Understanding the FRAML Process: Case Study Reviewsfiles.acams.org/webcasts/20110330/FRAML_3_30_PPT_Deck.pdf · Understanding the FRAML Process: Case Study Reviews (p.11) FINCEN DIRECTOR

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Understanding the FRAML Process: Case Study Reviews


Chris Swecker, Esq.Dr. Charles Robertson


Dr. Charles Robertson

Product Research & DevelopmentVerafin

PhD - Pattern Recognition, Image Processing and Artificial Intelligence


Hot Industry Topic

The emerging trend to combine AML and anti-fraud efforts


Chris Swecker, Esq.

Assistant Director, FBI, (Retired)1982-2006

Global Security Director, Bank of America, 2006-2009

Attorney/ Fraud and AML Consultant 2006-present

Board Member, Allied Barton Security Co.


A MARRIAGE OF EFFICIENCY, OR A COMPELLING MANDATE!


FINCEN DIRECTOR FREIS AT THE ABA/ABA MONEY LAUNDERING ENFORCEMENT CONFERENCE

WASHINGTON, DCOCTOBER 18, 2010

“There is no greater advocate on the importance of focusing on the nexus between fraud and money laundering than FinCEN. It really speaks to the core of FinCEN's mission to safeguard the integrity of the financial system, and has been an area I have personally focused on since I became Director of FinCEN three and a half years ago.”


Central Themes

The new “Organized Crime” are global and virtual criminal networks focused on financial crimes and fraud;

Terrorist organizations are global and often virtual networks which engage in a host of criminal activities to raise funds;

Money laundering is an integral part of fraud;

The underpinnings of Terrorist Financing is often fraud and money laundering activity associated with a variety of criminal actions;

In the current environment there is low risk of detection of network activity let alone prosecution of the network due to FI’s inability to “connect the dots”.


FOCUS ON THE “WHAT”, BUT DOMINATED BY PROFESSIONAL OPERATORS


Fraud is Big Business: 267 BillionFraud Type Annual Losses in Billions

Health Care Fraud 60 Billion

Insurance Fraud 40 Billion

Mortgage Fraud 40 Billion

Identity Theft 47 Billion

Stimulus Grant Fraud

Check Fraud

40 Billion

40 Billion


Fraud Risk Management DecisionMinimal Risk of Prosecution/Easy Money

Low Risk-High Reward Low Reward-High Risk

Understanding the FRAML Process: Case Study Reviews (p.16)16


The New MafiaViral GlobalNumber of Fraud Operators is Increasing Minimal Risk of ProsecutionCustomers/Merchants/Businesses /Agencies are One Step BehindAny Payment Channel That Touches the Internet is Insecure Opportunities are Increasing


THE PROFESSIONALS


FOCUS ON THE “WHO”


FinCEN Stats

1,321,418 total SARs filed in 2009;1,319,984 total SARs in 2010;In the first six months of 2010, reports indicating Terrorist Financing increased 45% from 262 instances in the first six months of 2009 to 379 during the same period in 2010;Terrorist Financing SARs consist of less than 1% of SARs;Money Laundering/BSA related SARs since 1996 consist of 46% of SARs filed in 2010.


SAR Categories


Criminal Violations That Support Terrorist Financing

Check, credit card, loan and debit fraudHealth Care FraudCigarette Tax FraudWIC FraudStolen Infant FormulaCopyright violationsInsurance FraudMortgage FraudInternet fraud schemesInvestment fraudsDrugs (Spain, UK and Bali Bombers financed by crimes)Taliban, FARC fully financed by drug cultivation and wholesale sales.


The Business Case


Fraud and AML Common Processes


Advantages of ConvergenceFraud and AML monitoring same data bases Fraud and AML are targeting the same actorsParallel tracks hinder “connecting the dots” between criminal activity and CTFInefficient and redundant processesFinCEN advocating convergenceAssist law enforcement/intelligence community in early identification of fraud and AML nexus facilitating prosecutive action.


ObstaclesDifferent roots, current structure is well entrenched Size and scale of the undertakingExecutive management supportRegulator/FinCEN disconnectTechnology challenges i.e. data sourcingChanging tires while car is moving down the roadDifferent cultures


FinCEN Study Inter-ConnectionBetween Financial Crimes

Subjects reported for suspected mortgage loan fraud may also be involved in other financial crimes such as check fraud, money laundering, stock manipulation, structuring to avoid currency transaction reporting requirements and othersFinCEN identified approximately 156,000 mortgage fraud subjects, and found that 2,360 were reported for suspicious activity in 3,680 of the other SAR types.


MythsFraud and AML require different skill sets:

Fraud consists of “knuckle draggers”;Fraud has law enforcement “cops and robbers” mentality;

AML has little to do with crime as it often involves “clean”money and no overt crime;Regulators are indifferent to convergence;Nothing bad has happened/ no urgency;System works well as currently structured;Fraud is cost of doing business and current levels are manageable.


Freis Urges Convergence Again“In FinCEN's daily interaction with financial institutions, we have seen a growing awareness from the business side of the logic of close coordination among those with anti-money laundering (AML) and anti-fraud responsibilities, but the different approaches, in part, reflect different roots.”

“Financial institutions are seeing benefits in leveraging their fraud resources with their anti-money laundering efforts and starting to take advantage of the significant efficiencies available through this leverage. Moreover, a corollary to leveraging anti-fraud and AML resources is that nothing should prevent a bank from multitasking regulatory tools. That is, using them for both compliance and either cost-reduction or increased profitability.”


Steps to ConvergencePeople and Process Technology

Align detection processesJoint FIUOne Executive responsible for both AML and FraudGovernance groupVendor contract governanceJoint Investigator/Analyst TrainingInvestigator/ Analyst skill progression

Shared data Base(s);Consolidate case management system;Shared event management system; Shared Technology Support Team ;Increase analytical firepower to facilitate identification of linkages.


Use Your Data to Go on the Offensive!

Focus Attention on the “Who” and the “What”


The Whac- a- Mole Strategy

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Chris [email protected]



Industry Endorsements44 States

North AmericanLeader

650+ Customersnearly 60 Core Systems

BSA/AML and Fraud Detection technology solution provider

Who We Are


intelligence inside

What We Do – ‘Intelligent’ Behavior Based Software

• BSA/AML Compliance• Customer Risk Scoring• Watch List Checking• Fraud Detection• FACTA Red Flags• Case Management• Vendor Management


(FRAML = FRaud detection + AML)

The FRAML Process

AMLFR


A FRAML process will improve your financial institution’s effectiveness.

effectiveness


catch more criminal activity

improved efficiencies

improved risk management

improved customer understanding

effectiveness


effectiveness

improved efficiencies

reduces duplication of efforts due to common customer alerts


effectiveness

improved risk management

ensures compliance activities related to fraud are known and acted upon (and vice versa)


effectiveness

improved customer understandingprovides better knowledge about a customer and their activity


effectiveness

catch more criminal activityallows more focus on preventing, reducing, and recovering from criminal activity


Non-FRAML Process

No coordination

BSA/AML compliance siloed

Anti-fraud efforts separated across product lines or branches


Confusion and lack of clarity means that some fraud might not be reported or acted upon

Without a central point of command, fraud efforts are more reactive than proactive

Poor communication leads to duplication of effort


Is fraud really everyone’s responsibility?


Although fighting fraud is everyone’s responsibility, it also has to be someone’s primary responsibility.


Who plans the institution’s training program?

What is the process to report fraud?

What happens to the fraud that’s reported?

How do we stop fraud before it occurs?



AMLFR

Implementing FRAML is not “one size fits all”

AML

AMLFR

FR


A FRAML program has 3 key components

technologypeople

process


We have talked to a number of financial institutions about their FRAML programs.


Case Study 1


Size of FRAML Group: 2

Roles: Director (BSA Officer)Fraud Investigator

Location: Southern California

Consolidated: Over 1 year ago

Case Study 1

Name: Fraud/Risk Management


Extent of Consolidation:

Processing Services investigates card fraud.

Team investigates all other fraud and ML.

Processes: All fraud in the institution is reported to the Director of FRAML group.

Director has the authority to make changes to procedures at branch level in order to prevent fraud or increase compliance. Also makes recommendations for broader changes.

When an alert appears, the Director triages to determine whether further investigation is necessary and who should investigate.

Case Study 1


Technology: Centralized consolidated account/transaction monitoring solution with alert/case management.

Case Study 1


Technology: Manually reported alerts are tracked in the case management system.

Dealing with poor data quality from core banking system was originally an issue. For example, inconsistent spelling and titles for occupations.

Case Study 1


Case Study 1

Comments: Having the support of senior management to consolidate made all the difference. The director was empowered to make process changes as necessary.

At many institutions senior management do not understand the nature of compliance. It is a full-time job to ensure compliance and to keep up with the changing regulations.

Ideally they need another BSA officer and an assistant to help the director to be even more proactive.


Case Study 2



Roles: Director (BSA Officer)Fraud Investigator

Location: Near Washington, D.C.

Consolidated: Since 2002

Name: Security

Case Study 2


Case Study 2

Extent of Consolidation: Team investigates all fraud and ML.

Processes: Team is fully cross-trained and meets regularly to review alerts and cases.

Other areas of the bank feed information into, and receives information from, the security team, which provides compulsory yearly training.

Team also handles garnishments, levies, and liens. This can provide a warning that a customer is in financial stress and could start laundering money or commit loan fraud.


Case Study 2

Technology: FRAML solution creates alerts based on analysis of customer transactional activity and non-transactional information for fraud and ML.

Software reinforces collaboration by improving communication. Both team members can easily see what the other is working on and provide insights.


Case Study 2

Comments: Communication with other teams in the institution is critical.

The director has found BSA audits and examinations have improved since automating.


Case Study 3



Roles: VP (Coordinator, BSA Officer)BSA InvestigatorsFraud Investigator

Location: Colorado

Consolidated: About 2 years

Name: Resource Services, Loss Control

Case Study 3


Case Study 3

Extent of Consolidation:

Resource Services (ML) and Loss Control (Fraud) work closely together, with a single coordinator.

Processes: The two departments work closely together, keeping each other apprised of activities through regular discussions and via the software.

If a SAR is required because of fraud, then report is passed over to Resource Services.

Discussions with law enforcement goes through Loss Control.


Case Study 3

Technology: Software reinforces collaboration by improving communication. Both departments can easily see what the other is working on and provide insights.

Have been alerted to cases of fraud through money laundering alerts, including a recent instance of elder abuse.


Case Study 3

Comments: Having a single, consistent point of contact with law enforcement has helped stop some cases of fraud.

Found that by setting expectations at beginning of the process, consolidation has gone smoothly. Had great support from senior management.


Suspicious Activity Alerts

Money Laundering

Investigations

Fraud Investigations


A FRAML software solution provides a common repository of customer data, complementary ML and fraud alert workflows,

and cross-enterprise case management.


effectiveness.

your financial institution’s

A FRAML process will improve


BESTPRACTICES

actively engage with all stakeholders

build support from senior management

cross-train investigators

create central intelligence hub


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Understanding the FRAML Process: Case Study Reviewsfiles.acams.org/webcasts/20110330/FRAML_3_30_PPT_Deck.pdf · Understanding the FRAML Process: Case Study Reviews (p.11) FINCEN DIRECTOR