The brokerage industry will spend almost $700 million in the next three years on anti-money-laundering technologies, according to a recent report by Massachusetts-based consultants, TowerGroup.
The 2001 USA Patriot Act requires financial institutions to establish anti-money laundering programs. These programs must include, at a minimum, development of internal procedures, policies and controls; establishing a compliance officer; conducting ongoing employee training; and instituting program testing by independent auditors.
Robert Iati, research director, Securities and Capital Markets, TowerGroup, outlines what brokers must do to meet the Patriot Act requirements. These actions involve establishing customer-identification programs that include record keeping, behavior-detection procedures to monitor unusual investment activity, and suspicious-activity reporting.
"The process is challenging because AML activity means that people are intentionally being evasive and tricky. They're trying everything they can to get around every initiative that you have," he says, adding that a money launderer is constantly morphing behavior in order to remain undetected.
Top-tier brokerage firms, such as Morgan Stanley, Merrill Lynch and Salomon Smith Barney, will take a lead in ensuring their own AML-compliance, Iati says.
Complex solutions include technology systems that offer artificial intelligence, he says, using rules-based analysis, such as Mantas or Searchspace. For example, if an investor suddenly changes investing behavior, and that investor uses a bank that has been known to transact terrorist funds, the technology would post an alert for the situation to be investigated. Iati notes that rules can often be modified and customized within the technologies, depending on the depth of investigation needed, and the amount of money that a broker is willing to invest.
Smaller firms with tighter technology budgets may not be purchasing specific AML technologies, but instead, are improving their data systems to get a more accurate picture of whom their investors are, Iati says. "If you're looking for intricate patterns in the way people trade, especially people that are trying to be evasive, the data must be accurate," he explains. "If it isn't, then you cannot determine as readily if a person is in violation because they cannot be adequately identified and you can't attach all transactions to that person."
Iati says that many vendors are getting involved in the AML-compliance marketplace, since almost every broker is allotting at least some level of their technology budget to ensuring compliance. These vendors include customer-relationship-management providers, transaction-data vendors and compliance companies.
While solutions average between $5 million and $10 million, with top-tier firms paying up to $30 million, Iati says that AML technologies are a worthwhile investment in order to avoid repercussions of non-compliance. Beyond the possibility of fines reaching up to $1 million, he explains that non-compliance is more dangerous to a broker's public reputation.
"Firms need to make sure to give the impression that they are making this a top-priority and might even be overspending to make sure that they're not cited as someone that is behind the curve," he says. "One article will cost them millions of dollars in losses and could be prevented by investing in a system that really worked."