Fiserv’s Fraud and Compliance Best Practice Community
Check Kiting: Is Your Institution Still at
Risk?
pg 4 Housing Crisis: Great for Real Estate
Launderers and Fraudsters pg 14 Vol 2 No. 3
NetPractice Exchange Jan/Feb 09
Jan/Feb 09
Volpg2 No.13
NetPractice Exchange This newsletter is a quarterly publication by Fiserv Fraud and Compliance for NetPractice members and others interested in NetPractice or Fiserv Fraud and Compliance in general.
NetPractice Advisory Board Not a NetPractice member yet? NetPractice is an online Fiserv Fraud and Compliance user community that develops, delivers and supports innovative services and resources that helps its members improve the way they control the risks associated with financial crime management and compliance initiatives. To become a member, please visit our online community portal at www.netpractice.org.
Florisela Bentoera, CAMS, Manager Compliance and AML Operations, RBTT Dutch Caribbean, Curacao, Netherlands Antilles Deborah King, CAMS, VP Director AML Investigations, Citizens Financial Group, Medfort, MA, USA Michiel Peeperkorn, CAMS, Compliance Officer, ING Bank, Amsterdam, Netherlands Saskia Rietbroek, CAMS, Financial Crime Advisor, Fiserv Fraud and Compliance, Miami, FL, USA (Chair) Cindy Shelton Ryan, CAMS, Compliance Officer, Bank-Fund Staff Federal Credit Union, Washington D.C., USA Aleksejs Truhans, IT Development, Parex Banka, Latvia
NetPractice Staff Director: Stanley Harmsen van der Vliet, CAMS Marketing Coordinator: Roos Goosen This newsletter is for general information purposes only. The views expressed in this newsletter are not necessarily those of Fiserv Inc. Fiserv Fraud and Compliance has taken all reasonable measures to ensure that the material contained in this newsletter is correct. However, Fiserv Fraud and Compliance offers no warranty and accepts no responsibility for the accuracy or the completeness of the material. In publishing this newsletter, neither the authors nor Fiserv Fraud and Compliance are engaged in rendering legal or other professional advice.
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Tel: +1 (917) 825 3910
info@netpractice.org www.netpractice.org © 2009 Fiserv, Inc. All Rights Reserved.
NetPractice Exchange Jan/Feb 09
Vol 2 No. 3
INSIDE Jan/Feb 09 Vol 2 No. 3
Fiserv’s Fraud and Compliance Best Practice Community
Word from the NetPractice Director .......................... 2 NetPractice Stay Up-to-Date pg 2
Stay Up-to-Date with NetPractice RSS ....................... 2 NetPractice Member List ........................................... 3 Check Kiting: Is Your Institution Still at Risk? ............. 4
Hot Docs and Downloads
Fraud and Compliance Must Converge ...................... 6 Fiserv Fraud and Compliance Product Overview......... 8
pg 10
Hot Docs and Downloads .......................................10 AML International Master Class ..............................11
Case Study: Fraud Prevention Success Story pg 12
Fraud Prevention Success Story ...............................12 Housing Crisis: Great for Real Estate Launderers and Fraudsters .......................................................14 Results Poll Question ..............................................15
Industry Thought Leadership: Housing Crisis
PAC Update ...........................................................16 Featured Functionality NetEconomy ........................16
pg 14
Financial Crime News from Around the World .........18 Calendar of Events .................................................20
Financial Crime News from Around the World pg 18
10 Reasons to Join NetPractice ...............................21
Word from the NetPractice Director Stan Harmsen van der Vliet Director NetPractice
O
ne of the benefits of being a Fiserv Fraud and Compliance Group software user is our extensive network representation of financial institutions across the U.S. and around the world. With the merger of the user communities of NetPractice and RiskXchange, we have more than doubled our membership: more than 2,000 members at more than a hundred financial institutions worldwide. (See list of member institutions on the following page.)
NetPractice Stay Up-to-Date
T
he NetPractice RSS news feeds provide a convenient way for you to receive content “feeds” from a variety of topics, including the latest news headlines from the NetPractice Web site. When you subscribe to an RSS feed, new stories and updates are automatically delivered to you the moment they
pg 2
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The combination of two user communities within the Group is a prime example of how our Fiserv 2.0 strategies come together to benefit clients from different business units. To leverage this network opportunity, RiskXchange.com, the online resource for Carreker’s risk solutions customers, is being combined with NetPractice.org, the website specifically designed for NetEconomy users and NetPractice members. The new site, providing shared value among the entire user base, will be launched soon. It will offer a range of valuable information about money laundering controls, risk management and fraud issues. Your questions and issues will be addressed by experts who know the most about the Fiserv Fraud and Compliance solution that your institution is using.
As you can see, we also have a new format for the NetPractice Exchange magazine. The new format conforms to the house style of Fiserv Fraud and Compliance. We hope it will inspire you to send us your valued contributions and input for the magazine. While the Carreker and NetPractice communities are being merged into a new online platform, NetPractice will continue to serve its members through www.netpractice.org. NetPractice together with its members and committees will continue to lead the effort to deliver value in the crucial realm of enterprise risk management.
Stay Up-to-Date with the NetPractice RSS News Feeder are published. RSS (Really Simple Syndication) is a quick, easy and lightweight format for monitoring new content added to our site and is a great supplemental communication method that gives you access to any kind of updates directly into your email client such as Outlook® or Lotus Notes®. Getting Started You can simply start by subscribing to our service by visiting the RSS
web page www.netpractice.org/ memberarea/rss.aspx. Click on the subscribe option and check your email client for any updates on our Web site. For more information or instructions on how to install the RSS news feeds, please watch the tutorial video on the “New Members Start Here” page on the NetPractice Web site (www.netpractice.org/ New-Members-Start-Here.aspx).
NetPractice Member List
Americas United States of America » 1st Bank Oklahoma » 1st CU of Gainesville » Athol-Clinton Co-operative Bank » Bank-Fund » Barre Savings Bank » Beverly Cooperative Bank » Calyon Financial Inc. » Central Bank » Chicopee Savings Bank » China Trust USA » Citizens Bank » Collins Community Credit Union » First Citizens Federal Credit Union » First Federal Savings Bank of Iowa » First Federal Savings Bank » First National Bank of Omaha » First Personal Bank » Florida State University CU » GCF Bank » Greenfield Savings Bank » Hancock Bank » Higher One » Home Savings Bank » Huntingdon Savings Bank » InsurBanc » Investment Savings Bank » Manasquan Savings Bank » Medina Savings and Loan Association » Merchants Bank » Metropolitan National Bank » Miami Savings Bank » Millbury Federal Credit Union » NBT Bancorp » NetSpend » NewAlliance Bank » Newton Federal Bank » North Akron Savings Bank » North Shore Bank » Panther Community Bank » Platinum Community Bank » QCR Holdings Inc. » Reliance Savings Bank » Savings Bank of Hegewisch » Security Savings Bank » Stephens Federal Bank
Meet and network with your fellow NetPractice members. Visit www.netpractice.org to see the full member directory: thousands of people worldwide! » Sunset Bank and Savings » Sunshine State Federal Savings » Texas Capital Bank » The Pittsfield Cooperative Bank » Union Building and Loan Savings Bank » United Roosevelt Savings Bank Canada » Sun Life Jamaica » First Caribbean International Bank
Malta » Bank of Valletta Netherlands » Credit Europe Bank » Friesland Bank » ING Group » Triodos Bank » Van Lanschot Bankiers Portugal » Banco BPI
Suriname » DSB Bank
Sweden » SEB Group » Lansforsakringar AB
Trinidad and Tobago » First Citizens Bank » RBTT Bank
Switzerland » Amas Bank
Europe Andorra » Banca More
United Kingdom » Abbey » Adam and Company » Close Private Bank » Nationwide Building Society » Saffron Walden Herts and Essex
Belgium » Dexia Group Cyprus » Bank of Cyprus » Emporiki Bank » Hellenic Bank » Laiki Group » Universal Bank France » AXA Banque » Banque AGF Guernsey » Credit Suisse Trust Ireland » Bank of Ireland
Asia India » Bank of Baroda Kuwait » Kuwait Finance House Oman » Bank Muscat Philippines » Bank of The Philippines Islands United Arab Emirates » Abu Dabi Commercial Bank » Emirates National Bank
Latvia » Parex Banka » Rietumu Banka
Africa Mauritius » The Mauritius Commercial Bank
Luxembourg » RBC Dexia
Morocco » Credit Immobilier et Hotelier
Vol 2 No. 3
NetPractice Exchange Jan/Feb 09
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Check Kiting:
Is Your Institution Still at Risk? By Saskia Rietbroek, CAMS
C
heck kiting is the most common form of check fraud and it’s possible that you may encounter it at your financial institution. In the Commercial Bank Examination Manual, the U.S. Federal Reserve states that kiting occurs when a person takes advantage of the “float time,” or the time it takes one institution to collect payment from another. Basically, a person who has two or more accounts writes checks between the accounts knowing that there are insufficient funds to cover those transactions. Although writing checks against insufficient funds is in itself a crime, it takes a series of such transactions before it is considered a check kiting scheme. Many thought that after the passing of Check 21, or the Check Clearing for the 21st Century Act, that check kiting would become a distant memory. This law allowed for checks to be cleared faster by allowing institutions to clear
substitute checks electronically, which in theory drastically reduces the float time of the check. However, many banks are not Check 21 ready. And financial institutions in the effort to become more competitive are offering their customers shorter clearing periods on credit, as well as offering branches in different markets, which makes kiting harder to detect. Regulation Weakens Institutions’ Defenses In addition, another regulation that institutions must comply with can also put them at risk for kiting. According to the Federal Reserve, “The requirements of Regulation CC, Availability of Funds and Collection of Checks, increased the risk of check kiting, and should be addressed in a bank’s policies and procedures.” Regulation CC mandates the length of time that banks are allowed to hold checks before making those funds available to their customers.
For example, checks drawn on an account held by your institution and deposited in person must be made available by the next business day. On the other hand, if a check is from another institution not in your check processing region, this check must be made available by the fifth business day after the deposit was made. It is this type of situation that a kiter can take advantage of, which is why they often deposit out-of-state checks. Not Worth the Risk Several cases this year saw banks losing millions of dollars due to this type of scheme. In one instance, an Ohio-based bank suffered a loss of more than US$4,000,000. The defendant named in the case allegedly made use of three levels of banks accounts. The first level consisted of 15 accounts in the name of restaurants. Every day the balances in these accounts would be transferred to the next level of ›› continued
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Check Kiting: Is Your Institution Still at Risk? ›› continued two “disbursement accounts,” then the balances in these two accounts would be transferred to the third level of accounts. The defendant in the case fraudulently wrote checks between the three levels of accounts, which caused the balances to become inflated. Unfortunately, the bank gave the defendant instant credit on the transactions. In the end, the defendant wrote more than 44,000 checks totaling $824 million dollars in order to continue the check kiting scheme. Detection and Prevention It is important to implement proper check kiting prevention and detection systems. Proper training of your staff is very important. Your tellers and frontline employees in particular need to be well versed in Regulation CC time limits. For many institutions, a transaction monitoring system finetuned to detect suspicious behavior is instrumental in detecting check kiting. It is a good idea to watch out for the following warning signs: • Signature and payee are the same • Changes to the amounts that are normally deposited • Checks are drawn on other banks and signed by the same depositor • Checks are deposited regularly and signed by the same maker • Customer makes frequent inquires about his or her balance or other account activity • Deposits are always made in the early morning or late afternoon
• Business is in a deteriorating financial condition • Accounts have a high average daily deposit relative to the ledger balance • Place of business or residence is inconveniently located in relation to a regularly used branch or branches • Wide and sudden fluctuations in account balances • Escalating balances
A kiting scheme can be extremely costly to a financial
trip to Spain and for the purchase of furniture, a car, and even a forklift. Such actions should raise a red flag to bank officials, because individuals rarely make checks out to themselves when making purchases – they write checks payable to the merchant. Despite technological advances and Check 21 check kiting is still on the rise. According to the January 2008 Suspicious Activity Report (SAR) released by the U.S. Financial Crimes Enforcement Network, kiting-related SARs are up by 58 percent from the preceding year. A kiting scheme can be extremely costly to a financial institution if it is not caught early. An institution cannot afford to be a victim of this crime, and should take early warning signs seriously.
institution if it is not caught early. The first kiting signal, when signature and payee are the same, is an indicator most often associated with cases involving a fraudster working alone. These people often use two or more types of accounts – for example, personal, custodial or business – and kite among them. In addition, to avoid suspicion, the fraudster may make a memo entry at the bottom of checks to provide justification for the increasingly large amounts of the checks. According to a report of the FBI, one kiter wrote checks to himself with memo entries for a
Saskia Rietbroek is Financial Crime Advisor at Fiserv Fraud and Compliance. From 2001-2005, she was the founding Executive Director of the Association of Certified Anti-Money Laundering Specialists (ACAMS). She is Partner of AML Services International (www.nomoneylaundering.com) and chairs the NetPractice Advisory Board.
Vol 2 No. 3
NetPractice Exchange Jan/Feb 09
pg 5
Industry Insight:
Fraud and Compliance Must Converge
A
ccording to Richard McCarthy, chairman of the Fiserv Fraud and Compliance Product Advisory Council, combining fraud and compliance efforts is crucial in effectively taking on the modern-day criminal. Just a few years ago, fraud and compliance departments were two worlds apart. Each served a different purpose, and each pursued a different goal. While compliance officers were driven by the fear of large fines imposed by the regulators to improve the detection of money laundering, fraud managers were tasked with the growing problem of tackling the financial losses incurred by new types of fraud, from credit cards to the Internet. All this is changing. In some cases, banks are already consolidating financial crime efforts into a single “group integrity” department that combines antimoney laundering (AML), fraud and, in certain cases, security. Additionally,
they are turning to advanced multichannel fraud and compliance detection technology to help them take on the modern-day criminal. In part, this is due to changes in the way that criminals commit financial crimes. Criminals are increasingly organized in the way they infiltrate customer accounts. They also attack across many or all payment channels, assaulting customer accounts globally. Consequently, financial institutions are accepting the fact that, to effectively combat financial crime, they need to group fraud and money laundering prevention resources together. Regulatory Backing Financial regulators are also adding their weight to these efforts to combine fraud and compliance. In a recent speech by the director of FinCEN, James Freis said, “I want to emphasize that financial institutions can benefit by leveraging their fraud resources with their AML efforts and starting to take advantage of the
significant efficiencies that I see being available through this leverage.” Freis added that financial institutions tend to associate his agency’s mission “exclusively with fighting money laundering and terrorist financing. In reality, the breadth of financial crimes and, therefore, our mission, is much broader.” The general verdict is that money laundering and fraud are often connected. Money laundering can be a malignant product of fraud, where perpetrators seek to disguise the proceeds of a financial crime by laundering it through the financial system. Yet the challenge of modernizing the way we detect and prevent fraud and money laundering will not be an easy one. Many compliance and fraud departments in banks have become entrenched in the methods they follow and in the detection tools they use. This is confirmed by Freis, who reports that “FinCEN is in ›› continued
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Fraud and Compliance Must Converge ›› continued the middle of an ongoing outreach initiative with some of the nation’s largest financial institutions in order to learn more about how their AML programs operate.“ Among the lessons learned by his agency, is that many of those programs “are run separately from the bank’s fraud detection departments.” The need for change is apparent. In a recent user survey conducted by Fiserv of its customers who use the NetEconomy product to help them in their anti-money laundering efforts, 68% of respondents stated that they plan to or already combine fraud and AML efforts. One of these customers includes NetSpend Corporation, a pioneer in the prepaid card industry. Founded nine years ago, NetSpend has become a U.S. leader, processing over $3.5 billion in card payments annually. NetSpend uses Fiserv’s NetEconomy Financial Crime Suite to detect money laundering, fraud and employee fraud. Thomas J. Firnhaber, director of compliance at NetSpend reports, “we are extremely pleased with the results of this implementation, as well as our ability to use one integrated solution across three crime areas.”
Money Matters For many industry experts, this convergence will not come as a surprise. Gartner Research, a leading information technology research and advisory company, reported last year that compliance and fraud mitigation needs are driving increased interest among large banks in securing enterprise-wide financial crime management solutions. Celent, a research and consulting firm focused on information technology in the global financial services industry, also recognizes this market demand and has given presentations on the subject of fraud and compliance convergence. Celent outlines some of the reasoning behind using a general detection platform for AML and fraud (see box, below). Both involve the monitoring of transactions and both share similar functional needs, including the generation of alerts and support for strong case management. A consequence of this is that an increasing number of vendors are
offering financial crime suites, and financial organizations appear to be increasingly selecting them to simplify their systems and improve their total cost of ownership. However, fraud, like AML, has its own particular needs. The demand for real-time monitoring is greater in fraud, and the volumes of data to be analyzed are also often greater. Combining fraud and compliance will therefore not be easy, and for this reason, many financial institutions are turning to the external experts, including the financial crime vendors. Fiserv, for one, has carried out an increasing number of projects of this nature. The lessons learned indicate that, with the right skills set and complementary technology, large benefits similar to those reported by NetSpend can be derived. Financial institutions need to adapt their approach to fighting financial crime, by incorporating both fraud and AML compliance to see the real benefits and efficiencies of this convergence.
By implementing this platform, NetSpend has saved money and optimized processes by investing in one solution that covers both fraud and money laundering prevention. For instance, it uses the NetEconomy system to monitor transaction activity at its partners’ locations and, as a result, was able to detect instances of fraud perpetrated by employees of its partners. Through early detection of this fraud with the NetEconomy system, NetSpend was able to help its partners prevent significant losses. Vol 2 No. 3
NetPractice Exchange Jan/Feb 09
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Fiserv Fraud and Compliance
Product Overview
R
ecent rankings show Fiserv fraud and compliance solutions as superior in the marketplace. CheckFree/Carreker ranked first in the OpRisk & Compliance Survey for its anti-fraud software; NetEconomy ranked first in the anti-money laundering software category and ranked second in the anti-fraud software category, and together with CheckFree/Carreker, gathered 48 percent of the total vote. In addition, NetEconomy was ranked first by IBS Publishing as the top-selling provider of anti-money laundering solutions for 2007. Below is an overview of what we have to offer. Fraud Prevention Solutions Multi-Channel Fraud NetEconomy Fraud Manager The NetEconomy Fraud Manager provides real-time detection for various forms of fraud including
check fraud, debit card fraud, credit card fraud and identity theft. The NetEconomy Fraud Manager identifies a range of fraudulent activity across multiple channels, product lines and geographies, giving financial institutions a holistic view to effectively mitigate risk and reduce fraud losses across their organization. Once alerts on fraudulent activity have been generated, a step-bystep workflow with built-in case management drives users through investigation, case tracking and reporting within one fully integrated environment. NetEconomy Advanced Peer Group Analysis The Advanced Peer Group Analysis module profiles average behavior for certain peer groups over various time periods using advanced statistical techniques to determine when account or customer behavior significantly deviates from its peer group’s behavior. When combined
with the NetEconomy solutions, the module can further reduce alert numbers for more accurate results and less time spent on investigation and reporting. NetEconomy Case Management Case Management System tracks, prioritizes and manages suspicious cases, automates reporting, and records an audit trail with complete case history and detailed log of all actions taken and reports filed. Check Fraud Detection FraudGuard FraudGuard is designed to meet the needs of financial institutions seeking comprehensive check fraud protection in a less expensive, outof-the box solution. The solution combines the performance of five industry-leading FraudGuard solutions to improve the likelihood of detecting any alterations made to the negotiable fields on a check. ›› continued
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FFC Product Overview ›› continued This powerful combination delivers unparalleled speed in the detection of check alterations, forgeries and counterfeits, all in a single processing cycle. Key Applications:
have been generated, a step-bystep workflow with built-in case management drives users through investigation, case tracking and reporting within one fully integrated environment.
• Payee Name Verification • Signature Verification
Leverage
• Secure Marks
the combined
• Counterfeit Detection FraudLink FraudLink includes advanced software applications for bank fraud detection and risk management. Solutions include conventional check fraud detection systems, which allow financial institutions to prevent and reduce losses from check fraud, deposit fraud, electronic (ACH) fraud, and check kiting. Our solutions also address the growing concerns related to check truncation, remote deposit capture and the migration to an electronic payments processing environment. Key Applications: • ACH Fraud • Check Kiting • Counterfeit and Forged Checks • Deposits Fraud Internal Fraud Prevention NetEconomy Employee Fraud Manager The NetEconomy Employee Fraud Manager detects employee fraud through monitoring employee behavior and any links to suspicious customers that might indicate internal fraud. Once alerts on suspicious employee activity
efficiencies and power of a portfolio of top ranking solutions
Compliance Solutions Money Laundering Detection NetEconomy AML Compliance Manager The NetEconomy AML Compliance Manager is a comprehensive and award-winning anti-money laundering solution. The NetEconomy AML Compliance Manager identifies a range of money laundering and terrorist financing activities across multiple channels, product lines and geographies, giving financial institutions a holistic view to effectively mitigate risk across their organization. NetEconomy monitors financial transactions such as cash, checks, wire transfers, and alerts its users to the appearance of suspicious activity. Once alerts have been generated, a step-by-step workflow
with built-in case management drives users through investigation, case tracking and reporting within one fully integrated environment. NetEconomy Customer Due Diligence Unique features such as dynamic risk scoring help financial institutions conduct ongoing due diligence with existing customers, placing a higher importance and priority on alerts generated from high-risk accounts and customers. NetEconomy Advanced Peer Group Analysis The Advanced Peer Group Analysis module profiles average behavior for certain peer groups over various time periods using advanced statistical techniques to determine when account or customer behavior significantly deviates from its peer group’s behavior. When combined with the NetEconomy solutions, the module can further reduce alert numbers for more accurate results and less time spent on investigation and reporting. NetEconomy Automated Alert Investigation The Automated Alert Investigation (AAI) Module reduces alert investigation on manually generated alerts (SARs), focusing on only the highest risk to your financial institution. The AAI module automatically filters out false positives through a series of checks and a scoring mechanism to present users with a recommended action. The module can be used for frontline teller/branch SAR analysis as well as automated post-alert investigation and analysis. ›› continued
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NetPractice Exchange Jan/Feb 09
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FFC Product Overview ›› continued NetEconomy Reporting NetEconomy Reporting automatically generates paper or e-files for various regulatory reports, including SARs and CTRs (USA), SOCA (UK), TRACFIN (France), CFI (Belgium), GIFI (Poland) and reports for eleven other jurisdictions.
Hot Docs and Downloads
Examination Procedures on Identity Theft “Red Flags” The FDIC, a U.S. bank regulator, issued exam procedures to assist financial institutions in implementing the Identity Theft Red Flags, Address Discrepancies, and Change of Address Regulations requirements (Red Flags Rule). The regulations require financial institutions and creditors to implement a written identity theft prevention program; card issuers to assess the validity of change of address requests; and users of consumer reports to verify the identity of the subject of a consumer report should an address discrepancy arise. Compliance is required by November 1, 2008. State-chartered credit unions that fall under Federal Trade Commission rules however, were granted an extension and have until May 1, 2009 to comply. http://www.fdic.gov/news/news/ financial/2008/fil08105a.pdf
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Watch List Matching NetEconomy List Matching With the List Matching module, alerts are generated if a match is found when checking customers or transactions against a specific watch list such as SDN List (OFAC). NetEconomy automatically checks transactions of new or existing
Report on Fraud in UK Government Departments An annual report on fraud was released in October by Her Majesty’s Treasury. This document focuses on fraud within UK government departments. 761 cases of fraud or theft (down from last year) were reported by 25 different departments, with losses totaling more than 4,278,000 British pounds. The report mentions fraud types including payment fraud, GPC/credit card fraud, personnel management related fraud and theft of assets. To decrease instances of fraud, HM treasury suggests better monitoring of GPC/ credit card usage by government and staff supervisors who have key responsibilities. http://www.hm-treasury.gov.uk/d/ govt_fraudreport031008.pdf Fine Issued to Money Laundering Reporting Officer For the first time ever, the UK Financial Services Authority fined a money laundering reporting officer on October 29, 2008. Michael Wheelhouse must pay a £17,500 penalty for failing to take the steps necessary to control his firm’s money laundering risks. The firm, Sindicatum Holdings, Ltd, a corporate investment advisory firm, was also fined £49,000
customers against watch lists or exception lists as required in real time or in batch mode. For more information on these products, please contact your account manager, or visit www.fiserv.com/ fraudandcompliance.htm or www.neteconomy.com.
for the deficiencies. Wheelhouse co-founded the firm, where he also held a senior management position. Specifically, the firm and Wheelhouse did not adequately verify the identity of its clients and did not properly maintain records pertaining to customer identification. http://www.fsa.gov.uk/pubs/ final/m-wheelhouse.pdf Withdrawal of Proposed AML Rules The U.S. Financial Crimes Enforcement Network submitted a withdrawal of the proposed AML rules for unregistered investment companies, commodity trading advisors and investment advisers; it would have become effective November 4, 2008. The withdrawal is part of the agency’s attempts to increase its effectiveness and efficiency in ensuring Bank Secrecy Act compliance. The proposed rules were first issued in 2002 and 2003, yet no further action has since been taken by the agency. FinCEN stated in a press release that it would not mandate that these entities follow BSA requirements until new proposals are published and they are allowed to comment. http://edocket.access.gpo. gov/2008/pdf/E8-26204.pdf
Competencies in a Changing World of AML Prof. Dr. Eddy Vaassen RA Maastricht University The Netherlands
A
nti-money laundering (AML) has become a major issue in the corporate world and particularly in the financial services industry. The main reasons for that are the significantly enhanced general awareness that money laundering is a severe threat to our economic system and the – obviously related – expansion of AML laws and regulations. Over the past decade the role of those dealing with AML has changed consequently and has become much more senior. Their working environment is now more demanding and AML activities are more integrated in commercial processes. AML has become an area where many professional disciplines meet under the umbrella of the basic business principle of profitability. The knowledge and skills needed for the implementation and maintenance of AML concepts, policies and programs have developed rapidly. Nowadays the competence to turn concepts into action is key. It requires the ability to deal effectively with internal politics, strategic planning and external stakeholders.
Anti-Money Laundering International Master Class Enhanced AML Education To prepare AML specialists for the changing environment, their education must be updated continuously. AML education must aim to develop an attitude that enables AML specialists to face the future challenges in a conceptual and flexible, yet pragmatic way. An exam preparation program that combines an academic approach with existing AML education is one option to address this need. This concept is not new and has a proven track record in Europe regarding the education of Chartered Accountants and Chartered Controllers. Money laundering is a global issue. Combating money laundering can be effective only when the professional standards, working methods and the level of knowledge are comparable worldwide. Therefore the Association of Certified Anti-Money Laundering Specialists (ACAMS) and the Maastricht University Business School (UMBS) are organizing the Master class Anti-Money Laundering. This is one of the initiatives to respond to the evolution of AML education needs
and to establish new channels for promoting ACAMS as the globally leading professional body of AML specialists. The applied methodology is a combination of self-study, lectures, cases and discussions among the participants. The highly qualified lecturers involved are dealing actively with the lectured disciplines in their daily professional life. All lectures have proven track records in turning AML concepts into operational environments in their specific professional discipline. The Master class is an international oriented and comprehensive program. It is offered in a six-day seminar and is followed by the official CAMS exam organized by ACAMS. The second edition of the Master class is scheduled for March 2009. Detailed information on the Master class Anti-Money Laundering is available on www.umbs.nl/aml. Any further questions can be directed to Drs. Ingrid Voncken at i.voncken@umbs.nl.
Vol 2 No. 3
NetPractice Exchange Jan/Feb 09
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Fraud Prevention Success Story:
NetSpend Prevents Fraud Losses with NetEconomy’s Solution The Results:
A Case Study The Challenge: • Ensure full compliance, and exceed wherever possible, all Federal and State regulations to meet NetSpend’s goals of maintaining an aggressive and comprehensive program of risk and compliance management. • Employ the best available measures to protect partner banks, distributors and their customers from the risk of unlawful activity. The Solution: • NetEconomy’s Financial Crime Suite implemented by a cross functional team including NetEconomy consultants, internal IT resources, risk management and compliance analysts, and investigators.
• Direct cost savings, optimized processes and a greater business insight into risk across the NetSpend environment. • Through early detection of employee fraud with the NetEconomy system, NetSpend was able to help its partners prevent hundreds of thousands of dollars in losses. A pioneer in the prepaid card industry, NetSpend was founded seven years ago and has grown to be a U.S. leader, processing over $4 billion in card payments annually. NetSpend uses NetEconomy’s Financial Crime Suite to detect money laundering, fraud and employee fraud with one fully integrated solution. By implementing this platform,
NetSpend has saved significant dollars, and optimized processes by investing in one solution that covers three crime areas. For instance, they use the NetEconomy system, to monitor transaction activity at partners’ locations and as a result were able to detect instances of fraud conducted by employees of its partners. Through early detection of this fraud with the NetEconomy system, NetSpend was able to help its partners prevent hundreds of thousands of dollars in losses. “Beginning this project, our initial goal for the implementation of NetEconomy’s Financial Crime Suite was to ensure that our processes for monitoring customers met or exceeded AML/CTF guidelines,” ›› continued
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Fraud Prevention Success Story ›› continued said Thomas J. Firnhaber, Director of Compliance of NetSpend. “We are extremely pleased with the results of this implementation, as well as our ability to use one integrated solution across three crime areas.” “In addition, we have quickly reaped a ROI well beyond what we had imagined by detecting employee breaches, saving our partner hundreds of thousands of dollars while at the same time ensuring ongoing protection against these threats now and into the future,” Firnhaber added. NetSpend maintains an aggressive and comprehensive program of risk and compliance management to ensure its full compliance, and to exceed wherever possible all Federal and State regulations. “Working with NetEconomy continues our effort to employ the best available measures to protect our partner banks, distributors and their customers from the risk of unlawful activity. NetEconomy has proven it possesses innovative, flexible and configurable features for us to continue to expand the solution platform as new crime areas or product launches open us to new risks.” NetSpend initially selected NetEconomy in order to comply with regulatory requirements and to remain vigilant in its fight against financial crime. NetSpend added fraud detection and employee fraud detection as a follow-on phase.
Today, NetSpend monitors over 700,000 cardholder transactions per day across the U.S. and all card sales and deposits at over 60,000 distributor locations. The system is exceptionally flexible and can adapt to new scenarios and rules easily, and can scale as the NetSpend business grows exponentially.
We have quickly reaped a ROI well beyond what we had imagined by detecting employee breaches
A Holistic Approach to Financial Crime Management NetSpend has embraced the progressive and holistic approach to financial crime management – combining silos and integrating risk areas. With one NetEconomy implementation instead of three, one department could oversee multiple crime areas and risks resulting in direct cost savings, optimized processes and a greater business insight into risk across the NetSpend environment. And, with one solution and technology environment, NetSpend benefits from less
expensive technology platform costs, as well as reduced personnel overhead for installing and operating back-office environments – driving down the total cost of ownership (TCO). With NetEconomy’s implementation NetSpend was able to combine systems and aggregate transaction data, delivering cost savings, reduced revenue loss and a greater business insight. With this integrated approach, NetEconomy can also uncover links and associations of suspicious activity broadening NetSpend’s view of risk. “Today, we have more in-depth knowledge of what the customer does and how our business operates,” Firnhaber said. In summary, by leveraging one solution, there is direct costs savings – one solution cost instead of three – as well as optimized processes, saved resources, and lowered operational and labor costs. Adding to these innovations and efficiencies is the detection of employee fraud that would have resulted in hundreds of thousands of dollars of lost revenue. NetSpend’s progressive approach for prioritizing and addressing these risks demonstrates a strong commitment to innovation, risk management and fighting financial crime within the prepaid card industry.
Vol 2 No. 3
NetPractice Exchange Jan/Feb 09
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Housing Crisis:
Great for Real Estate Launderers and Fraudsters By Saskia Rietbroek, CAMS
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ow is the time to revamp your institution’s protection from money laundering via real estate purchases and transfers. U.S. Federal officials agree that the current economic state and the depressed housing market may lend itself to an increase in real estate and mortgage loan related suspicious activity. In fact, a recent report released by the U.S. Financial Crimes Enforcement Network in May of 2008 states that SAR activity related to the residential real estate industry is on the rise and with the refinancing of mortgages this trend will continue. A report released in the same month by the U.S. Federal Bureau of Investigation on mortgage fraud corroborates this statement. According to the FBI, fraudsters often take advantage of desperate real estate owners and personnel trying to maintain their standard of living.
Statistics in the report indicated that mortgage fraud related SARs rose by more than 10,000 in 2007. There is a clear connection between mortgage loan fraud and money laundering, as the money launderer often commits mortgage loan fraud in order to conceal ill-gotten gains. Launderers often make use of “straw buyers,” people who allow their names and credit ratings to be used to secure fraudulent mortgage loans. FinCEN believes that this may have been the case in one example listed in their report. According to a SAR, a mortgage officer of a bank was discovered supplying reference letters to non-resident aliens on mortgage loans. It was discovered that this employee had a business relationship with both an appraiser and a real estate agent involved in the sale of all the properties involved. Because all of the loans were performing and
did not default, it may be indicated that these were straw buyers who obtained mortgages, which were then used to launder funds as payments were made. Most SAR Subjects Outside Real Estate Industry The above-mentioned case is not the norm. As a financial institution you might feel that scrutinizing real estate industry clients may be enough to protect you; however, according to the FinCEN report more than 75 percent of residential real estate-related SAR subjects were unaffiliated with the real estate industry. It is very important that your institution’s policies include conducting due diligence on customers who ask for mortgage loans. In one example from the FinCEN report, a bank declined a ›› continued
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NetPractice Exchange Jan/Feb 09
Vol 2 No. 3
Housing Crisis: Great for Real Estate Launderers and Fraudster ›› continued borrower’s mortgage loan application because of information it had obtained on the Internet. As it turned out, the customer was under investigation for laundering up to $500,000 in dirty money per week.
• Indications that the parties are not acting on their own behalf and are trying to hide the identity of the real customer.
In addition, there are red flags that your institution can watch out for in order to make sure that you are not involved in a scheme like this. The Financial Action Task Force, an international organization dedicated to aiding governments in establishing anti-money laundering controls, lists several red flags in a 2007 report on money laundering through the real estate sector. A few of these include:
• The customer does not appear interested in the specifics of the transaction, for instance the date on the loan or when the property will be handed over.
• Individuals who unexpectedly repay problem loans or mortgages or who repeatedly pay off large loans or mortgages early, especially if in cash. • Transactions involving recently created companies when the amount is large compared to their assets.
Results Poll Question
• The customer is not interested in improving the terms of the loan.
• Customers who express strong interest in buildings in a certain area, regardless of what price the property is going for. • Transactions made by a third party that is not involved in the initial sale of the property. Another step that some institutions are taking in order to protect themselves involves the form 4506T. This form is filed with the U.S. Internal Revenue Service to verify tax information and is normally required at the closing of the loan. However, according to CCH, some institutions
have begun to require this form during the application process instead. Fraud and AML Unite Other institutions are more closely integrating their fraud and AML departments, specifically because of the connection between fraud and money laundering as mentioned earlier. An efficient anti-money laundering program is instrumental in protecting an institution from mortgage fraud. Integrating these departments allows each to work more effectively by eliminating common redundancies. As the housing market crisis worsens, it will be increasingly important for your institution to fight fraudsters and money launderers who are abusing the situation. By paying attention to these red flags and working together, your institution can protect itself from money laundering through real estate and mortgage fraud.
After how many SARs/STRs do you typically close the account? The poll question for next month: How frequently do you update country risk profiles for purposes of monitoring for suspicious activity?
After how many SARs/STRs do you typically close the account? • 2 - 21.05% • 3 - 42.11% • No specific limit, we can’t close the account - 36.84%
Answers: • Once per month • Once per quarter • Once per year Cast your vote at www.netpractice.org
Vol 2 No. 3
NetPractice Exchange Jan/Feb 09
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Product Advisory Council Update Richard McCarthy Chair PAC
F
ollowing the Product Advisory Council (PAC) meeting held in June 2008, Senior Management at Fiserv Fraud and Compliance have participated in a number of meetings to look at the business objectives and the recommendations made by the council members. Some of the council members have already been approached during the normal course of business and have given replies on a number of topics and issues raised.
In general, Fiserv Fraud and Compliance has looked at each of the requests to find which are commonly perceived as the most urgent between all its members. Additionally, the results of this year’s NetEconomy Product Evaluation Survey have been reviewed to add importance and help prioritize topics brought up by the PAC members. During several internal meetings, the Fiserv Fraud and Compliance management team has identified the most important areas of the NetEconomy product to focus on based on the information gathered via the above channels. As some subjects, such as “usability,” need further clarification, the next step is to clarify specific requests made under each subject among the PAC
members and those that took part in the Product Evaluation Survey. Product Management at Fiserv Fraud and Compliance has continuously been involved in this product review process, and begins to access how these requests can be added to the product line, and when best to add them given the existing product release cycle. What Is the PAC? The Product Advisory Council (PAC) is a strategic platform where NetPractice members and the Fiserv Fraud and Compliance product management team meet for strategic product direction and product suggestions. The PAC has eight board members and was founded in June 2008.
Featured Functionality NetEconomy: Case Management Configuration
I
n NetEconomy (ERASE) 4.1.6, Case Management Configuration has been introduced, allowing financial institutions to add fields to Case Management screens, change field labels, make fields protected, change presentation and make fields mandatory.
Maintain custom fields You can add fields to the case management windows. When you add a field, it will appear in a newly added Additional Information tab of new or existing cases in the system. The following elements can be defined:
The Case Management Configuration functionality, which is part of the “Maintenance” function group in the CONFIGURE module, allows you to do the following:
• Object: a custom field must be linked to one of the available objects (case, incident, transaction, account, person or company).
• Name: the name that is used to store the field in the database. • Label: the field name that is displayed in the case management windows. • Type: the type of the field, for example “Text” or “Drop-down.” • Mandatory: you can make a custom field mandatory. Case investigators will then be required to enter a value for the field; they cannot leave the field empty. ›› continued
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Featured Functionality NetEconomy ›› continued ›› Figure 1 - Add custom field for Person
›› Figure 2 - Custom field for Person displayed in the case
Maintain standard fields You can modify standard fields to some extent. The limitation is that you can only make standard fields more restrictive. This means that you can do the following: • Make a non-mandatory field mandatory so that users are required to enter a value for the field. • Change an open text field into a drop-down field by specifying a drop-down set for the field.
A button is available to reset the customized standard fields to their default. Maintain custom sets You can maintain custom sets of values that are available in dropdown lists for custom fields or for modified standard fields. Custom sets are similar to static tables, which contain values that are displayed in the standard drop-down boxes for standard fields. When you add a custom set, you must specify a
name and description, and define the elements of the set. Each element consists of a code and a description. Depending on how you configure the custom field, either both the code and the description or only the description will be displayed in the drop-down box. For more information, please contact NetEconomy Product Management at info@netpractice.org.
Vol 2 No. 3
NetPractice Exchange Jan/Feb 09
pg 17
Financial Crime
News From Around the World U.S. FinCEN Proposes New Organizational Structure for Regulations On October 23, 2008, the U.S. Financial Crimes Enforcement Network submitted a proposal to simplify anti-money laundering regulations by reorganizing them within the Bank Secrecy Act. This change would create a new chapter within the Code of Federal Regulations in which all the AML rules would be located. According to the press release, the agency also proposes creating general and industry specific sections to the regulations. The numeric system that the code will use in this reorganization will also be more logically constructed. The release offers this example: .320 might be used for all requirements to report suspicious transactions, so a bank’s SAR requirements would be found at
1020.320, a casino’s at 1021.320, a securities’ at 1023.320, and so on. Currently the AML rules are found in the CFR as Part 103 in Chapter One of Title 31. Under this proposal, the rules would be found in a newlycreated tenth chapter entitled “Title 31 Chapter X – Financial Crimes Enforcement Network.” FinCEN officials hope that this change will make the regulations easier to navigate and therefore easier to understand, the release states. Loan Broker Indicted in $15 Million U.S. Fraud Case A loan broker from the Philippines was charged on October 7, 2008 with defrauding the Export-Import Bank of the United States. An indictment handed down by the federal grand jury in the District of Columbia alleged that Bettina Balderrama brokered approximately
$15 million in fraudulent loans between Philippine companies and U.S. lending institutions. The Ex-Imp Bank acted as guarantor or insurer in these transactions. As the official export credit agency of the U.S., the Ex-Imp Bank issues loan guaranties to U.S. banks on behalf of foreign companies. The purpose of these loans is to purchase U.S. goods. When the borrower defaults on the loans, the Ex-Imp Bank pays the loan back to the lending institution. According to the press release, Balderrama, as part of the scheme, enlisted a U.S. exporter to create fraudulent shipping documents stating that the loan was being used to purchase goods when the money was actually being funneled to accounts held by Balderrama. She faces charges of fraud and money laundering. ›› continued
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Vol 2 No. 3
Financial Crime News From Around the World ›› continued Haiti Still Behind in Combating the Financing of Terrorism The Caribbean Financial Action Task Force released a report in September assessing the Republic of Haiti’s anti-money laundering and terrorist financing controls. The evaluation, performed by experts from the World Bank, was based on the FATF’s 40 Recommendations and Nine Special Recommendations. The report states that although Haiti passed a law in 2001 with the purpose of fighting money laundering, the country has yet to establish a legal framework to counter the financing of terrorism. According to the evaluation, even the AML laws are weak when compared to the international standards. For instance, there are still restrictions on the lifting of bank secrecy and some non-financial businesses and professionals are not covered. The World Bank also called the current regime ineffective, citing the lack of money laundering convictions
and low number of suspicious transaction reports (STRs) (filed only by the banking sector) as examples. The lack of STRs seems to be explained by grave concerns about the confidentiality of the reports, the protection of the identity of the reporting person and the personal risks that the reporting individual might incur. It was recommended in the report that Haiti adopt a more strategic approach in its AML regime, that the country pass a terrorist financing law and that a major training effort be launched. OLAF and Eurojust Agreement Aims to Improve Financial Fraud Fight In September, the Europe Anti-Fraud Office (OLAF) and Eurojust (the European Union judicial cooperation body) entered into a practical agreement that will enhance their cooperation on fraud cases that endanger the financial interests of the European community.
This agreement calls for closer collaboration and includes provisions on the exchange of information between the two agencies. Specifically, it calls for close and regular contact through teams consisting of members of OLAF and Eurojust who will meet on a quarterly basis, or even more frequently. These teams will exchange case summaries on cases involving corruption, fraud and other financial crimes. In addition, the teams will provide feedback on progress, including decisions to close or not to pursue cases, in the attempt to reinforce the collaboration between the two bodies. The avenues through which the two agencies must exchange personal data is also set forth in the agreement, as are guidelines for the protection of personal data. The agreement also provides for the exchange of strategic information, such as fraud and corruption trends.
Vol 2 No. 3
NetPractice Exchange Jan/Feb 09
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Calendar of Events Event
Location/Website
Date
ACAMS 2nd Annual Anti-money Laundering & Counter Terrorism Financing Conference
Dubai, UAE www.acams.org
January 25-27, 2009
9th Annual Florida International Bankers Association (FIBA) AML Compliance Conference
Miami, Florida www.fiba.net
February 19-20, 2009
Alert Global Media’s 14th Annual International Money Laundering Conference & Exhibition
Hollywood, Florida www.moneylaundering.com
March 16-18, 2009
European Insurance Forum
Dublin, Ireland www.eventznet.com
March 30-31, 2009
Fiserv Fraud and Compliance European User Group Event
2009 The 2009 European User Group event will take place on 11th and 12th June 2009. This event offers you an invaluable opportunity to discuss the fight against financial crime with your colleagues and peers. The day-and-a-half program will include customer presentations, interactive workshops and training sessions with plenty of networking opportunities as well. A gala dinner is traditionally held on the evening of the first day. Visit www.netpractice.org/Fiserv-User-Event-2009.aspx to tell us which city you prefer for the event: Amsterdam, Brussels or Paris?
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Vol 2 No. 3
10 Reasons to Join NetPractice
A chance to interact with other AML and fraud detection experts
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etPractice is a highly specialized service that focuses on the specific needs of one niche group: financial crime professionals who work with Fiserv’s Fraud and Compliance technology. NetPractice’s value and advantage lie in its focused best-practice information, its dedicated services and its commitment to enriching the professional lives of its members. NetPractice combines our technology with the human element, an online user community to enrich the professional development, learning, connectivity and the professional lives of the members through the sharing of knowledge. 10 Reasons to Join NetPractice 1. Online member community of thousands of peers using Fiserv Fraud and Compliance solutions for fast real-world problemsolving and idea sharing 2. Watch online videos with stepby-step instructions about how to best use our solutions
3. Receive monthly training on solutions, compliance strategies and financial crime
8. Receive insight into the latest anti-money laundering and antifraud initiatives
4. Receive NetPractice Exchange: a print newsletter with thought leadership articles, news and best-practice techniques for improved risk detection and management
9. Get involved! NetPractice is a rewarding way for you to share your expertise while meeting new people and making new contacts around the world
5. Get immediate online access to dedicated tools and resources to enhance performance, streamline processes and reduce costs 6. Enhance your anti-money laundering and fraud investigation skills so you can take yourself to a new professional level 7. Get continuous access to an international network of other users of our solutions to ensure up-to-date knowledge and expertise in using monitoring techniques
10. Get ACAMS continuing education credits for selected NetPractice webinars For more information on NetPractice, please call +31 (0) 70 452 5448, email info@netpractice.org, or visit www.netpractice.org. “Compliance communities address a deep need for sharing experience and best-practices to help address these challenges. Organized by a leading compliance solution vendor, the NetPractice user community is a welcome addition in this area.” Neil Katkov Senior Analyst of Celent
Vol 2 No. 3
NetPractice Exchange Jan/Feb 09
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NetPractice Headquarters: Loire 200-202, 2491 AM The Hague, The Netherlands Tel: +31 (0) 70 452 5440 Fax: +31 (0) 70 452 5444, info@netpractice.org United States of America: Ansonia Station, P.O. Box 230887, New York, NY 10023 Tel: +1 (917) 825 3910 NetPractice Exchange Š 2009 Fiserv, Inc. All Rights Reserved.