By Donald Fenton
As banks in Europe play catch-up adapting to new global banking rules (Banking and Nothingness: Europe's dithering banks are losing ground to their decisive American rivals, The Economist, October 17, 2015) banks in America have embraced one company's declared war on fraud, money laundering and terrorist financing led by a former RCMP commander in the battle against an estimated $300 billion annual loss to crime.
Penalties for failing to detect and report fraud are substantial and can run into the hundreds of millions of dollars and cripple a financial institution commented Bernard Beck, senior vice president and chief compliance officer at AscendantFX, a foreign exchange company with 2,500 bank clients.
Mr Beck, a former commander in the RCMP's commercial crime unit, said the level of protection his company offers helps to manage both reputation and assets.
With 30 years of experience in legal and regulatory compliance overseeing financial propriety, he is responsible for ensuring that AscendantFX www.AscendantFX.com the company and its employees meet and exceed the industry's legal and compliance requirements in every jurisdiction of operation.
Until his departure in December 2009 as SVP, Chief Compliance Officer at Custom House Ltd (Western Union Business Solutions) a high growth company that specialized in foreign exchange hedging and commercial payments, Beck directed a team of compliance professionals, business risk consultants and legal experts in the development and maintenance of processes and systems to manage business risk and for legal compliance globally.
Experience in Great Britain, EU, Asia Pacific and North America
By overcoming barriers to entry, he guided the company through stringent regulatory and financial services licensing requirements in Great Britain, Europe, Asia Pacific and North America. The compliance and risk programs contributed substantially to the success and growth of the company and its sale to Western Union for $370m.
Mr Beck says the forces against financial crime are formidable and offers this overview of financial crime legislation.
The Office of Foreign Assets Control (OFAC) of the US Department of the Treasury administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States.
OFAC acts under Presidential national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze assets under US jurisdiction. Many of the sanctions are based on United Nations and other international mandates, are multilateral in scope, and involve close cooperation with allied governments.
The Financial Crimes Enforcement Network (FinCEN) is part of the United States Department of the Treasury. FinCEN's mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities. FinCEN monitors depository institutions, money services businesses, securities and futures firms, insurance companies, casinos and card clubs and other types of financial institutions.
The Currency and Foreign Transactions Reporting Act of 1970 (the legislative framework is commonly referred to as the "Bank Secrecy Act" or "BSA") requires U.S. financial institutions to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. It was passed by the Congress of the United States in 1970. The BSA is sometimes referred to as an "anti-money laundering" law ("AML") or jointly as "BSA/AML." Several AML acts, including provisions in Title III of the USA PATRIOT Act of 2001, have been enacted up to the present to amend the BSA.
Examples of massive fines
Mr Beck noted a few examples of massive fines.
Legal documents show that JP Morgan was fined $1.7 billion for failure to file suspicious-activity reports on transactions arising from the Bernie Madoff investment scheme. HSBC was fined $500-million for failing to detect and report money-laundering activity. And one small regional bank in West Virginia, with only $94 million in assets, had to pay a $4.5-million penalty for failure to detect suspicious activity involving $9.2 million.
While fines are expensive, Beck said, smaller banks often look at a complete security and compliance regime as too expensive. Ascendant FX has the ability when customers are trading on their systems and AFX is facilitating their foreign exchange or making payments around the world to track the activity and detect fraud, money laundering and terrorist funding.
A provider of worldwide payment solutions, AFX recently enhanced the security features available on its online payment platform, AFXOnline, by supporting security tokens for multi-factor authentication.
Security tokens are used to prove an individual's identity electronically and multi-factor authentication provides the highest levels of security against fraud. Along with the employee's user identification and password, clients now have the option to require their employees to insert their personal security token into their computer before being able to login to AFXOnline.
Authentication methodology that is easy to use
AscendantFX has developed an authentication methodology that is easy to use and has security functionality with a unique USB device offering one-touch, strong authentication that supports multiple authentication protocols for all devices and platforms and the multi-factor authentication can be activated on a per client basis.
The main benefits of AFX's fraud detection and prevention features include no need for drivers or client software and middleware that employs native drivers and support built into the browser. There is no installation, no configuration and no certificate authority needed and open source reference software is available for integrations.
AFX's solution is highly scalable while protecting the client's privacy and generates a new set of encryption keys for every service. The keys are only stored on the specific service being accessed such that no secrets are shared among service providers and any number of services are supported.
Bank clients report a great user experience and like the fact that all it takes to register and authenticate is a simple touch of a button. Authentication can be owned and controlled by AFX clients who connect directly to a service provider without a third-party software or provider.
The enhanced international payment platform delivers compliance with trend-based transaction monitoring using risk analytics software.
Financial institutions are responsible for developing policies and procedures to combat money laundering and other financial crimes, including being aware of the methods by which these crimes are carried out. This is a difficult task as criminals continually adapt to new and changing regulatory protocols.
Failure to have an adequate compliance program increases operational, reputational and financial risks and can result in regulatory penalties, forced operational changes, lost revenue streams or frozen assets, and negative publicity.
AscendantFX has incorporated risk analytics software to enhance client compliance services and to add additional screening to help financial institution clients identify risks that may not be easily identifiable with their present tools.
AFX complements existing anti-money laundering and fraud prevention expertise and helps detect and prevent fraud, increasing the ability to identity unusual or suspicious activity in the customer base with flexibility and the highest levels of security and privacy.
The company supports front end OFAC validation and helps financial institutions with regulatory requirements by providing them with the tools needed to be compliant with the Bank Secrecy Act and Anti-Money Laundering global regulations.
Examples of financial crimes detected
Mr Beck summarized financial crimes that he has seen on his watch.
Money laundering transforms illegally obtained cash into legitimate funds. A worldwide problem, worth an estimated $300 billion annually in the United States. Criminals deposit funds in financial institutions or convert cash into negotiable instruments. The federal Bank Secrecy Act requires financial institutions to report deposits of more than $10,000 in cash made by an individual in a single day. To disguise this, launderers will route cash through a "front" operation, a business such as a check-cashing service or a jewelry store or convert the cash into negotiable instruments, such as cashier's checks, money orders, or traveler's checks.
Terrorist Financing or funds for terrorist activity is raised from legitimate sources, such as personal donations, profits from businesses and charitable organizations, and criminal sources, the drug trade, the smuggling of weapons and other goods, fraud, kidnapping, extortion and even the recent sale of archeological treasures. Terrorists use techniques like those of money launderers to evade authorities' attention and to protect the identity of their sponsors and of the ultimate beneficiaries of the funds. However, financial transactions associated with terrorist financing tend to be in smaller amounts than is the case with money laundering, and when terrorists raise funds from legitimate sources, the detection and tracking of these funds becomes more difficult. To move their funds, terrorists use the formal banking system, informal value-transfer systems, Hawalas and Hundis and, the oldest method of asset-transfer, the physical transportation of cash, gold and other valuables through smuggling routes.
Fraud by beneficial owners refers to illegal gains made by the true owner of an entity, asset, or transaction as opposed to any stated ownership provided in documents or oral representations. The beneficial owner is the one that receives or has the right to receive proceeds or other advantages as a result of the ownership. It is common practice in offshore financial secrecy jurisdictions to interpose entities, individuals, or both as stated owners. The beneficial or true owner is contractually acknowledged in side agreements, statements or by other devises.
Phishing is when internet fraudsters impersonate a business to trick you into giving out your personal information, it's called phishing. They use reply to email, text, or pop-up messages that ask for your personal or financial information. Here are three examples: (1) we suspect an unauthorized transaction on your account. To ensure that your account is not compromised, please click the link below and confirm your identity. (2) During our regular verification of accounts, we couldn't verify your information. Please click here to update and verify your information, (3) our records indicate that your account was overcharged. You must call us within 7 days to receive your refund. Often you are asked to click on links within. Don't – even if the message seems to be from an organization you trust. It isn't. Legitimate businesses don't ask you to send sensitive information through insecure channels.
Advanced fee schemes fraud gets its name from the fact that an investor is asked to pay a fee up front or in advance of receiving any proceeds, money, stock or warrants in order for the deal to go through. The fee may be in the form of a commission, regulatory fee or tax, or some other incidental expense. These secondary "advance fee" schemes work very similarly to boiler room operations, the difference being that an advance fee scheme generally targets investors who already purchased underperforming securities, perhaps through an affiliated boiler room, offering to arrange a lucrative sale of those securities, but first requiring the payment of an "advance fee." Characteristic of some advance fee fraud solicitations and other fraudulent schemes to deceive and defraud unwary investors is the use of websites and e-mail addresses ending in ".us" or ".org" and containing ".gov" as part of the domain address.
AFXOnline has always OFAC scanned its transactions, but by giving financial institutions the value added ability of OFAC scanning on one system, simplifies the process, lowers processing costs and increases the value of compliance reports.
To build market share, financial institutions must balance attracting new clients with comprehensive BSA/AML compliance. Losing clients to the competition because they are not offering a complete range of products can seriously affect the bottom line of any financial institution. AscendantFX helps financial institutions build fences around their clients and keep their full wallet share.
AFXOnline offers regulatory compliance features that include mitigation of risk exposure with enhanced due diligence data, the ability to generate compliance reports on all transactions including case management reporting.
The system controls regulatory costs, supports critical compliance requirements and delivers fast screening with access to the most robust global watch lists enabling banks to fight money laundering and terrorism financing while protecting their reputation and bottom line.