Time For a Change

The compliance deadline for an anti-money laundering (AML) program may be more than three years old, but for financial services firms like New York-based brokerage firm TD Waterhouse, the AML fight is ongoing. In February, TD Waterhouse began the phased implementation of a surveillance solution by Herndon, Va.-based Mantas. The new solution will replace the firm's previous process of using internal exception reports for AML initiatives such as event correlation and analysis. "As the Patriot Act and the Bank Secrecy Act have continued to develop and get enhanced, the expectations on financial institutions and broker-dealers has continued to rise to a level where you need technology to support your business and ensure compliance with the rules," says Anthony Verga, director of compliance at TD Waterhouse.

The USA Patriot Act significantly amended the 1970 Bank Secrecy Act - which requires financial institutions to report cash transactions in excess of $10,000 - and cast a bright spotlight on anti-money laundering initiatives within the U.S. financial services industry. A congressional mandate soon followed, compelling regulators to push businesses to develop better ways to detect and report terrorist financing.

Currently, Title III of the Patriot Act states that all financial institutions must have an AML program that, at a minimum, includes written policies, procedures and controls; the designation of an AML compliance officer; training; and periodic independent testing. Consistent with the Patriot Act, both the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE) have enacted similar rules - NASD Rule 3011 and NYSE Rule 445, respectively.

"There's a lot of pressure from the regulators to improve technology approaches to identifying, analyzing and reporting suspicious activity," says Alan Abel, head of the AML risk management services group in Deloitte & Touche's U.S. forensic and dispute service practice. "Everyone's struggling with that and [firms] are looking to new technology solutions to bring it all together."

According to Michael McCabe, a lead partner in the financial markets, risk and compliance division of IBM Business Consulting Services, a number of the top 50 financial institutions are reexamining the solutions they implemented to comply with the Patriot Act's April 2002 AML program deadline. "Firms are seeing that the products have matured a lot in the past three years, and, as a result, they're saying, 'Maybe we should revisit how much we're spending internally on our solution - maybe our solution's not good enough; maybe it isn't flexible to grow with what we need to do,'" he says.

In With the New

After considering four other solutions (which Verga declines to name), TD Waterhouse went live with the Mantas solution on Feb. 25. The first phase of the implementation involved the execution of nine anti-money laundering scenarios, each of which is dedicated to a specific type of review, including large transactions, the rapid movement of funds and networking. (Subsequent phases, which were scheduled for June and August as of press time, will involve additional broker and institutional scenarios.) The Mantas solution captures data, digests it and produces alerts for the end user. "We have daily and weekly scenarios set up and we get alerts delivered through a Web-based desktop approach," explains Verga. "Our AML group will review the alert in detail and pursue it to see if there's a potential violation."

For situations that don't warrant additional follow-up, Verga adds, one of the key benefits of the solution is that all of the activity history is stored in the system. New alerts take into consideration prior activity and risk rate them depending on past activity at different levels (e.g., activity level, account level, household level, etc.).

"One of the key drivers as to why we went for Mantas is that they're dedicated to producing these scenarios and the analysis of the data where we don't have to do that in-house," he says. "They're the developers and we can fine-tune the thresholds and the setting to accommodate our specific business needs."

TD Waterhouse isn't alone in relying on vendors to do the legwork. According to IBM's McCabe, there is a definite trend across the financial services industry with regard to firms looking for a packaged solution.

"Three or four years ago, the solutions were: 'Here's a tool kit, build what you want.' Today firms expect us to walk in the door and tell them what the solutions should look like, or in the case of a Mantas solution, what the scenarios are that they should be looking at," he says. "Firms are expected to be lead or advised very strongly. ... They're not interested in tool kits anymore."

Clearly, as firms' needs evolve, the steps they will take to find and implement the appropriate technology will change as well. However, TD Waterhouse's Verga says, what won't change is their goal. "If we can be preventative and look at that check or wire or the potential identity theft and stop it before it gets in the door, then we've served the purpose of what we're trying to accomplish in the AML world," he says.

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A Sampling of AML Service Providers

Actimize
1250 Broadway, 28th Floor
New York, NY 10001
(212) 643-4600
www.actimize.com

Mantas
13650 Dulles Technology Dr.
Herndon, VA 20171
(703) 673-0500
www.mantas.com

Protiviti
1285 Ave. of the Americas
3rd Floor
New York, NY 10019
(212) 603-8300
www.protiviti.com

SAS Institute
100 SAS Campus Drive
Cary, NC 27513
(919) 677-8000
www.sas.com

Searchspace
60 Broad Street
New York, NY 10004
(212) 422-5100
www.searchspace.com