The fight against financial terrorism requires all the tools in the box

By Said Patel, Group Director at Eastnets, the compliance, payment and anti-fraud experts, explains how to protect against terrorist financing in 2022

Meeting the requirements of ever-changing anti-money laundering (AML) and anti-terrorist financing (CTF) laws, regulations and guidelines is no small feat. The depth and breadth of requirements from such a range of organizations can be daunting to even the most seasoned industry experts.

The first place they might look when it comes to anti-money laundering is the sanctions and politically exposed persons lists, to make sure the latest regulatory requirements are incorporated into the financial institution‘s watch lists. .

There is a wide range of international and domestic regulations to follow, including the United Nations Sanctions List, the United States OFAC Consolidated Sanctions List, the United States OFAC SDN List, the EU Financial Sanctions List, UK Government Sanctions List and Monetary Sanctions Authority of Singapore. Listing.

Other notable AML guidelines include standards developed by the Financial Action Task Force (FATF), the intergovernmental organization created to stop money laundering and terrorist financing. It aligns standards across the 36 Member States by regularly issuing guidance to financial authorities.

There are 40 FATF Recommendations on AML and CFT. This provides a comprehensive set of countermeasures covering the criminal justice system, law enforcement, financial system, regulation, and international cooperation. These have been endorsed and adopted by individual countries, regional and international bodies.

Among the FATF recommendations, FATF 10 stands out for its requirements for customer due diligence measures prohibiting financial institutions from trading with anonymous or fictitious accounts. Another important recommendation is FATF 16, known as the travel rule, it requires countries to collect identifying information from originators and recipients of domestic and cross-border wire transfers. The objective is to improve the traceability of transactions.

Added to this are the UN resolutions, the USA Patriot Act and the EU 6e Anti-Money Laundering Directive. The latter introduces the harmonization of AML/CFT rules in EU Member States, creating a new Anti-Money Laundering Authority (AMLA) to combat money laundering and promote cooperation.

Despite the complexity and plethora of different regulations, it is crucial to ensure that financial institutions follow the rules. Their integrity and reputation, as well as that of the markets in which they operate, are at stake.

Financial institutions should ensure that they invest in appropriate systems and controls to detect and report suspicious activity. This means that nothing can be left to chance. New, advanced financial crime risk management solutions are needed to address the dynamic evolution and increasing complexity of watchlists, AML rules, SAR and STR reporting requirements.

A technological solution

The question is, what should financial institutions be looking for in their attempt to stay compliant? The answer is to understand the important elements of the rules and then ensure that the systems are fully up to date and fully aware of the regulatory requirements.

In the case of AML and CTF, the key elements are the watchlists that underpin the compliance verification systems. They include details of every organization or person subject to sanction against them, including those on the Politically Exposed Persons (PEP) list.

Most manual watchlist updates occur once a day, leaving financial institutions exposed to breaches between the time an entity is placed on a watchlist and the time it begins screening. There must be instant compliance to avoid violations and fines.

This can be achieved with real-time updates based on the blockchain. As soon as a country, individual or entity is added or removed from a watch list, updates are transmitted securely to AML systems. This means that shielding solutions are always up to date, guaranteeing the highest level of protection.

But that’s only half the job. The other puts watchlists into action. Screening and monitoring software should utilize up-to-date watch lists by detecting potential criminal behavior in real-time or in batch mode.

It must be able to monitor all transactions for AML including verification of all financial traffic including different message types such as SWIFT ISO 20022, SEPA, ACH, Target RTGS and Ripple. It should be able to quickly and comprehensively filter everything from huge databases to names, files and messages against an unlimited number of sophisticated lists and rules.

Of course, this can create a huge amount of “noise” and potentially problematic transactions, which could be false positives. There must be a mechanism to monitor them and take automatic action based on the rules established by the financial institution.

As the process continues, systems should learn from previous decisions and automatically replay them on future detections, reducing false positives and the time and effort required to clear detections. Of course, there must also be reporting and auditing functions so that regulators can see how decisions have been made and what actions have been taken.

By following this model where watchlists are always 100% up-to-date and then efficiently actioned using advanced software capable of making the right decisions, financial institutions stand a chance of coping with the enormous pressure exerted on them by the LBC and the CFT.

And one thing is certain. The landscape will only be more complex, transactions harder to detect and financial criminals more determined. In this context, the fight against financial criminals and terrorism requires all the tools in the box.

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