AML efforts, they could

minimize the dedication of company resources and time to satisfying AML compliance

requirements—while simultaneously meeting regulatory requirements and minimizing

operational risk (Culp, 2015). With such screening software in place, any suspicious customer

activity could be flagged and shared rapidly to other banks, thus halting money laundering before

it can begin.

Chapter 5
Software Detection

Improved technological software and platforms have hastened the detection of unusual
financial transactions. This software enables banks and other financial institutions to monitor
transactions of money laundering along with Ultimate Beneficial Owner (UBO) and Customer
Due-Diligence (CDD). With the Due diligence requirements, companies will be looking to
invest in the next platform to upgrade or exceed their current methods. AML software refers to
building a means to an end, which enables banks and other financial institutions to monitor
customer behavior. Transparency and increased capabilities of detection happen for suspected
criminal financial activities through automated processes and can be easier to detect. Increasing
in the volume of global transactions will fuel the deployment of AML solutions even more.
The global anti-money laundering AML software market size was valued at $879.0 million in
2017 and is projected to reach $1,642.2 by 2021 and then to $2,717.0 million by 2025
(BusinessWire, 2018).

22
(photo courtesy of technavio)

The significant factors that include that have driven and increased AML regulatory

requirements, the increases in money laundering cases, and growth in IT spending. However, the

lack of AML professionals may hamper the AML software market growth. On the

contrary, emerging artificial intelligence technology in AML solutions and increased adoption of

cloud-based solutions is expected to provide lucrative opportunities for AML software market

expansion during the forecasted period. The CIP management segment led the overall market in

2017 and is expected to maintain its dominance. All the while, owing to the rise in cases of

identity theft-based money laundering cases (BusinessWire, 2017).

23
 Figure 1

CAGR refers to the Compound Annual Growth Rate. (photos courtesy of Businesswire)
Figure 2

(photo courtesy of BusinessWire)

24
 On-premise AML solutions project segments shown in Figure 1 above dominated the

market in 2017; Then, due to enhanced security offered by these systems, the cloud-based

segment is expected to witness the highest growth rate, due to the adoption of cloud-based

solutions shown in Figure 2 above in small- & medium-sized financial organizations to combat

money laundering (BusinessWire, 2017).

With the current need for AML software solutions and an ability to adopt technologies

into current practices, the growth of the IT environment and software market with enhancements

should fuel education institutions. Citigroup is expected to invest $8 billion on technologies in

2018 which was 20% more of the bank's expense budget. Other banks increased their budgets as

well and currently the expectation if for companies to increase 5-10% of the expense budgets to

increase compliance with new software (BusinessWire, 2018).

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 Chapter 6

Factors that hinder the effective implementation

Some of the factors that hinder the effective implementation of the anti-money laundering

program are training in virtual currencies and methodology in detection. In knowing this, the

audit department is the last line of defense in AML. Training of case managers or employees in

Suspicious Activity Report (SAR) or Suspicious Transactions Report (STR) or Currency

Transaction Report (CTR) is a must during their initial training even if they are not in the audit

department. Active reports in a business unit are the best mechanism for suspicious or

questionable customer behavior. However, the use of virtual currencies over the last decade

have prompted governments around the world to reevaluate their use and possible benefits.

Moving money over the web via peer-to-peer networks has taken on challenges to AML

programs. In a current decentralized model, a private company controls the virtual currency.

Then issues units to its users which determines the virtual currency’s value. Lastly, the digital

ledger records transactions, and the company keeps track of customers’ balances. The company

is the controlling force that drives everything in the system. Crowdfunding coin or token

offerings is a method or source of investing in new companies (Nigh & Pelker, 2015).

In the United States, virtual currency services have made great strides to comply

with regulations and rules, but many cannot or have not implemented programs or procedures to

comply with AML. The Financial Action Task Force was formed as an international

intergovernmental body to set standards and promote policy to combat money laundering

(Financial Action Task Force, 2008, p.5). They added Terrorism Financing shortly after 9/11

(United Nations Security Council Resolution, 2001, p.5). Anti-Money Laundering and Counter-

Terrorism Funding (AML/ CTF) (FAFT, 2008, p.4). Together with the Dept. of Treasury in the

26
United States and a division not much talked about is the Office of Terrorism and Financial

Intelligence (TFI).

The TFI also looks into Non-Profit organizations (NPO) and Non-Governmental

Organization (NGO) local and abroad. In other countries, some of the agencies are called

Financial Investigation Units (FIU) and are mainly local looking at NPO’s and NGO’s. Charities

and fundraisers need to be registered, and many go unnoticed. One of the connections

discovered to terrorism funding was transfer ledger system called Hawala. A ledger system

developed in Persia around the 8th century in now India that is illegal in both in India and

Pakistan.

Hawala or Hewala in Arabic is an accessible and informal value transfer system based on

the performance and honor of a huge network of money brokers, primarily located in the Middle

East, North Africa, the Horn of Africa, and the Indian subcontinent, operating outside of, or

parallel to, traditional banking, financial channels, and remittance systems. Dubai has been

standing out for decades as a welcoming hub for hawala transactions worldwide. To put it

simply, it is an illegal/informal transfer of money without moving it physically, leaving no traces

or evidence. Another system is Fei CHIEN or flying money, ledger system (H.R., 115-32, 2017,

p.10). The Chinese underground method of sending money abroad. These systems were based

on honor and trust. All existed to protect traders on the Silk Road. Now Cybersecurity with

terrorism financing is at the heart of this digital ledger controversy.

27
Conclusion

Money laundering is about concealing the origins of money obtained illegally by passing

it through a sequence of banking transfers or commercial transactions. One problem of criminal

activities is accounting for the proceeds without raising the suspicion of law enforcement

agencies. There are three stages in money laundering. They are placement, layering, and

integration. Anti-money laundering changed the financial world forever, as banks and other

financial institutions changed how every client is perceived many unintended consequences

occurred. Many peoples' lives changed as these regulations have evolved, in some countries

hard-working individuals can no longer send money home to their families weighing heavily on

many countries economic standard, and increased regulations have financial burdens banks can

no longer handle. While these costs have increased dramatically banks and other institutions

have put this cost onto the customer, unintentionally increasing the cost of doing business

throughout the world.

For the financial services industry, new risks arise, requiring a change in risk

management systems and procedures, including that of the institution’s anti-money laundering

program. To have the best chance of successfully implementing AML policies, it is imperative

that businesses implement working groups into their daily operations. Doing so will optimize

internal communications, while also keeping firms up to date on compliance regulations.

Moreover, these working groups will provide valuable links to compliance officers—

relationships that are crucial to AML implementation.

Financial institutions have taken on billions of dollars in losses due to inadequate risk-

taking. Therefore it is vital to have a basic understanding of the risks that financial institutions

have faced and may continue to suffer, as a result of poor anti-money laundering programs.

28
Through the masking of the legitimate source of funds, money launderers attempt to alter the

monetary proceeds obtained from an illegal activity into funds with a seemingly legal source. If

left unrestricted, money laundering may eliminate the operational integrity and financial stability

to financial institutions.

29
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