UK: Why Watching The Money Isnít Enough

Last Updated: 25 June 2003
Article by Nigel Morris-Cotterill

The financial services industry is getting only part of the risk management and anti-money laundering point. And modern business models in banking and insurance militate against effective know-your- customer procedures says Nigel Morris-Cotterill of The Anti Money Laundering Network.

World-wide, regulators are including in the requirements they place on affected businesses demands that they build a profile of their customers.

This "know your customer" approach is vital in the attempts to detect and deter money laundering and terrorist financing.

Historically, many financial institutions have taken a narrow view of "know your customer." The basis for this is that, historically, banks in particular have wanted to know enough information to enable them to enforce their contract terms in cases of default or fraud. And so, whilst not going as far as "We know where your children go to school," "we know where you live" was generally seen as good enough.

And banks, and their regulators, used to take the view that this approach was good enough for countering money laundering, too. After all, the basic principles of Basle II are not new - they are restating good business practice: they can be summarised as "donít think about how much you might make, worry about how much you might lose," or "always watch the downside."

That was then, and this is now.

Now under a raft of buzzwords (e.g. enhanced due diligence) and legislation driven panic and uncertainty, financial services businesses are driven to implement ever more complex and costly risk management systems.

From checking lists of names for blocked and politically exposed persons to installing neural networks to monitor all transactions happening world-wide in large and complex financial services businesses the issue of compliance comes down to one thing: the state is pushing the burden of policing onto the financial sector and with it the massive costs associated with detection and prevention.

The Regulators often miss the most salient point: the demands that they are placing on regulated businesses is diametrically opposed to the business model that banks and insurance companies, in particular, are developing.

The new business model is to put distance between those conducting financial services operations and those to whom the services are provided.

Internet banking and telephone banking are the more obvious examples but the most insidious, and the most dangerous, is that of centralised call centres which handle the calls for a number of branches. There is no personal relationship between a bank officer and the customer. Centralised payment processing services add to the remoteness of services provided.

The cost savings created by these measures are now being largely offset by the need to create, implement and maintain compliance and risk management systems that were built into old fashioned banking: the bank manager did, actually, know his customers.

He knew where they came from; he socialised with them if they had much money and saw daily exception reports if they didnít. Those with routinely small credit balances and average regular salaries simply flew under the radar: they were not marketing prospects, nor were they risks to the branchís balance sheet.

In short, the bank manager used to run a business: in effect, he was a salaried franchisee and to make his franchise work, he needed to understand his own business, his potential constituency and his customers.

Now, to a degree as a result of the work in marketing which uses KYC to more efficiently target sales efforts, and the use of computer analysis of a wide range of lifestyle data, the concept of KYC for risk management is largely entrusted, at least at a preliminary level, to technology.

That technology focuses on the transaction history and predicted transactional activity of an account.

The mixing of the need for financial risk profile and for marketing information has led to a strange marriage - one where the two sides are in bed but there is a big gap between them. The bank collects two different sorts of data about the same people but has no way of linking them.

Marketing people are able to tell with some degree of accuracy what a customer wants for himself and financial transaction analysis programmes can tell if he is under-or over achieving against the bankís expectations for that account. But these two sets of data are not tied together.

But they can be: Pat Dade of Risk Values has developed a system for bridging the gap between the two types of data. And in doing so, has developed a software tool that collects information that relates to the customerís attitude to the institution to provide a view as to the likelihood that the person displays a propensity to commit financial crime such as fraud, money laundering or using accounts for terrorist financing.

But there is one thing existing technology cannot do: it cannot develop a "gut reaction." But Risk Values does precisely that.

Using the customerís own view of himself and how he relates to the institution, and setting that off against psychological norms and background data collected over a period of some 30 years, Risk Values assesses those applying to do business with a financial institution and displays, on a scale of one to five, the risk associated with that customer.

The principles of enhanced KYC mean that simply knowing the customerís name and address are not enough. Financial institutions are having to build models based on the sort of customer they expect to attract, the sort of activity that would be normal for those customers and then to assess whether account activity - or non-activity - fits within those norms. This is both time consuming and expensive. And it fails to address the issues relating to new customers and to low activity accounts.

Certain types of business, such as money services businesses, rarely conduct more than occasional transactions with customers. They do not build up a transaction history and, in any case, the software and hardware necessary to do such is far outside their budget. This is also the case with, for example, community banks and thrifts.

These businesses need to resort to manual monitoring of accounts and that, too, is expensive. The use of profiling for propensity to financial crime would mean that the manual monitoring could be focused on the higher risk accounts: around 70% of account holders are regarded as unlikely ever to abuse the relationship with the financial institution but banks find it difficult to know which 30% of their customers should receive greater monitoring. And under 1% of the population are "the really bad guys."

It follows that banks are wasting huge resources by monitoring everything that passes through their hands.

The cost of monitoring is not just the cost of the technology: it is to a large extent the cost of dealing with the reports that the technology produces. Where monitoring criteria are set too wide, then cases will slip through, exposing the institution to risk of fraud or being involved in money laundering or terrorist financing.

Where monitoring criteria are set too narrowly, then there will be too many "false positives," that is reports which, on analysis, prove to be merely out of the ordinary. It is these false positives that cause cost to the organisation: each has to be investigated and reasons displayed as to why there are not, in fact, suspicious circumstances.

By integrating the collection of the data for assessing the Risk Value into the customer acquisition process or future CRM surveys, the cost of collection of that data may be, in percentage terms, insignificant.

By applying the Risk Value as a criteria within the monitoring system, the number of false positives may be significantly reduced - and therefore the cost of monitoring much reduced.

Moreover, for those businesses which are performing manual monitoring of all transactions, the additional "gut reaction" provided by an assessment of the customerís attitude to the account will provide the bank with a way of prioritising the accounts it monitors, and of prioritising the handling of exception reports. This will lead to greater efficiency and, again, a cost reduction.

Simply watching the customerís financial profile is not enough - as the focus enhanced due diligence shows. It is not enough to know the customerís financial position - banks and an increasing number of businesses to be brought within the scope of money laundering legislation also need to know the customer. There is no doubt that this means more than just his name and address.

Nigel Morris-Cotterill is a counter-money laundering strategist with Silkscreen Consulting, part of The Anti Money Laundering Network. www.countermoneylaundering.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think youíve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.comís content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltdís services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) Ė meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with ďno disclosureĒ in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a userís hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friendís name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our usersí information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a userís personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that userís personal data provided to us. This can usually be done at the ďYour ProfileĒ page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.