PATRIOT Act Takes Aim at the Financial Sector
Knowing your customer has become more than a business imperative.
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For the financial sector the phrase know your customer is extending beyond building customer profitability and into identifying terrorist activity. The reason, industry pundits say, is largely due to this month's compliance deadline for anti--money- laundering policies set forth by the USA PATRIOT Act, designed to identify suspicious patterns of behavior. However, speculation remains about how effective it will be. The events of 9/11 have triggered a series of more stringent legislation and compliance regulations designed to crack down on terrorist activity like movement of large amounts of money. Prior to 9/11 large sums of terrorist money changed hands, but virtually all of it went undetected. The regulations at that time only required banks to file a suspicious activity report (SAR) when transactions larger than $10,000 were made. By keeping each transaction below that sum the terrorists and their sympathizers were able to move millions of dollars below the radar. "The $10,000 cutoff was more of the traditional way of looking at potential money-laundering cases," says Bob Blumstein, research director at IDC. "Now, banks are looking at a person's behavior as an account holder. They are asking 'Is this a normal pattern? Does the pattern of money transfer send a message of unusualness?'" The aptly named PATRIOT (Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) Act aims to answer those questions by requiring banks to not only report transactions of more than $10,000, but also through software that identifies suspicious patterns of money movement that might indicate attempts at money laundering. To ready the banking industry, the legislation additionally requires banks to appoint a compliance officer if they don't already have one, provide anti--money- laundering training to employees, and have an independent third-party conduct an audit that tests the program's ability to track money movement. The legislation, however, does not require banks to automate the detection process, which Mitch Bishop, vice president of sales and marketing at TightLink Corp., based in Berkeley, Calif., says would be a critical time saver. "Policies, procedures, and controls have to be put in place, but nothing says it has to be automated. It can be done by hand," Bishop says. That is Bishop's concern--the effectiveness of a manual investigation process. The legislation requires banks to have manual investigation software, but "that's not very useful for large banks, because it's time-consuming and expensive, and subject to a lot of human error," Bishop says. Instead, Bishop suggests banks of all sizes consider automated investigation software. "If you're in the top 1,000 banks in the country you probably have some sort of automated money-laundering policy in effect already. Some smaller banks may have existing solutions in place, but likely they are manual." TightLink's software does not automate the transactional part of the detection equation. Blumstein expects more companies to automate the entire detection process, moving away from the cumbersome and time-consuming ways of detection enforced in the PATRIOT Act. "I think the software out there is beginning to move in that direction--more of an individual deviation as opposed to just looking at everything over $10,000," Blumstein says. "It's going to be interesting to see how it plays out," Bishop says. "The October deadline is not the end of the story. It's only the beginning." -- David Myron
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