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OFAC Name Matching and False-Positive …

Cognizant 20-20 Insights OFAC name Matching and False-Positive reduction Techniques To meet Office of Foreign Assets Control rules for combating money laundering, financial institutions need to take stock of new software tools that automate the process of identifying possible illegal activities and reduce the probability of unwarranted red flags. Executive Summary Financial institutions typically spend more time, money and resources investigating false Complying with Office of Foreign Assets Control positives as transaction volume and money (OFAC) regulations1 and transaction filtering are transfer activity increases. This can be reduced by key requirements for all financial and nonfinan- improving their OFAC compliance processes and cial institutions. Financial institutions are the implementing new software with sophisticated primary medium for money laundering and they time-saving Matching algorithms that recognizes are typically more vulnerable compared with different variants or misspellings of names and other thus reduces the number of false positives to a As such, financial organizations are working to minimum.

OFAC Name Matching and False-Positive Reduction Techniques. To meet Office of Foreign Assets Control rules for combating money laundering, financial institutions need to take stock of new software

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Transcription of OFAC Name Matching and False-Positive …

1 Cognizant 20-20 Insights OFAC name Matching and False-Positive reduction Techniques To meet Office of Foreign Assets Control rules for combating money laundering, financial institutions need to take stock of new software tools that automate the process of identifying possible illegal activities and reduce the probability of unwarranted red flags. Executive Summary Financial institutions typically spend more time, money and resources investigating false Complying with Office of Foreign Assets Control positives as transaction volume and money (OFAC) regulations1 and transaction filtering are transfer activity increases. This can be reduced by key requirements for all financial and nonfinan- improving their OFAC compliance processes and cial institutions. Financial institutions are the implementing new software with sophisticated primary medium for money laundering and they time-saving Matching algorithms that recognizes are typically more vulnerable compared with different variants or misspellings of names and other thus reduces the number of false positives to a As such, financial organizations are working to minimum.

2 Other approaches include intelligent ensure that their payment networks and money automation workflows, robust management transfer solutions are not used inappropriately by and audit controls, implementing industry best the customers listed on the Specially Designated practices and gaining the technical ability to Nationals (SDN)3 list. However, legitimate trans- analyze past sanctions screening results. actions sometimes are flagged as problematic This white paper offers advice on unique strategies for false hits (also known as false positives ). to reduce the False-Positive rate, including name - during the transaction review process. Screening Matching techniques and critical mitigation steps. transactions and clients for possible sanction violations is an essential component of an Anti-Money-Laundering Regulatory effective compliance program.

3 Requirements and Their Expansions It is a real challenge to identify and block The fight over money laundering started in 1970. suspicious transactions while processing higher through the Bank Secrecy Act (BSA).4 Since then, volumes of legitimate straight-through trans- many additional regulations have been enacted actions with greater accuracy and maintaining to provide law enforcement and government operational efficiency and client service level agencies with the most effective tools to combat agreements (SLAs). money laundering (see Figure 1). Post 9/11, cognizant 20-20 insights | july 2014. A Chronology of AML Activities Definition or Year Law or Group Content or Important Releases Responsibilities The primary anti-mon- Requires banks to track cash transactions, ey-laundering regulatory file CTRs for transactions of $10,000 or Bank Secrecy statute, enacted in 1970 greater and report suspicious activity and 1970.

4 Act and most notably amended to keep records of various financial transac- by the USA PATRIOT Act in tions. 2001. Established by the central Customer Due Diligence for Banks paper bank governors of the G10. (2001). Sharing of financial records between Basel Promotes sound supervisory jurisdictions in connection with the fight Committee on standards worldwide. against terrorist financing (2002). 1974. Banking Super- General Guide to Account Opening and vision Customer Identification (2003). Consolidated KYC Risk Management paper (2004). Money The first law in the world to This act criminalized the act of money make money laundering a laundering, prohibited structuring to avoid 1986 Laundering crime. CTR filings and introduced criminal and civil Control Act forfeiture for BSA violations.

5 An intergovernmental body Comprises 40 recommendations on with 34 member countries money laundering and terrorist financing and two international (see Figure 2). Financial Action 1989 organizations established by Task Force the G7 to develop policies to combat money laundering and terrorism funding. The EU directives on anti- 1st EU Directive on Prevention of the Use money-laundering require of the Financial System for the Purpose of EU member states to issue Money Laundering (1991). 1991 European Union legislation to prevent their 2nd Directive (2001). domestic financial systems 3rd Directive (2005). from being used for money laundering. Enacted on October 26, This piece of legislation significantly upped USA PATRIOT 2001, it brought more than the ante and the regulatory burden on 2001.

6 Act5 50 amendments to the Bank institutions, and has served as a driver of Secrecy Act. AML regulation in other countries. Association of 11 global Wolfsberg Anti-Money-Laundering Principles banks. Aims to develop for Private Banking (2012). standards on money The Suppression of the Financing of 2002 Wolfsberg Group laundering controls for Terrorism Guidelines (2002). banks. Anti-Money-Laundering Principles for Cor- respondent Banking (2014). Informal networking group Statement of Purpose (2004). of financial intelligence Principles for Information Exchange units. Between Financial Intelligence Units for 2004 Egmont Group Money Laundering Cases (2013). Best Practices for the Exchange of Informa- tion Between Financial Intelligence Units (2004). Figure 1. cognizant 20-20 insights 2.

7 FATF 40 Recommendations A. Legal Systems Recommendations 1, 2 - Scope of the criminal offense of money laundering. Recommendation 3 - Provisional measures and confiscation. B. Measures to Be Taken to Prevent Money Laundering and Terrorist Financing Recommendation 4 - Financial institution secrecy laws. Recommendations 5-12 - Customer due diligence and record-keeping. Recommendations 13-16 - Reporting of suspicious transactions and compliance. Recommendations 17-20 - Other measures to deter money laundering and terrorist financing. Recommendations 21-22 - Preventive measures to the countries that do not or insufficiently comply with the FATF recommendations. Recommendations 23-25 - Regulation and supervision. C. Necessary Measures in Systems for Combating Money Laundering and Terrorist Financing Recommendations 26-32 - Competent authorities, their powers and resources.

8 Recommendations 33-34 - Transparency of legal persons and arrangements. D. International Cooperation Recommendation 35 - International instruments. Recommendations 36-39 - Mutual legal assistance and extradition. Recommendation 40 - Other forms of cooperation. Figure 2. Congress passed the USA PATRIOT Act, which Watch-list filtering. dramatically expanded the security require- ments to implement comprehensive customer Record-keeping. due diligence (CDD)6 policies, procedures and Customer behavior. processes for all customers, and enhanced due Watch-List Filtering diligence7 (EDD) for high risk customers who pose a higher risk for money laundering and terrorist Watch-list filtering solutions help financial insti- financing. For example, politically exposed tutions keep ahead of regulatory changes and persons (PEPs)8 are considered high risks and eliminate the risk of fines and reputational require enhanced due diligence, predominantly exposure.

9 They filter transactions and customers while using private banking services. This act also against sanctions. The Treasury Department, provided a platform for other AML-related regula- State Department and Commerce Department tions and requirements to be enforced. each maintains lists of companies and people that all citizens and companies are forbidden to Key Elements of AML Solutions do business with. The watch lists are frequently updated and contain thousands of names, Financial institutions are required to put enhanced hundreds of which are located in the United AML capabilities in place. Banks require AML. States. Business relationships with entities on environments that can be reasonably expected to these watch lists can result in extremely large detect, deter and report suspicious activity.

10 Key fines and other penalties, including loss of export elements of AML solutions include: privileges or imprisonment. Know your customer (KYC). Watch-list filtering was designed to detect Customer due diligence (CDD). matches against each part of the name . The Suspicious activity monitoring. screening criteria used by banks to identify name variations and misspellings must be based on the Case management services. level of OFAC risk associated with the particular cognizant 20-20 insights 3. product or type of transaction. For example, in Business-specific sanction list ( , trade-spe- a high-risk area with a high volume of transac- cific caution list of exporters). tions, the bank's software should be able to flag close name derivations for review. The specially Internal lists: Banks generate this list for high-risk customers.


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