Understanding the FRAML Process: Case Study Reviews (p.1)
Understanding the FRAML Process: Case Study
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Understanding the FRAML Process: Case Study Reviews
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Chris Swecker, Esq.Dr. Charles Robertson
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Dr. Charles Robertson
Product Research & DevelopmentVerafin
PhD - Pattern Recognition, Image Processing and Artificial Intelligence
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Hot Industry Topic
The emerging trend to combine AML and anti-fraud efforts
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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.
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A MARRIAGE OF EFFICIENCY, OR A COMPELLING MANDATE!
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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.”
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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”.
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FOCUS ON THE “WHAT”, BUT DOMINATED BY PROFESSIONAL OPERATORS
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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
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Fraud Risk Management DecisionMinimal Risk of Prosecution/Easy Money
Low Risk-High Reward Low Reward-High Risk
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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
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THE PROFESSIONALS
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FOCUS ON THE “WHO”
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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.
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SAR Categories
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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.
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The Business Case
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Fraud and AML Common Processes
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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.
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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
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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.
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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.
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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.”
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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.
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Use Your Data to Go on the Offensive!
Focus Attention on the “Who” and the “What”
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The Whac- a- Mole Strategy
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Industry Endorsements44 States
North AmericanLeader
650+ Customersnearly 60 Core Systems
BSA/AML and Fraud Detection technology solution provider
Who We Are
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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
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(FRAML = FRaud detection + AML)
The FRAML Process
AMLFR
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A FRAML process will improve your financial institution’s effectiveness.
effectiveness
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catch more criminal activity
improved efficiencies
improved risk management
improved customer understanding
effectiveness
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effectiveness
improved efficiencies
reduces duplication of efforts due to common customer alerts
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effectiveness
improved risk management
ensures compliance activities related to fraud are known and acted upon (and vice versa)
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effectiveness
improved customer understandingprovides better knowledge about a customer and their activity
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effectiveness
catch more criminal activityallows more focus on preventing, reducing, and recovering from criminal activity
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Non-FRAML Process
No coordination
BSA/AML compliance siloed
Anti-fraud efforts separated across product lines or branches
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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
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Is fraud really everyone’s responsibility?
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Although fighting fraud is everyone’s responsibility, it also has to be someone’s primary responsibility.
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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?
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AMLFR
Implementing FRAML is not “one size fits all”
AML
AMLFR
FR
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A FRAML program has 3 key components
technologypeople
process
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We have talked to a number of financial institutions about their FRAML programs.
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Case Study 1
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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
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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
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Technology: Centralized consolidated account/transaction monitoring solution with alert/case management.
Case Study 1
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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
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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.
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Case Study 2
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Size of FRAML Group: 2
Roles: Director (BSA Officer)Fraud Investigator
Location: Near Washington, D.C.
Consolidated: Since 2002
Name: Security
Case Study 2
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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.
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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.
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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.
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Case Study 3
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Size of FRAML Group: 5
Roles: VP (Coordinator, BSA Officer)BSA InvestigatorsFraud Investigator
Location: Colorado
Consolidated: About 2 years
Name: Resource Services, Loss Control
Case Study 3
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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.
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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.
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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.
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Suspicious Activity Alerts
Money Laundering
Investigations
Fraud Investigations
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A FRAML software solution provides a common repository of customer data, complementary ML and fraud alert workflows,
and cross-enterprise case management.
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effectiveness.
your financial institution’s
A FRAML process will improve
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BESTPRACTICES
actively engage with all stakeholders
build support from senior management
cross-train investigators
create central intelligence hub
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