Category Archives: Insights

The alleged inventor of Bitcoin, who brought the cryptocurrency trend to the mainstream, was revealed last week. Or maybe not.

When Newsweek published its 4,500 word exposé that allegedly doxed Satoshi Nakamoto, there were immediate controversy and questions about both sides of the story. Since the story published, Nakamoto has been chased through the streets of Los Angeles by reporters, eaten a sushi lunch and denied any and all involvement with Bitcoin.

The story in and of itself is a riveting tale. But the financial implications of this make it vital reading for anyone who has invested in or is considering investing in cryptocurrencies. We’ve discussed the impacts cryptocurrencies have had on anti-money laundering regulations, but when the alleged inventor of the technology has the ability to disappear with millions of dollars worth of real money, the questions surrounding this become even more complex.

The continued push to legitimize financial startups and innovations such as cryptocurrencies and payment processors such as Square are not helped when the person who could be a powerful voice chooses to remain anonymous and shrouded in mystery.

In the past, financial regulators and banks that have centuries of managing wealth and processing financial transactions have adapted to new technologies. We have evolved from running gold across the American West on horseback to being able to fund a college education from a smart phone. But the quickened pace of offering new solutions to existing problems has been a challenge.

Some are proposing a safe harbor for financial startups. This would alleviate the steep fees and lengthy regulatory processes companies must endure to secure licensure to offer financial services. It would not eliminate protections, but it would help to foster innovation.

Now, of course there are risks to this innovation. Those risks likely led the Bitcoin inventor(s?) to remain anonymous. But Alacer and other anti-money laundering solution providers are here to protect consumers and financial institutions from those risks. The more we all innovate, the safe and more efficient we can be.

We’ll be at the ACAMS conference this month. Talk to us about your ideas of how we can innovate together.

By Richard Paxton

Want to learn more? Alacer’s AML experts will be attending the 19^th Annual AML & Financial Crimes Conference, being held March 16-19 at the Westin Diplomat in Hollywood, FL. Send an email to me at Richard@alacergroup.com to arrange a chat.

And… the this just keep on coming. This week, Citigroup is in the news, revealing that a federal probe is currently underway into its anti-money laundering (AML) compliance. This comes days after it disclosed that there is the possibility of $400 million in fraud at its Mexican subsidiary, Banamex. Thanks in large part to this discrepancy, Citigroup slashed its 2013 profits by $235 million and an immediate drop in its share price on the stock market.

You can be certain that, if Citigroup’s AML policies and controls are found to be deficient, the government will levy a substantial fine on top of the money the financial institution has already lost due to theft. So what happened? In this scenario, the details are still sketchy, but seem to point to a Banamex employee’s suspected involvement in the scheme.

One of the ways financial organizations minimize their risk of internal security breaches is through independent auditing and testing of AML compliance programs. Since compliance regulations are constantly being revised and tightened, it’s essential to closely monitor how well each organization’s programs are mirroring these updates. Oftentimes, independent consultants conducting surveys can pinpoint process inefficiencies that, once corrected, actually more than pay for the reviews.

Perhaps more importantly, a regular schedule of independent audits can help a financial organization identify and correct deficiencies BEFORE they are found by regulatory agents, helping safeguard a bank’s reputation and minimize its risk.

By Richard Paxton

Want to learn more? Alacer’s AML experts will be attending the 19^th Annual AML & Financial Crimes Conference, being held March 16-19 at the Westin Diplomat in Hollywood, FL. Send an email to me at Richard@alacergroup.com to arrange a chat.

More than a few things have changed in banking since farmers and traders instituted grain loans circa 2000 BC. Today’s banking industry is often so diversified that complex processes and safeguards have been developed, sometimes haphazardly, to ensure legitimacy and prevent fraud and money laundering.

Over time, complex processes have a tendency to become overcomplicated. Before you know it, “business as usual” becomes all-consuming and costly. One review becomes two, multiplying over and over until redundancy becomes infused with a “how we’ve always done it” mentality for processes and controls.

Think about your current processes and answer this: how many people within your financial organization are involved in collecting data, reviewing and approving anti-money laundering (AML) and other regulatory compliance efforts? How long does it take to handle a typical internal review or audit? Can you keep pace? Do you have enough resources to handle growing case loads?

At Alacer, we’ve used Lean Kaizen techniques to help financial institutions find ways to successfully battle the increased demand for oversight and risk management. With the right facilitator, it’s not uncommon to reduce process time by as much as 50%, just by taking a thoughtful step back to review existing workflow and developing a plan for continuous improvement.

The key to ongoing Lean Kaizen success is being proactive and diligent. Getting started can be daunting as constraints, excess and waste accumulate with more red (no-value) than green (value) designations. Don’t get discouraged. The AML function is complex. Stay focused on reducing costs and increasing effectiveness. The resulting savings can be reapplied to meeting growing case loads without adding staff or resources (or incurring costly fines and penalties).

By Richard Paxton

Want to learn more?  Alacer’s AML experts will be attending the 19^th Annual AML & Financial Crimes Conference, being held March 16-19 at the Westin Diplomat in Hollywood, FL.  Send an email to me at Richard@alacergroup.com to arrange a chat.

Know Your Customer policies (KYC) are a key aspect of any financial institution’s overall anti-money laundering (AML) compliance program. At its most fundamental level, KYC processes ensure that an organization knows who it is doing business with, whether it’s an individual or a business, and prevents the bank from inadvertently facilitating money laundering.

It sounds like common sense, but the US Patriot Act made due diligence of paramount importance within the financial industry, and federal regulators today hold organizations accountable for being able to verify the identities of their customers. In some cases where banks have inadvertently participated in funding terrorist activities, their abilities to prove that ongoing KYC due diligence has been the norm can mitigate the level and severity of punitive actions and fines.

Today, financial institutions collect and store all types of personal data on their customers as part of their KYC policies. But that also adds a level of risk to the bank. Take Barclays—it recently had a data security breach of disastrous proportions. More than 27,000 individuals had their information stolen, and the data went far beyond their financial accounts. Their profiles included medical conditions, passport numbers and more—all kept by Barclays through its KYC policy procedures. This data is currently being sold in the black market.

So today, we face an interesting dilemma: verify customers through more diligent profiling and store that data, or risk even more damage when that data is misused.

The answer is not to abandon KYC, which has proven more successful than not. And the answer is not strictly limited to more data security. Any process is only as strong as its weakest link—and with KYC policies, the weak link usually involves human resources. Financial institutions need to ensure the following:

• all personnel are well-trained in KYC and follow the processes to the letter, especially customer service and sales personnel that may face the pressure of sales quotas
• have adequate personnel available to conduct KYC implementation (this can be achieved through additional hires or by streamlining existing processes so that existing personnel have more time available)
• ensure the complete integration of processes (KYC and AML)

And, of course, financial organizations should regularly troubleshoot their data security systems.

By Richard Paxton

Want to learn more? Alacer’s AML experts will be attending the 19^th Annual AML & Financial Crimes Conference, being held March 16-19 at the Westin Diplomat in Hollywood, FL. Send an email to me at Richard@alacergroup.com to arrange a chat.

Where did the time go? This year, anti-money laundering (AML) regulations will celebrate their 44^th birthday and yet most of us think of AML as coming of age as a result of 9/11. In truth, AML regulations had their birth as part of the Currency and Foreign Transactions Recording Act (more commonly known as the Bank Secrecy Act), which Congress passed in 1970 to track the millions of dollars being laundered through U.S. banks.

Specifically, it required financial institutions to keep records of any cash transactions exceeding $10,000 and to report suspicious financial activities.

It’s unclear who coined the phrase, “anti-money laundering,” but it was sometime after the passage of the Bank Secrecy Act. It was accepted financial industry jargon by the time the USA Patriot Act was enacted in 2001, a law that expanded the power of the Secretary of the Treasury to monitor financial transactions, especially money laundering.

U.S. money laundering itself dates back to the early 1920s, when organized crime was common place and the gangs were earning huge sums of cash from illegal gambling, bootleg liquor and other underground activities. They needed a way to legitimately explain these funds, and came up with the brilliant idea of purchasing laundromats. Laundromats were a cash-only business—but over time, even the laundromats couldn’t explain just how they were as profitable as they had become.

Meyer Lansky, one of Al Capone’s contemporaries, ultimately became the Father of Money Laundering. He was determined to avoid Capone’s fate (a conviction in 1931 for tax evasion) and was the one responsible for figuring out how to use the Swiss banking system to hide his growing cash reserves. He developed the first real laundering technique, which placed illegally-received money into the Swiss bank and then loaned it back to other foreign banks, thus making it legitimate.

But the term “money laundering” really didn’t appear until 1973, when reporters began using it to reference the Watergate scandal. And oddly, it didn’t appear in a judicial or legal context until 1982 even though it was recognized as an illegal activity by the Bank Secrecy Act.

by Richard Paxton

Want to learn more? Alacer’s AML experts will be attending the 19^th Annual AML & Financial Crimes Conference, being held March 16-19 at the Westin Diplomat in Hollywood, FL. Send an email to me at Richard@alacergroup.com to arrange a chat.

When it comes to monitoring anti-money laundering (AML) compliance, the Office of the Comptroller of the Currency (OCC) can strike fear into the hearts of U.S. financial institutions–and does so on a regular basis with massive fines and sanctions. As it turns out, the OCC wields considerable power with foreign banks as well, and not just those in countries where U.S. citizens like to offshore assets.

Take Rabobank, a well-known Dutch financial institution, and a global leader in underwriting food and agricultural businesses. It’s one of the 30 largest financial institutions in the world, with 682 locations outside of its home country, including several branches in California. In 2013, it received a $1 billion fine from the OCC for manipulating interest rates; Chief Executive Piet Moerland resigned immediately in the wake of that scandal, and three former traders were criminally charged.

You’d think that a $1 billion fine would be a big wake-up call that the OCC is closely watching the bank’s operations… but apparently not. Just last month, the OCC ordered Rabobank to fix problems with its AML programs, requiring the bank to appoint a compliance committee and to conduct an assessment of locations and products that pose significant risk to the bank. Although no new fines were levied, the message is clear: AML programs are continuing to be at the top of the OCC’s priority list for close scrutiny.

by Richard Paxton

Want to learn more? Alacer’s AML experts will be attending the 19^th Annual AML & Financial Crimes Conference, being held March 16-19 at the Westin Diplomat in Hollywood, FL. Send an email to me at Richard@alacergroup.com to arrange a chat.