Instant payments: Enormous Potential versus Financial Crime Risks

Instant payments: Enormous Potential versus Financial Crime Risks

   

The world of banking continues to evolve at a breathtaking pace and is becoming ever more competitive. Once a new technology has come to market, banks are faced with a dilemma: do we embrace it and run with it, or do we let our competitors gain a first-mover advantage? Delay implies a commercial risk. But the operational and compliance risks that you take on as a first mover may be even greater.

Given the harmonisation of national payment systems across regions, the focus has shifted to international payments and to improve the overall user experience like speed, cost, reliability and traceability. Therefore, payment processors today are seeing some major developments, with new tools appearing such as SWIFT’s gpi and SEPA’s instant payment. These instant cross border payment initiatives are a prime example of what will become the norm in payments.  

The rapid pace of digitalisation of payments brought growing market pressure which have led cross-border payments to undergo significant infrastructure modernisation. The overall trend in digital transactions which are increasing at 6% per year alone in Europe. Total number of traceable transactions in Europe increased from 2013 to 2017: from 113B in 2013 to 144B in 2017 (+27,4%; CAGR +6%)

Number of Digital Payments: Global E-Payments increased from 28,6B in 2013 to 56,5B in 2017 (CAGR: 18,6%); Global M-Payments increased from 24,6B in 2013 to 70,4B in 2017 (CAGR: 30,1%)

Banks that offer this service will gain a competitive advantage over banks that don’t provide it. Clients want their payments to be processed quickly because for them it increases efficiency, transparency, convenience, and financial control. For small and medium-sized companies, this form of payment processing helps alleviate liquidity stress and counter party risk. And, in general, people have grown accustomed to things moving fast, so they have little patience and understanding when payment processing is slow.

Instant payment allows sellers and buyers to exchange money and purchase services in seconds. Funds are received in the payee bank account almost immediately, instead of requiring few business days. That can make a significant difference to a small business’s cash flow, in particular, and it means less time spent waiting for money to clear from the buyer’s point of view. Fast transactions are a common requirement in the new economy, especially with increased mobility: the current generations of customers (so-called millennials and beyond) want to be able to make payments anytime, anywhere, using their mobile devices.

So, what’s not to like about instant payment?

Well, quite a lot, actually. Instant payment processing makes it more difficult to detect financial crimes like money laundering and financial fraud. Criminals want to move money as quickly as possible through a number of accounts at different international banks to disguise the origin of funds. There is no faster way to do this than with instant payments. How can a bank possibly detect money laundering activity in a real time world when transaction monitoring is conducted in a batch process needless to mention the more complex criminal activity?

The Bangladesh Bank heist is a perfect illustration of the future complexity involved in monitoring instant payments.

From the $ 81 million stolen from the Bangladesh Bank in February 2016 only $ 15 million has been recovered and there is still no word on who was responsible. Cyber attackers illegally transferred US$ 81 million from the Central Bank of Bangladesh (CBB), to several fictitious bank accounts around the world, by subverting their SWIFT accounts. The hackers used the SWIFT credentials of the CBB to send dozens of fraudulent payments to fake accounts in the Philippines, and other Asian banks. This was without questioned a well-planned attack that used time differences and regional holidays brilliantly.

How will current anti-money laundering systems work in a world of instant payments?

Its difficult enough for financial institutions to monitor against money laundering violations when it takes three to five days for a transaction to be cleared, or at best overnight. With instant payment, the near-impossible becomes totally impossible using conventional methods as transactions clear in a matter of milliseconds. By conventional, we mean here rule-based approaches, where suspicious transactions are put in a queue and investigated in batch mode.

Even in a world operating in batch, traditional AML systems generate too many false positives (typically between two and 15% of all transactions) and therefore imposes a huge workload on banks and investigators.

Number of Suspicious transactions reported to UIF: +51% (’12-16), from 67K in 2012 to 101K in 2016

With instant payment, this problem is greatly increased because banks are under pressure from customers and consumers to clear transactions as quickly as possible in order to meet the agreed level of service.

Transaction monitoring systems built on current technology and based on machine learning offers the only credible answer. By creating algorithms that learn from past results with the expertise and knowledge of AML compliance officers, the system learns to identify false positives, and compliance officers can focus on alerts where there is a higher probability that money laundering is actually occurring.

Another technology-based approach that has been developed recently, called visual mapping, provides insights into how instant payments are moved around. Suspicious payments can be tracked as they move between bank accounts, regardless of whether the payment amount is split between multiple accounts, or those accounts belong to the same or different financial institutions. The software creates a visual map of where and when money has moved, providing new insights and intelligence for fraud and compliance teams to take action.

By bringing together transactional data from multiple financial institutions and running sophisticated algorithms, such solutions can identify the so-called “mule accounts” that are used for money laundering and other illegal activity. Many of these accounts are not set up directly by the criminals themselves but via a number of scams including phishing, spam email, instant messaging etc.

It is worth pointing out that while technology is a necessary condition for successful AML compliance in the new world of instant payment, it is not a sufficient condition. In addition, financial institutions will need to review their compliance procedures and their service offerings to strike the optimum balance between competitiveness and security.

What should be the upper threshold for an instant payment?

Should they give priority to VIP and profitable customers when reviewing suspicious transactions? What about social and political issues? (For example, Muhammad is the world’s most common name, and also appears a lot on sanctions list. But that also means a significantly large number of false positives, which could lead to claims of unfair profiling.) And finally, even with advanced technology and effective redesign of processes and procedures, banks may still need to increase their staffing in order to meet the challenge. They need to ensure that they have enough staff with sufficient knowledge and authority to be available to review transactions quickly.

Some banks have offshored or outsourced simple customer due diligence functions to keep pace. That said, the trend is definitely towards investment in more technology. As a recent article in The Economist put it, “Now, the biggest question for bank controllers is how many humans they can replace with bots without compromising compliance […] Banks are going into partnership with some of the hundreds of ‘Regtechs’ that have sprouted in recent years.” Technology must be a large part of the solution, but banks will just need to take care and seek expert independent advice in reviewing the new Regtech apps: the regulators and the markets will penalize them should their techno-experiments fail.[1]

For more articles on financial crime and Anti-Money Laundering join the AML Knowledge Centre at https://www.linkedin.com/groups/8196279/


[1] “The past decade has brought a compliance boom in banking”, Economist 2 May 2019.

Money laundering in Russia and what we know!

Money laundering in Russia and what we know!


Money laundering in Russia has its own characteristics. In the normal world money laundering is the transformation of “illicit money” into “clean money”: criminals selling drugs to invest in real estate, in Russia it is different. There money laundering mostly means turning “clean money” into “illicit money”, for example, by evading taxes or using illegal schemes to withdraw money from the country that could be both illicit and clean. Сompanies trying to transfer legal money abroad because investing in Russia is too dangerous: high political risks, weak legal infrastructure, criminalization and corruption of the economy. To withdraw money from the country companies need an approval from the Central Bank and an economic purpose like a financial or commercial transaction. Along with the money earned in Russia by legal means, there are also sources of illegally earned money:

Where the illegal money comes from?

Sources of legal funds in Russia can be divided into 4 major categories:
  • Illegal sale of natural resources: oil, natural gas, metals, etc .;
  • Smuggling of alcohol, tobacco, weapons, and drugs;
  • Income derived from such “classic” types of illegal activities, like extortion (racketeering), prostitution, theft, fraud, theft of cars, etc .;
  • Offenses “of white-collar workers”: the plunder of state property and funds, false declarations of income and profits, tax evasion, illegal “flight” of capital.
GAFI experts note that foreign sources of illegal funds entering Russia and the countries of the former USSR for laundering are little known.

How does the money laundering work in Russia?

The most common method of money laundering in Russia is the opening of individual accounts at financial institutions, placing there significant amounts in cash and then transferring them to the accounts of fake companies, which in turn transfer them to another location.
Other methods include the use of counterfeit accounts, double bookkeeping and contract fraud. A typical scenario involves the transfer of funds in foreign currency to the account of a fake company overseas, allegedly for the purpose of financing a commercial transaction. A false contract for the purchase of goods from a shell company is submitted to the bank as evidence of the commercial need for transfer of funds. Once the money is transferred, legalized funds can be freely transferred to another account or converted into cash. This method is also used to steal public funds.

To launder proceeds from illegal activities in the region, banks, exchange offices, non-bank financial institutions, casinos and real estate companies are also used. Most of the laundering operations are carried out using cash or wire transfers, as well as bank and traveler’s checks.


Global Laundry allowed to launder more than $ 80 billion

According to documents received by the international organization of investigative journalists OCCRP, for three years from Russia was withdrawn at least $ 20 billion, but the real amount can be $ 80 billion. Journalists believe that about 500 people were involved in the corruption scheme named Global Laundry, including oligarchs, bankers and individuals.

Money laundering usually took place according to the following scheme: participants registered, for example, in the UK, two fake companies, the real owners of which were hiding behind a chain of off-shores. The authors of the investigation assume that both enterprises actually had the same owners. Then both companies signed a loan agreement, according to which company “A” lends a large sum from company “B”. In reality, the deal was fictitious, and no money was given to company “A”.

The contract stipulated that commercial structures from Russia would act as guarantors of repayment of the loan, which in almost all cases was headed by a Moldovan citizen. The company “A” then declared itself insolvent, and obligations to repay the debt automatically passed to Russian companies.

As the Moldovan citizen was at the head of Russian companies, the lawsuits had to be considered in the Moldovan court. Corrupt judges confirmed the existence of the debt and issued an order to recover from the guarantors the required amount. According to the investigation, more than 20 Moldovan judges were involved in the scheme. Some of them are under investigation now, and the others have resigned.

After the court decision, the bailiffs, who were also involved in the scheme, opened accounts with Moldindconbank in Moldova. To these accounts, Russian companies had to transfer money, thus closing a fictitious debt.

n the end, the money was transferred to the account of the “creditor company”, for the opening of which the Latvian bank Trasta Komercbanka was always selected. Thus, the money legalized by the Moldovan court was on the territory of the EU: swindlers could now dispose of the money at their discretion and transfer them to accounts in other countries.


Mafia capital and money laundering

Criminal groups continue to make significant investments in real estate, hotels, restaurants and other businesses in some countries of Western Europe. Funds for these purposes often come through intermediary offshore companies. The establishment of links between organized Russian and foreign criminal gangs is noted.
In Russia today there are objective economic conditions for the active legalization of criminal capital. Illicit drug trafficking, the trade in arms and radioactive materials, prostitution, underground gambling, organized crime, illegal financial and banking activities, the plundering of public funds and funds, license-free video business, illegal use of copyright and trademark rights, illegal production of alcohol are all more than favorable conditions for the emergence of significant by the standards of even Western states of illegal capital.
The presence of such money in the country is recognized by the international community as a sufficient condition for large-scale criminal financial operations.
The situation is aggravated by the fact that a huge part of the economic turnover in Russia is served by cash. According to some estimates, “cash” provides up to 60 per cent of the economic turnover (compared to 20 – in the US, or 40 – in Germany). Cash turnover significantly reduces the possibility of introducing effective reporting by financial and other institutions (casinos, salons for the sale of expensive cars, etc.) for transactions with a certain “ceiling”.
In addition to objective circumstances (the “shadow” economic foundation) is not enough to carry out large-scale laundering operations. It is necessary to have well-developed connections with the main financial centres of the world: London, New York, Tokyo, Zurich, Frankfurt am Main, etc.
The facts show: such links are established and expanded by Russian criminals. Active counter-movement of money began. Simplified departure from Russia – there was a legal possibility of investing money in the foreign real estate, securities, luxury goods. Such operations are carried out even during tourist trips to foreign financial centres and “tax havens”.
On the other hand, Russia is rapidly becoming the sphere of application of foreign criminal capital. For example, the Association of Russian Banks believes that over the past two years about 16 billion dollars of Mafia capital have migrated to Russia. The “dollarization” of the domestic economy is growing, and according to various estimates, there are 12 billion of US dollars circulating in Russia in 2018. The currency in the country has long been freely convertible in thousands of exchange offices.
More than 3 thousand criminal groups specialize in the legalization of criminal proceeds, almost 1.5 thousand of these groups formed their own legal economic organizations for this purpose. Up to 80% of the economic facilities of the non-state sector of the economy are under the control of criminal communities that charge them, including more than 500 banks, about 50 exchanges, almost the entire wholesale and retail trade network. According to expert estimates, 2/3 of the legalized funds received in this way are invested in the development of criminal entrepreneurship, 1/5 of it is spent on the acquisition of real estate.
A characteristic feature of money laundering technologies in Russia is the illegal cashing out of funds in order to conceal traces of origin and subsequent involvement in illegal or legal economic circulation.

“Top Misconceptions of Cryptocurrency as a Payment System”

 

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