4 minutes
Don't get hung out to dry by evolving criminal threats and regulations.
North Dade Community Development Federal Credit Union’s run-in with federal regulators and eventual demise over anti-money laundering violations offers a cautionary tale on the need for continued vigilance in complying with the Bank Secrecy Act and USA Patriot Act. In reporting its investigation and resulting $300,000 fine, the Financial Crimes Enforcement Network charged that the $3 million credit union had exposed the U.S. financial system to significant risks of money laundering and terrorist financing from high-risk countries in the Middle East and Central America.
North Dade Community Development FCU was liquidated in 2015 by the National Credit Union Administration as a result of the violations. The credit union had been contracted to provide services to 56 money service businesses in high-risk areas. It handled almost $2 billion in financial transactions for those MSBs and in the process failed to comply with anti-money laundering and counter-terrorist financing obligations to verify clients, file reports, undertake risk assessments, report suspicious transactions and maintain robust controls to mitigate associated risks.
This case serves as a warning to credit unions that they must monitor clients and related businesses rigorously and cannot rely on third parties to conduct due diligence and comply with AML requirements.
Fit-for-Purpose Compliance Program
A standard compliance program that fits all financial institutions simply does not exist, so each organization should develop a framework that meets its needs and culture. A first step for any credit union building a sound AML compliance program is to conduct a comprehensive risk assessment considering all products, services, customers, entities, transactions and geographic locations with internal controls set to mitigate risks. It should then test and evaluate the effectiveness of its AML policies and procedures. Once any weaknesses are identified and strengthened, credit unions can then develop a single, holistic view of members and risks.
KYC principles
The second key step is to consistently apply “know your customer” principles. An effective KYC program is one of the key strategies to prevent violations of anti-money laundering regulations. This includes a compliant Customer Identification Program, which is intended to enable the credit union to form a reasonable belief that it knows the true identity of each member. The frontline evaluation of member risk and processes and procedures to understand members’ financial transactions are designed to head off unknowingly onboarding bad actors and becoming a conduit for money laundering.
It is crucial to build an internal team to identify indications of money laundering activity. Financial institutions are required to appoint a dedicated AML compliance officer and ensure that appropriate procedures are in place to enable employees to report any suspicious activities. Accurate reporting means credit unions must document and follow clear escalation procedures for high-risk transactions, so that any credit union employee who has a question or suspicion about a transaction knows how to escalate it up the management chain—who to communicate with, how to communicate (phone, email, in person, or using a specific software application/system) and when to communicate (within what time frame).
Finally, credit unions must invest in the ongoing training of personnel responsible for handling funds and opening accounts to make sure that these employees recognize the red flags of money laundering.
New Threats, Old Tools
According to the Wall Street Journal, smaller U.S. banks and credit unions are now being targeted by criminals attempting to avoid the more sophisticated and rigorous controls used by larger banks. Attempting to detect new threats with outdated tools or security measures that are not comprehensive leaves financial institutions open to ever-evolving forms of crime and to findings of noncompliance.
Traditional AML technology solutions used by many institutions focus on customers, transactions and accounts to screen for suspicious transactions. These systems take a rules-based approach relying on a pre-defined set of fixed rules to identify known patterns of criminal behavior, such as “Tell me where customer A’s ID is used” or “Tell me when there is a cash deposit of more than $10,000.”
This approach is suitable for identifying suspicious activities that have been tried and identified previously, which is one aspect of regulatory compliance. But this reactionary approach often cannot uncover new methods carried out by criminals to launder money, commit fraud or use the financial system to facilitate other types of crime.
To identify these more sophisticated financial crimes, credit unions need to be able to look beyond the usual member information—members’ identity, accounts and transactions—that are typically screened for suspicious activity. A broader view might encompass other information channels, such as phone calls, emails and social media posts. However, the complex web of disparate systems, geographies and functions within financial institutions can make collection and analysis of additional data challenging.
One solution is to use advanced analytics software that can filter through large amounts of data to identify suspicious behaviors. Advanced analytics software provides a higher level of protection against money laundering by looking at all available data and fusing and analyzing it to create actionable intelligence for investigators. Using anomaly detection, advanced analytics looks across all available data and highlights unusual relationships between accounts, customers and transactions. It identifies and alerts users to suspicious activity such as unusual funds transfers and account interaction patterns.
Derek Brown is VP/Americas for Wynyard Group, which develops financial crime analytics software. Brown has more than 20 years of experience in assisting organizations to gain business value from effective use of technology and in applying advanced crime analytics in financial services organizations and government agencies.
