Prevention of Money Laundering in Europe

The enactment in Europe of the 2005/60/EC Directive of the European Parliament and of the Counsel on the Prevention of the Use of the Financial System for the Purpose of Money Laundering and Terrorist Financing took place on October 26, 2005. This so-called Third Directive became effective on December 15, 2005.

The 40 recommendations of the Financial Action Task Force (FATF) were incorporated in the Third EU Money Laundering Directive.

Anti-Money Laundering in Germany

In June 18, 2008 the Federal Parliament decided on the new Money Laundering Act (Geldwäschebekämpfungsergänzungsgesetz GwBekErgG) to regulate the obligations of financial institutions in combating money laundering and the financing of terrorism.

AML Laws in Switzerland

The Federal Law for combating money laundering in the financial sector has been in effect in Switzerland since October 10, 1997 (Geldwäschereigesetz, GWG (Anti-Money Laundering Act AMLA). On December 18, 2002 the Swiss Financial Market Supervisory Authority issued the Directive on the Prevention of Money Laundering (Geldwäschereiverordnung FINMA).

In addition, a board of control (FINMA) was established to combat money laundering.

Money Laundering Guidelines in Liechtenstein

The money laundering ordinance is described in the Sorgfaltspflichtgesetz (SPG - Due Diligence Act), and is explained in more detail in the Sorgfaltspflichtverordnung (SPV - Due Diligence Directive). Guidelines and further information can be found on the homepage of the Liechtenstein Financial Market Supervisory Authority.

On December 12, 2008 Liechtenstein Parliament decided on a national Money Laundering Act  to regulate the obligations of financial institutions in combating money laundering and the financing of terrorism.

Meeting Customer Due Diligence Duties

Only the person with additional information on his customers is in a position to be able to make a decision in a case of doubt as to whether a customer relationship or a transaction carries a risk. The specific obligations under the KYC principle are:

• obligation to identify the contracting party

• obligation to establish the beneficial owner

• obligation to clarify the financial background

Risk Classification of Customers 

A risk classification of individual customer relationships is required in order to make an evaluation of unusual transactions and events. MLDS money laundering detection system operates a five-stage classification process. The categorization of individual customers is made in a rule-based project that takes into account the financial relationships and transaction performance of the customer in addition to the customer master data.

Creating Synergies for Relationship Management

The information collected in the KYC profile is not only relevant for compliance. It can also be used in relationship management, and offers other opportunities for profit.

Analyzing Risk-Oriented Transactions

The heart of MLDS is an intelligent analysis module that brings together all available data on customers, transactions, and histories, and then evaluates them with respect to various risk scenarios. This high quality identification of unusual transactions is the result of many years of practical experience and constant optimization of the modeled business logic.

Identifying Unusual Transactions and Suspicious Transaction Patterns

Transactions are analyzed taking into account the individual risk classification and the information contained in the KYC profile. Conclusions can thus be reached as to whether the amount of a transaction or deposit is, in fact, unusual. MLDS also identifies suspicious transaction patterns, such as pass-through transactions.

Graphically Model Rules - without IT Support

The rules applied to identify unusual transactions are modeled graphically with Visual Rules. The compliance department can define and revise the monitoring of the rules without the support of IT. 

The Result: Initiate Clarification Actions

Rule-based analysis marks and prioritizes the transactions or events identified as unusual. To support the editor, MLDS delivers reasons with extensive explanations as to why a transaction was found to be unusual. Next, the required steps for clarification are initiated automatically, using defined processes.

Clarification of Hits

Different clarifications are initiated based on the risk level of the transaction.  These clarifications range from an acknowledgement of the simplest case up to complex processing under the dual control principle. In addition to the customer advisor, his superiors, as well as the compliance department, will become involved depending on the clarification type.  MLDS provides each of the people involved with an application specific to their individual tasks.  The customer advisor completes an electronic checklist during the course of the clarification. It is approved by compliance and his superior, respectively, and, if necessary, returned to the customer advisor for the addition of further details.  All work steps are paperless, and archived automatically.

Process-Oriented Workflows

All persons involved are linked through the electronic workflow.  An automatic workflow forms the basis for efficiency and security, particularly for financial institutions that have a high daily transaction volume.  Unusual transactions or transaction types trigger defined activities to be performed by the persons involved on a systematic and mandatory basis.

How Are Risks Classified?

Classification logic first differentiates among various types of business relationships: private or retail banking, corporate customer business, institutional investors or brokerages.  Their business behavior differs.  For example, in the case of corporate customers, large money inflows and outflows are the order of the day.  In contrast, this transaction pattern would be more unusual for a private account.  

Classic Risk Factors Include:

• Country risk

• Transaction behavior

• Legal form

• Financial circumstances

• Industry 

• Politically exposed person (PEP)

• Occupation

The results of risk classification are used, for example, to define limits for transaction monitoring.

Risk Classification with the MLDS Money Laundering Detection System

The MLDS Money Laundering Detection System classifies both business relationships and customers according to their typical business behavior and takes into account the above risk factors.  The rules of risk classification are depicted graphically; the business department can create, test and revise rules on its own.