Some banks have combined staffs of these two functions; others aren’t sure
By Steve Cocheo, executive editor,
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Anti-money-laundering efforts increasingly overlap with anti-fraud detection, prompting some banks to consolidate functions
Six months ago, Brian Wimpling took part in a significant merger. It wasn’t a business combination for his employer, $2.5 billion-assets Capital City Bank, Tallahassee, Fla. It was the merger of the investigative staffs of the bank’s anti-fraud and Bank Secrecy Act/Anti-Money Laundering units.
The move came at a time when Wimpling, senior vice-president, and a former IRS Criminal Investigation Division investigator, had been hearing of layoffs and budget cuts of other banks’ compliance staffs. His bank hadn’t gone that way. The merger came in the course of some internal combinations for the sake of streamlining, but Wimpling feels comfortable with the new arrangement. He thinks it makes perfect sense: “Many of the cases that you see coming out of the fraud area have to be reported on a Suspicious Activity Report anyway.”
From overlap to trend
Capital City isn’t alone in taking this step, or preparing for it.
At $5.7 billion-assets Johnson Financial Group, Racine, Wis., John Topczewski, vice-president and compliance officer, says his institution is in the midst of moving its AML investigative team over to the company’s fraud protection department.
“We think there are great synergies to putting all that together,” says Topczewski. He points to coming consolidations that will change the way that wire transfers, for instance, are reviewed.
The bank once had four different groups looking at the same wire transfer data when its alert system kicked out transactions selected by its rules and filters. “Now we are going to have one person looking at the wire data for four reasons,” he says.
Topczewski has no illusions that compliance activities will ever become regarded as profit centers, but he says efforts already undertaken have yielded business intelligence. For instance, followup to monitoring system data has identified individuals operating businesses out of personal checking accounts. This has enabled the bank to pitch those customers on switching to more-appropriate (and potentially more-profitable) business checking instead.
In many institutions, there is a growing realization that fraud and money laundering often are related, “even if it’s with five or ten degrees of separation,” says Paul Henninger, head of the financial crimes product group at Actimize, which recently acquired Fortent (an ABA-endorsed provider).
Melding BSA/AML and anti-fraud activities isn’t a universal trend by any means. Some bankers aren’t so sure the synergies will be there. “There should be communication between the two groups, but we’re not sure that merger is the right approach,” says María De Lourdes Jiménez, senior vice-president and manager of the corporate compliance division at San Juan’s $23.8 billion-assets Banco Popular de Puerto Rico.
Breather brings structural reflection
Debate over taking such steps comes at an unusual time for the banking industry and its BSA compliance contingent.
The BSA/AML area “has been kind of quiet,” says Robert Rowe, ABA vice-president and senior counsel specializing in the field. While it isn’t a case of nothing happening, this area, marked by controversy and frantic adaptation both before and certainly after 9/11 has, Rowe and others say, come to a point of “maturity,” for lack of a better word. There’s plenty of work to be done. BSA examinations continue to be conducted. But in the absence of sweeping new regulatory regimens and in the wake of the financial crisis, executives in charge of these matters have turned attention to efficiencies, economy, and navigation of the recession in all its implications for their functions.
Many bankers, consultants, and vendors say that the news, for once, is inside the banks, in the BSA/AML field. And that is the potential for the kind of strategic shift that banks like Capital and Johnson are trying.
Factors driving shifts
“Financial institutions are being called upon to do more with less,” says S. Ramakrishnan, CEO at Oracle Mantas Products at Oracle Financial Services Software. “This is especially so in the compliance area, and is even true within the fraud management area, where financial institutions can calculate ROI and direct impact to the bottom line. Couple this with the increased incidence of financial crime and growing complexity of fraud and money laundering schemes, and the need to upgrade systems, streamline processes, and improve efficiencies becomes clear.”
Adds Ramakrishnan: “Many banks are rationalizing the move from the traditional siloed approach to a cross-channel approach—especially in how they address fraud—although most are still considering how to get there.”
Bill Nicholson, risk specialist at Jack Henry & Associates, says more and more banks in his market area are bringing multiple functions together. For instance, it is increasingly common for a chief risk officer to have both a compliance person and operations staffer report to them for transaction monitoring purposes.
This organizational evolution comes at a time when the impact of the recession on personal finances and on small businesses has changed behavior. Bankers and vendors interviewed referred to rising garden-variety frauds, such as check kiting, that muddy the waters. Often, these incidents are not intentional frauds.
“There are a lot of businesses just trying to stay afloat,” says Ann Marie Tarantino, vice-president, compliance/ BSA at New York’s $2.3 billion-assets Bank of Smithtown. “Many of them aren’t trying to be dishonest.”
But other events of today’s extraordinary period, when the outgoing tide exposed many weaknesses and outright dishonesty, darken the picture further.
Merging silos and staffs
In some ways, the issue of merging functions or at least improving communication between BSA and Anti-Fraud is a matter of maximizing the bank’s return on its investment of resources in both areas. Veteran senior FBI agent Dennis Lormel, now managing director, northeast region, for IPSA International, Herndon, Va., says that he and fellow agents used to discuss how “stovepiped” federal law enforcement and intelligence was, losing the benefit of cross-pollination and sharing in the process. Banks, he’s found, are just as bad. And that’s unfortunate, he adds, because “there is a growing nexus” between fraud and money laundering.
Lormel cites one case where terrorists were caught running a $25 million cigarette smuggling ring, the goal being self-generated funding for their activities. The ring was using roughly 500 bank and credit card accounts to launder the proceeds when it was broken up.
And he points out that laundering becomes a necessary side activity for the types of white-collar frauds that have been coming to light over the course of the last 18 months or so. Lormel says the growing group of Ponzi schemes that have been exposed, for instance, would require laundering to protect the proceeds. Indeed, he predicts that as the smoke clears from the Madoff and other Ponzi cases, banks will be sued by victims for not detecting and reporting laundering.
Getting over cultural barriers
With banks having invested years of effort, program and system development, and money into BSA and anti-terrorist financing, “it makes sense to take what you have and leverage it for other financial crimes,” says John Byrne, president, Condor Consulting LLC, and ABA BJ’s AML blogger.
However, what makes sense on an organizational chart doesn’t always play so well in real life, notes Byrne.
He has seen many attempts to address this, and a common barrier is culture. While banks have cultures of their own, disciplines and departments in banking can also have such cultures.
Byrne says the two functions, BSA/AML and anti-fraud, carry longstanding baggage. BSA/AML staffers most typically come from a banking industry background, he explains; though they have moved into investigatory work, they are bankers by breeding. On the other hand, anti-fraud investigators tend to come from law enforcement backgrounds, Byrne points out.
The two types of backgrounds don’t always mesh so well. As a consequence Byrne advises that banks not “worry so much about merging the people as merging the data,” so both groups of investigators can draw on the same pool of information as they go about their separate tasks.
Are cultural barriers going to be a long-term problem? John Atkinson, director of regulatory risk consulting at Protiviti, and a former senior compliance regulator at the Fed, thinks not. “There are always growing pains and there are always things you tweak along the way,” he explains.
“Fraud and BSA may not be brothers,” cracks Jack Henry’s Bill Nicholson, “but they are certainly close cousins.”
Johnson Bank’s Topczewski acknowledges the potential for culture clash.
“It’s a very legitimate concern,” he says. However Topczewski believes this stumbling block can be removed, by hiring someone out of law enforcement who has the right mindset.
In the case of his bank, as part of the process of merging the functions, the bank hired a retiring senior FBI agent. Topczewski says area banks have worked with the former agent for years, and through that contact he has come to learn the banking business. As a result, in coming aboard, he’s acknowledged that he is making a career transition, not just a change of desk. BJ
The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj1109/index.php?startid=30
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