Africa has earned an unfair reputation of being a haven for money laundering and terror financing activity. There’s good reason for this. Africa has traditionally lagged behind developed markets in terms of promulgating legislation to combat money laundering. And where there is legislation, enforcement is lacking – and criminals have taken advantage.
By William Lawrence, regional practice lead: fraud and financial crimes at SAS
While South Africa is somewhat more mature than the rest of the continent, compliance with anti-money laundering (AML) legislation by banks in Africa is seen as a grudge activity that does not necessarily drive revenue. And – as with most things we’re obliged to do but don’t really believe in – it’s likely that they’ve done the bare minimum in order to tick the right boxes. It’s also likely that the required people, processes and technology needed to uncover dodgy transactions have not been implemented.
Winds of change
But there’s something happening in Africa.
Banks are facing increasing pressure from two main sources to get their systems and processes in order.
In one corner, regulators are starting to take compliance seriously, as seen in the recent promulgation of a number of new laws. They, too, are under increasing pressure from global financial markets to play their part in the fight against money laundering.
In Kenya, the Proceeds of Crime and Anti-Money Laundering (Amendment) Act 2017 has just been signed into law, imposing stiff penalties on those guilty of economic crimes. In South Africa, the Financial Intelligence Centre Amendment (FICA) bill has also been promulgated, which aims to strengthen existing legislation that combats money laundering and the financing of terrorism.
Clearly, governments are starting to take a hard line approach towards economic crimes, as non-compliance could affect their ability to procure foreign loans needed for development and could also exclude them from global financial markets.
In the other corner, local banks are starting to realise that, in order to conduct business in global markets, they need to comply with anti-money laundering legislation and take measures to protect themselves. Banks in foreign markets are reluctant to sign on African financial institutions as correspondent banks because they expose themselves and their clients to unnecessary risk if the partner bank in Africa is not compliant. In fact, banks such as Deutsche Bank have terminated their correspondence relationships with banks in Africa for this very reason.
The journey to compliance starts with a single step
Banks are the first and last line of defence when it comes to identifying money laundering transactions. More and more legislation is compelling banks to implement a number of controls and processes aimed at detecting and investigating suspicious activity. These include verifying the identities of clients before setting up accounts, maintaining transaction records, reporting suspicious and unusual transactions, and formulating and implementing internal rules and training to govern all of this.
But banks do not have adequate measures in place – and the regulator is starting to impose strict penalties. Common challenges we’re seeing within the banks include those around adequately verifying customers and screening them against sanctions lists and watch-lists, monitoring suspicious transactions, and reporting transactions above a stipulated threshold.
But these are not the only reasons why fraudulent transactions are going unnoticed. Firstly, departments within banks still operate in silos, meaning the retail banking division does not know what the business banking division is doing, for example. This introduces the risk of missing direct and indirect links between a customer and another account with known links to organised crime.
Secondly, while banks may have systems in place to detect suspicious activity, these usually flag thousands of transactions a day, making it impossible for a compliance division with limited resources to investigate every alert, allowing some to slip through the cracks.
Covering all bases with advanced analytics
As soon as a transaction enters the banking system, advanced analytics becomes the bank’s best tool for identifying money laundering behaviour. Simple business rules in isolation are no longer effective; banks need more advanced analytical capabilities, such as array processing, which allows them to monitor multiple risks during a single pass of data.
This gives them the ability to process more transactions in less time, which is crucial because banks only have a short window during which to report suspicious activity to the regulator.
Advanced analytics solutions, using very specific algorithms, subject every transaction to analytical processing, checking for anomalous behaviour, screening customers against watch-lists, and building a single view of the customer, including how many direct and indirect links he or she has with other accounts in the bank.
All this happens behind the scenes without annoying customers who are conducting legitimate transactions but whose activity might be erroneously flagged as suspicious. Rather, sophisticated analytical models within modern solutions are able to drill down into thousands of transactions and only flag those with a high propensity for money laundering and/or fraud – which could be just 40 transactions out of 4 000 – with the focus on increasing the integrity of alerts, and thereby bringing the number of transactions that need to be investigated down to a more manageable figure and greatly improving detection accuracy.
The fact that there are fewer false positives also reduces AML compliance costs as investigators spend less time processing legitimate exceptions (for example, a pension fund pay-out) and more time focusing on high-risk events.
With advanced analytics, banks can take a risk-based approach to monitoring transactions for illicit activity using a combination of segmentation, behavioural and peer-based analytics techniques that lead to improved detection accuracy. With multiple detection methods and faster processing, banks can monitor more risks in large data volumes in minutes. Not only does this enable them to comply with AML regulations but also helps them to avoid penalties and reputational damage associated with non-compliance.
The perception that Africa is the ideal destination to launder money is slowly changing. Legislation, a commitment by banks, and the right technology represent the trifecta that will allow us to collectively start addressing the requirements and move towards becoming a world-class compliance environment.