PricewaterhouseCoopers reported that around $1-2 trillion laundered every year. Yet, less than 1 percent of that money is recovered by authorities.
The scope and persistence of money laundering has forced regulatory agencies to crack down on financial institutions for their anti-money laundering compliance and policies. Just in the first few months of 2017, multiple financial institutions have been fined for mistakes made within their operations regarding compliance.
Western Union Financial Services, for example, agreed to pay $586 million for violations of the Bank Secrecy Act, according to the Alabama Bankers Association Board. In another case, Merchants Bank of California was fined $7 million for AML discrepancies, American Banker reported.
To avoid hefty penalties - or worse - criminal activity being conducted through your institution - all credit unions must review their AML compliance initiatives and work to ensure they are robust enough to satisfy the requirements laid out in BSA and to catch misdoing when it occurs.
There's no penalty for over-reporting...
FinOps Report explained that financial institutions should file a Suspicious Activity Report when they have reason to believe that illegal activity could be happening - not necessarily when they know something illegal is happening.
"Regulators won't penalize banks and others for filing too many SARs, but they won't hesitate to penalize them if they miss illegal activity," Aaron Kahler, managing director of AML Compliance Advisors in New York, told FinOps Report.
For some financial institutions, though, they're far from over-reporting. PricewaterhouseCoopers found that more than one-fourth of financial service firms have yet to assess their AML compliance. However, the agency predicts an increase in compliance spending, growing to more than $8 billion in 2017.
But false positives should be avoided
While under-reporting suspicious activity is something your credit union should avoid, it's important to mitigate over-reporting as well. In a guest post for Datavisor, Keith Furst, the founder of Data Derivatives, explained that false positives create more work for a financial institution, often to the detriment of the employees who sift through the reports.
"A bank can only investigate so many alerts and still conduct effective investigations," Furst argued in his post.
Additionally, the more false positives an institution turns up, the less urgency a real issue will create - and the bigger the probability of it flying under the institution's radar.
Speaking with FinOps, AML compliance officers in New York said they estimate about one-fifth of SARs are unnecessary. In the seven years from 2006 and 2013, SARs increased nearly 50 percent to just under 1 million.
A tailored approach
Avoiding false positives is something that should begin with the onboarding process for new members. The better the information you have on your members, they more likely you are to recognize abnormal behavior. An inaccurate risk profile could either call unnecessary attention to completely legal transactions, or allow illegal activities to go undetected.
In addition to filing accurate data for new members from the get-go, credit unions should also have a transaction monitoring system that is tailored to the institution's unique needs.
"[An off-the-shelf platform is] better than nothing, but still not good enough," Kahler implored. "Examiners won't be understanding if the financial firm doesn't do further work to improve the results of its transaction monitoring system."
Thresholds and qualifications for a report should be set according to the credit union's own products and services, and should reflect the member base. Additionally, supplementing a current TMS with software that uses artificial intelligence can improve efficiency and effectiveness of the system, David McLoughlin, the CEO of QuantaVerse, a AML transaction monitoring technology company in Pennsylvania, told FinOps Report.
Build a relationship with regulators
It would behoove credit unions to be proactive about any compliance issues they may encounter in the future. Reaching out to regulators before there's a problem could help the institution bolster its AML efforts, explained Natasha Taft, who runs a consultancy firm in New York and has experience as a chief compliance officer for several foreign banks.
"Financial firms need to build beneficial relationships with regulators and not react with paranoia," Taft explained. "Granted, some examiners are more helpful and knowledgeable than others, but it would make more sense to learn as much as possible from what the regulator is looking for to improve one's systems and procedures."
Anti-money laundering laws are nothing to take lightly. It's important that financial institutions do their part in identifying criminal activity when it occurs. To do this, it's crucial that credit unions have a strong TMS in place.