Automation and analytics: Unraveling trade-based money laundering

This article was written by Stu Bradley, VP Fraud and Security Intelligence, SAS

Trade-based money laundering is a growing problem. In a recent U.S. Government Accountability Office study, the Financial Action Task Force identified trade-based money laundering as “one of the primary means that criminal organizations use to launder illicit proceeds.” That assertion was further validated in a live poll of financial professionals attending a virtual event on the topic late last year, approximately 40% of whom reported they’ve seen more trade-based financial crime attempts or risks.

Sophisticated criminal organizations can be attracted to trade-based laundering because it can be significantly more difficult to detect than other money laundering typologies. Identifying laundering through trade can require a deeper understanding of the circumstances and parties involved in a transaction — which often means closer scrutiny of underlying documents and generally gathering more context in order to detect potentially illicit behavior.

Transaction complexity and hands-on, paper-driven processes historically have made it challenging for some banks to address trade-based money laundering. However, as digital transformation accelerates, today’s market may be primed to help solve this issue. By embracing digital, aligning the right stakeholders, and taking a holistic, data-driven approach, financial institutions can potentially increase the value of information provided to law enforcement.

The problem with paper

Across the financial services industry, variations in processes and customs requirements spanning large transaction volumes often can make compliance monitoring and the detection of suspicious activity more challenging. The unstructured nature of trade documentation and heavy reliance on paper and manual processes can make scrutinizing transactions more difficult.

“Paper is still very much the way that this business is conducted, and the reality is that we still require large amounts of resources and reliance on a very niche skill set to review transactions,” said Valeria Sica, Global Head of Trade Product Development, at Citi Treasury and Trade Solutions. “We see the first challenge is to digitize that paper — extract the information that you receive in a way that you can standardize, process and analyze hundreds of thousands of transactions every day.”

Once that groundwork is in place, financial institutions can leverage their data assets and apply analytics at scale to review new transactions against modeled financial crime typologies. This ability to automate at least some portions of the process is critical to help drive the needed operational efficiency.

Jake Jacobson, US Commercial and Wholesale Banking Technology Leader at EY, agrees. While many banks do a pretty good job of monitoring for suspicious activity, he says, “The challenge is not in massive amounts of activity going undetected — it’s really in the level of effort that it takes to accomplish that monitoring.”

Digital transformation starts now

To achieve this vision, financial institutions should consider prioritizing digital transformation. Fortunately, current conditions may be optimal for jumpstarting digital initiatives.

The COVID-19 pandemic forced major changes in the way business is conducted and compelled many businesses to use more digital tools — both internally and in communication with customers. These shifts appear to have led to greater acceptance of digital tools among key stakeholders. The aforementioned poll echoed this attitude, with more than half (approximately 53%) of financial professionals in attendance reporting that their organizations are currently undertaking a trade transformation program, or plan to within the next year or two.

To help take advantage of transformation opportunities, financial institutions should consider aligning with the right parties, internal and external, to build momentum for the necessary technology and operational change. That means:

• Engaging key stakeholders — People are a big part of digital transformation, as their processes, workflows and mindsets will need to evolve with changing technology. Getting the right parties onboard early and often can be vital for success.
• Picking the right technology partner — As important as the technology is, how it is deployed is just as critical. “Make sure you have the right partners involved and make sure they’re truly acting as a partner, not just a vendor,” advises Jacobson.
• Considering regulatory engagement — Large global regulators have recently shown a real appetite for innovation by sponsoring hackathons and other sessions exploring ways to apply new technology. Financial institutions should consider capitalizing on this shift in mindset.

The companies spearheading these efforts today may be better positioned for future innovation.

The automation and analytics difference

In 2021 and beyond, it appears the industry will continue to see technology enabling financial institutions to more effectively collect, digitize and analyze vast quantities of data — ultimately moving towards scalable automation in a variety of applications.

A critical step in this process is enriching data to ensure it provides a holistic view of the entities involved, and the much-needed behavioral context that can help drive better decisions. Improved data can then serve as a baseline for analytic developments and help bolster financial organizations’ overall control environment.

These extraordinary business circumstances are creating a real opportunity for the financial services industry to help make this digital vision a reality over the next few years. By working with the right partners and stakeholders to advance digitalization, financial institutions may not only set themselves up to effectively observe and report trade-based money laundering and other financial crimes, but they’ll also create a larger analytic framework that may help support business success.

Bradley’s anti-fraud career spans more than two decades. Since joining SAS in 2009, he has served in leadership roles advancing the Fraud and Security Intelligence portfolio across three main pillars: Industry Fraud, AML Compliance, and Security. He’s declared it his personal mission to help organizations and businesses implement a modern approach to stopping crime before it happens.