March 27, 2007

By Nathan Conz, Insurance & Technology

Anti-money laundering (AML) compliance has been a high priority for insurance carriers and other financial services institutions since 9/11 and the subsequent Patriot Act, which placed a regulatory focus on money laundering and terrorist financing. As a result, significant AML investments have been made in recent years. Still, a recent survey suggests that companies have set AML benchmarks that they have yet to meet.

A survey of banking, brokerage and insurance executives conducted by audit, tax and advisory services firm KPMG (New York) found that 75 percent of respondents plan to either implement an automated transaction monitoring system or upgrade their current one. It's a statistic that's all the more telling when one considers that 71 percent of those same respondents said their financial institutions already had automated systems to help monitor transactions and identify potentially suspicious activity."This is still a very big focus for institutions even now, many years after the regulations have been in place," says Darren Donovan, a principal and forensic services leader for the banking and finance sector at KPMG. "You always look for something to plateau, and we haven't seen that yet."

Insurers are vulnerable to money laundering in much the same way as other financial institutions - when strong monitoring controls aren't in place. Specifically, carriers need to be aware of clients who are putting money into a product and then quickly turning it over. "Insurers need to make an inventory of their products and services where they could be vulnerable to those turnaround or u-turn transactions," Donovan says.

Implementation of monitoring technology has become a "de facto requirement" in the realm of AML compliance. Donovan says. "It's hard to for a company to convince a regulator that it could reasonably do an effective job of monitoring without such tools," he explains.

Data feed gaps, where certain lines of business or geographic areas don't show up in the monitoring system, are a potential pitfall for AML software. "Sometimes this happens because of acquisitions or legacy systems. The work isn't done to tie them to the monitoring system," Donovan says.

Regardless of how well AML technology performs, a key to AML compliance is in the workforce. In fact, Donovan is careful when referring to AML compliance products as solutions. The products are tools that help real people identify unusual and suspicious activities and decide when to file a suspicious activities report (SAR).

"Everything about monitoring really comes down to KYC, Knowing Your Customer, and really understanding the risks of your business. That allows you to have the right rules and scenarios in place [within the AML technology]," notes Donovan.

KPMG issued its survey at the Florida International Bankers Association AML Conference in Miami, which drew a mix of executives from U.S., Latin American and Caribbean institutions. The survey also found that a majority of respondents plan to increase spending on their automated transaction monitoring system over the next 12 months.

Interest in AML technology has not waned, Donovan says, because of the regulatory momentum behind anti-money laundering compliance. There's great awareness within financial services regarding AML and a culture around enforcement, he says, due in large part to the events of September 11 and the Riggs Bank controversy.

"There was a big, hopefully once-in-a-lifetime event in 9/11, and then on top of that there was a regulatory kick-in. It created this momentum that has built a really big infrastructure and culture around AML," Donovan says. "It's rare to get that critical mass on any sort of regulatory issue, but it does happen and it certainly did happen around AML and terrorist financing."