Who expected that one terrorist attack will bring in a humongous change in the way financial institutions were functioning. Even in the past, financial institutions have been accused of being used as a medium for anti-social activities; however, this attack in particular changed many things. It was found that the September 11, 2001 hijackers used U.S. and foreign financial institutions to hold, move, and retrieve their money. The hijackers deposited money into bank accounts, primarily by wire transfers and deposits of cash or travelers checks brought from overseas. Additionally, several of them kept funds in foreign accounts, which they accessed through ATM and credit card transactions. The findings forced the Banks to look into their AML and CFT policies.

Banks started the process of modifying their compliance and AML policies. Banks, who could afford, formed their own ‘transaction monitoring department’; However, the ones who were not ready or not in a position to invest a large amounts, outsourced their process. Many Banks formed their captive units and later moved them to other countries where cost of living maintaining such centers is low. Compliance centers are cost centers; however, due to the mandate by the regulators Banks cannot afford not to have one. Banks keep raising their concerns pertaining to the cost of having a compliance centers. On the other hand regulators are not ready to relax the stringent laws defined for the financial services industry.

So, now we see few models in which Banks are managing the cost of compliance centers.

1. Banks having their compliance centers in the country of operation. This is a costly affair for the banks in developed countries where the cost of living is reasonably high when compared to the countries in developing stage.



2. Few Banks having large presence decided to move their compliance units to a developing country. This option has certainly helped them reducing the cost without compromising on quality.



3. Other Banks outsourced such processes to a third company and they simply monitor the outcome of the work performed.



Post filing the suspicion with the Financial Intelligence Unit (FIU) Bank’s responsibility comes to an end. Many a times suspicion is reported only based on lack of information. Banks have their own limitations when it comes to investigation, especially when investigation involves funds transfer with another financial institution. USA Patriot act Section 314(b) talks about permitting financial institutions to share information with one another in order to identify and report to the federal government activities that may involve money laundering or terrorist activity. The catch here is government has permitted the financial institutions to share the information and not ordered to share the information with other financial institution(s). Getting the information becomes even more complex when banks from other jurisdictions are involved in the transaction. As a result a good number of suspicions are registered with the FIU due to lack of information.

It’s a known fact that the Banks do face trouble in getting information from their corresponding banks. They also face issues in getting information from the Banks present in secrecy jurisdiction, including their own branches or counterparts. Based on the above observation, categorization of suspicion can be of two types. (1) Suspicion registered due to is lack of information received from the Correspondent Bank(s). (2) Suspicion registered based on details/ information available with the Bank. Question one should as is, is there a way to reduce the count of suspicion recorded due to lack of co-ordination between correspondent banks? An Umbrella organization like a FIU could be the answer as they are the one able to see the complete picture. At country level, FIUs monitoring the suspicious activities reported by financial institutions are getting a larger picture of activities taking place in financial institutions. Surely, FIUs are incurring a huge cost in such investigations. Now, the question to be asked is, is there a way to bring the cost down and manage the whole process?

It’s debatable however, may be the FIUs can provide an infrastructure along with the staff and Banks pay a subsidised license fee for getting the transactions monitored. Dual monitoring of transactions will can be eliminated.


Benefits for FIU:

1. Customers profiling at country level so that monitoring of activities can be made easy and effective.

2. Instant (near or absolute real-time) monitoring capabilities to the FIU and the cost of transaction monitoring may come down as Banks will be sharing the cost.

3. The suspicion recorded to lack of co-ordination between correspondent Banks can be brought down as information will be available from correspondent banks present in the same jurisdiction.

4. Instant detection of patterns and activities at a country level and new regulations can be derived easily


Benefits to FIs:

1. FIs can concentrate on core business instead of investing heavily on infrastructure for monitoring transactions.

2. Reduction in cost as FIU is sharing the cost.

3. FIs need not worry about the penalty for not adhering to laws of the jurisdiction.


Sumit Lepcha
Sr. Business Analyst  at CustomerXPs Software

Sumit Lepcha

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