Losing the War Against Dirty Money: Rethinking Global Standards on Preventing Money Laundering and Terrorism Financing

Following a brief overview in Part I.A of the overall system to prevent money laundering, Part I.B describes the role of the private sector, which is to identify customers, create a profile of their legitimate activities, keep detailed records of clients and their transactions, monitor their transactions to see if they conform to their profile, examine further any unusual transactions, and report to the government any suspicious transactions. Part I.C continues the description of the preventive measures system by describing the government\u27s role, which is to assist the private sector in identifying suspicious transactions, ensure compliance with the preventive measures requirements, and analyze suspicious transaction reports to determine those that should be investigated. Parts I.D and I.E examine the effectiveness of this system. Part I.D discusses successes and failures in the private sector\u27s role. Borrowing from theory concerning the effectiveness of private sector unfunded mandates, this Part reviews why many aspects of the system are failing, focusing on the subjectivity of the mandate, the disincentives to comply, and the lack of comprehensive data on client identification and transactions. It notes that the system includes an inherent contradiction: the public sector is tasked with informing the private sector how best to detect launderers and terrorists, but to do so could act as a road map on how to avoid detection should such information fall into the wrong hands. Part I.D discusses how financial institutions do not and cannot use scientifically tested statistical means to determine if a particular client or set of transactions is more likely than others to indicate criminal activity. Part I.D then turns to a discussion of a few issues regarding the impact the system has but that are not related to effectiveness, followed by a summary and analysis of how flaws might be addressed. Part I.E continues by discussing the successes and failures in the public sector\u27s role. It reviews why the system is failing, focusing on the lack of assistance to the private sector in and the lack of necessary data on client identification and transactions. It also discusses how financial intelligence units, like financial institutions, do not and cannot use scientifically tested statistical means to determine probabilities of criminal activity. Part I concludes with a summary and analysis tying both private and public roles together. Part II then turns to a review of certain current techniques for selecting income tax returns for audit. After an overview of the system, Part II first discusses the limited role of the private sector in providing tax administrators with information, comparing this to the far greater role the private sector plays in implementing preventive measures. Next, this Part turns to consider how tax administrators, particularly the U.S. Internal Revenue Service, select taxpayers for audit, comparing this to the role of both the private and public sectors in implementing preventive measures. It focuses on how some tax administrations use scientifically tested statistical means to determine probabilities of tax evasion. Part II then suggests how flaws in both private and public roles of implementing money laundering and terrorism financing preventive measures might be theoretically addressed by borrowing from the experience of tax administration. Part II concludes with a short summary and analysis that relates these conclusions to the preventive measures system. Referring to the analyses in Parts I and II, Part III suggests changes to the current preventive measures standard. It suggests that financial intelligence units should be uniquely tasked with analyzing and selecting clients and transactions for further investigation for money laundering and terrorism financing. The private sector\u27s role should be restricted to identifying customers, creating an initial profile of their legitimate activities, and reporting such information and all client transactions to financial intelligence units

Nonbanks and risk in retail payments

This paper documents the importance of nonbanks in retail payments in the United States and in 15 European countries and analyzes the implications of the importance and multiple roles played by nonbanks on retail payment risks. This paper also reviews the main regulatory safeguards in place, and concludes that there may be a need to reconsider some of them in view of the growing role of nonbanks and of the global reach of risks in the electronic era.

Risky business: managing electronic payments in the 21st Century

On June 20 and 21, 2005, the Payment Cards Center of the Federal Reserve Bank of Philadelphia, in conjunction with the Electronic Funds Transfer Association (EFTA), hosted a day-and-a-half forum, “Risky Business: Managing Electronic Payments in the 21st Century.” The Center and EFTA invited participants from the financial services and processing sectors, law enforcement, academia, and policymakers to explore key topics associated with the challenge of effectively managing risk in a payments environment that is increasingly electronic. The meeting’s goal was to identify areas of potential risk and explore interindustry solutions. This paper provides highlights from the forum presentations and ensuing conversations.

The importance of monitoring the operational risk at the level of banking companies

The purpose of this paper is to analyze the potential operational banking risk losses and to introduce the key operational risk indicators. We present a possible matrix of the operational risk monitoring indicators and the correlations between the main types of the operational banking risks and the measures to prevent and diminish the operational risks. The majority of operational risk events should be prevented with the adequate procedures and for this reason, operational banking risks events need to be identified and monitored. It is very important for a bank to develop loss events tracking and reporting, that represent early warning signals in the banking risks management.operational risk, monitoring indicators, banking risk management

Oversight of non-cash payment schemes: objectives and implementation procedures.

The use of non-cash payment schemes is particularly widespread in France where the number of non-cash transactions is in fact well above the European average. Though they have different features corresponding to users’ varying needs (payments may be face-to-face, remote or recurring, for instance), non-cash payment schemes generally consist of an instrument that generates a payment order combined with the technical and organisational arrangements that enable this order to be processed. Putting these arrangements in place requires close co-operation between all participants of the payment «network», i.e., naturally, credit institutions that hold accounts for debtors and beneficiaries, and also their technical service providers. The Everyday Security Act of 15 November 2001 entrusts the Banque de France with a specific task with regard to overseeing the security of non-cash means of payment. This task falls naturally within the purview of central banks, which guarantee both the value of the currency and the stability of payment systems. To carry out its task, the Banque de France analyses the potential threats associated with payment schemes and defines, in consultation with the parties involved, the minimum security objectives designed to prevent the occurrence of payment-specific risk events. To assess the security of a payment scheme, the Banque de France ensures that the parties involved comply with these objectives.

Risk management and nonbank participation in the U.S. retail payments system

The retail payments system in the United States has changed significantly in recent years. Advances in technology have caused a greater reliance on electronic payment networks. And the industrial structure of the payment services industry has evolved, as more and more nonbanks deliver payment products to end users and supply back-end processing. In general, these changes have made the payments system more efficient and given more choices to consumers and more payment options to merchants and businesses. ; At the same time, however, the rapid pace of change has introduced new risks to the payments system. First, as more and more banks market payment services to nonbanks and outsource payments processing, the differences in information possessed by payments participants can magnify difficulties in managing risk. Second, electronic payments have a significantly different risk profile than paper checks. Third, greater complexity of the payments network potentially reduces incentives to manage risk and may cause difficulties in coordinating risk mitigation. ; Sullivan lays the groundwork for a dialogue on policy to control risk in the U.S. retail payments system. He concludes that a thorough review of supervisory authority relevant to retail payments would be valuable. In particular, the original authority to supervise nonbank payment processors was established over 40 years ago, when the primary reason for establishing that authority was the use of computer technology applied to bank accounting systems. Is that authority adequate given the revolutionary changes in the payments technology seen over the last four decades?Payment systems

The role of IT/IS in combating fraud in the payment card industry

The vast growth of the payment card industry (PCI) in the last 50 years has placed the industry in the centre of attention, not only because of this growth, but also because of the increase of fraudulent transactions. The conducted research in this domain has produced statistical reports on detection of fraud, and ways of protection. On the other hand, the relevant body of research is quite partial and covers only specific topics. For instance, the provided reports related to losses due to fraudulent usage of cards usually do not present the measures taken to combat fraud nor do they explain the way fraud happens. This can turn out to be confusing and makes one believe that card usage can be more negative than positive. This paper is intended to provide accumulative and organized information of the efforts made to protect businesses from fraud. We try to reveal the effectiveness and efficiency of the current fraud combating techniques and show that organized worldwide efforts are needed to take care of the larger part of the problem. The research questions that will be addressed in the paper are: 1) how can IT/IS help in combating fraud in the PCI?, and 2) is the implemented IT/IS effective and efficient enough to bring progress in combating fraud? Our research methodology is based on a case study conducted in a Macedonian bank. The research is explorative and will be mostly qualitative in nature; however some quantitative aspects will be included. The findings indicate that fraud can take up many forms. A classification of the different forms of data theft into different fraudulent appearances was made. We showed that the benefits from implementing the fraud reduction efforts are multiple. Results show that a bank has to be very small to experience losses from fixed expenditures coming from the implementation of the fraud reduction IT/IS. Medium-sized and large banks should not even see any problems arising from those expenditures. Based on the empirical data and the presented facts we can conclude that the fraud reduction IT/IS do have a positive effect on all sides of the payment process and fulfills the expectations of all stakeholders

Strengthening e-banking security using keystroke dynamics

This paper investigates keystroke dynamics and its possible use as a tool to prevent or detect fraud in the banking industry. Given that banks are constantly on the lookout for improved methods to address the menace of fraud, the paper sets out to review keystroke dynamics, its advantages, disadvantages and potential for improving the security of e-banking systems. This paper evaluates keystroke dynamics suitability of use for enhancing security in the banking sector. Results from the literature review found that keystroke dynamics can offer impressive accuracy rates for user identification. Low costs of deployment and minimal change to users modus operandi make this technology an attractive investment for banks. The paper goes on to argue that although this behavioural biometric may not be suitable as a primary method of authentication, it can be used as a secondary or tertiary method to complement existing authentication systems

Operational risk in banking - card fraud

During the last years the problem of card fraud expanded dramatically due to the growth of numbers of users, the increase number of ATM or POS transaction, internet or mobile payments. Together with this, the criminals become more sophisticated and the impact of losses generated by their actions is now considered a world problem.operational risk, banks, card fraud

Banking Panics and the Origin of Central Banking

Gorton and Huang (2001) argue that private coalitions of banks can act as central banks, issuing private money and providing deposit insurance during times of panic. This lender-of-last-resort role depends upon banking panics occurring threat of liquidation makes the private bank coalition incentive compatible, inducing banks to monitor each other. But, despite the evolution of private bank coalitions, government central banks and government deposit insurance schemes historically replaced the private bank coalitions. In this paper we ask why this transition from private arrangements to public arrangements occurred. We survey the historical and international evidence on panics, suggesting that Gorton and Huang (2001) are consistent with the evidence. Then, we extend Gorton and Huang (2001) to show the welfare improvement brought about by a government central bank replacing private bank coalitions as lender-of-last-resort. In particular, panics, while necessary for private coalitions to function, are costly because they disrupt the use of bank deposits as a medium of exchange. With government deposit insurance, panics do not occur, but the government must monitor banks. Such monitoring by the government is not as effective as private bank coalitions. We provide conditions under which the government can avoid the costs associated with panics by implementing deposit insurance and thereby raise social welfare.