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Making Compliance Pay. IBA Seminar 22nd October 2005. Ian Larkin. Head of Risk and Compliance LogicaCMG UK. Regulatory Compliance. The harsh reality is: Cost of regulation is huge Implementation, then operation & maintenance £200m for a Tier 1 bank, £1bn in 2005 for B2 across Europe

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making compliance pay
Making Compliance Pay

IBA Seminar22nd October 2005

Ian Larkin

Head of Risk and Compliance LogicaCMG UK

regulatory compliance
Regulatory Compliance

The harsh reality is:

  • Cost of regulation is huge
    • Implementation, then operation & maintenance
    • £200m for a Tier 1 bank, £1bn in 2005 for B2 across Europe
  • Aim for minimum acceptable compliance
    • Minimizing spend, cutting scope
  • Regulatory programmes are “siloed”, despite overlaps
    • Minimizing the project dependencies
    • Little coordination, few synergies, multiple hits
  • Compliance causes business and strategic disruption
    • Delays strategic business programmes
    • Impacts business as usual
  • Is a rubber stamp the only benefit?
an alternative strategy
An Alternative Strategy

Regulatory compliance is not just an overhead - it should add value!

so…

Don’t do it because the regulator says so;

do it for business benefit, and comply “en passant”.

two ends of a spectrum
Two ends of a spectrum

Minimumcompliance

Benefit-based

  • Disparate projects to cost, implement & manage
  • No strategic overview
  • “Do what we must”
  • Back-pressure
  • Repetition of work
  • Resource intensive
  • Co-ordinated strategic approach
  • “Compulsory spend – use it wisely”
  • Business gain costs less!
  • Progressive, incremental development
  • Optimal economic capital allocation
some quotes
Some quotes
  • Woolly or wise?
  • “We don’t want MI to provide information internally – only to send reports to satisfy the regulator!”
  • “We are not spending anything on Basel II! We are enhancing our Credit Risk system, which will be Basel compliant.” (Tier 1 Head of Risk)
  • “We see B2 as giving us the opportunity to develop risk-based pricing for our retail customers.”
  • "Spending on Sarbanes-Oxley is an upfront investment in making the processes of the company better," says BP’s Macdonald. "We don’t view it as an intolerable burden.”
how to get some benefit
How to get some benefit…
  • Re-use information & systems
      • Sox process maps  B2 OpRisk
      • AML analysis  CRM
      • Stress testing  risk navigation
  • Use aggregated information
      • Counterparty exposure  limit utilisation, sales authorisation
      • Shared statistics  model calibration, benchmarking
  • Use consistent metrics
      • Enterprise Compliance Data Management
      • Comparative risk measures  risk-adjusted returns
      • Finance & Risk Integration
business issues in aml
Business Issues in AML

Manage high volume of alerts from detection systems

Identity

Fraud

Trader

Fraud

Anti-Money

Laundering

Financial Crime

A multi faceted beast…

Prove that the organisation is following the correct processes

Investigate crime holistically across the organisation

Investigation and Case Management

Corporate

Fraud

Employee

Fraud

Claim

Fraud

Use case data proactively to protect the organisation

Conduct processes more efficiently and reduce workload

financial crime is more than aml

money laundering

criminals using FIs to make dirty money clean by placement, layering and integration

identity theft, ATM fraud, counterfeit cards, cheque kiting, credit-card fraud, skimming

marketabuse

late trading, market timing, front running parking investments,

employee

fraud

theft of cheques, misappropriation of funds, removing money from customer accounts

fraud

financial crime

Financial crime is more than AML

Take a Proactive Holistic Approach

to fight the Growing Threat of Financial Crime

what is a holistic approach

Combines Multiple Functions and Crime Areas

Market Abuse

Corruption

Reporting

Anti-

Phishing

Card

Fraud

Check

Fraud

KYC

Identity

Fraud

AML

What is a Holistic Approach?

Holistic Solution

Stovepipe Solutions

the value of a holistic approach
The value of a Holistic Approach

With a unified, holistic approach, financial institutions benefit from:

  • increased operational efficiencies and optimized processes
  • reduced costs
  • increased profitability
  • maximized revenues (fraud)
  • greater business insight into risk

Combining Crime Areas Directly Impacts Your Bottom Line

range of solutions
Range of solutions

Know Your Customer By Name

Know Your Customer’s Business

Cost

Behaviour

Detection

Solutions

Data

Integrity and

Acquisition

Rules based

systems

Transaction

and Customer

Watch List Filtering

Customer Due Diligence

Complexity

detection techniques

Profiling

  • Decision Tree
  • Neural Networks
  • Text Mining
  • Outlier Detection
  • Link Analysis
  • Rule Patterns
  • Sequence Matcher
Detection Techniques
rule based detection
Rule-Based Detection

ATM

cash

Internet

foreign banks

wires

Rules Engines

Good news: Simple to implement, simple to understand, does not require historical data

Bad news: Can not detect unknown activity, may miss high risk or ML activity if too narrowly written, or if written too broadly, will increase number of false positives

Only Known Scenarios Can Be DetectedLeaving New Schemes to Go Unnoticed

many detection techniques

Link Analysis

  • Profiling
Many Detection Techniques

Profiles of entities are dynamically created based on account activity over time. Used to detect deviations from historical or peer group behaviour. Simpler systems profile only on summarised and discrete account data,e.g. end of day balance. More advanced systems create a statistical fingerprint of multiple account data. The speed of adapting the profile may be linked to the look back period. A shorter look back would result in the profile adapting quicker.

Some systems differentiate between Profiles and Outlier Detection. Profiles relate to a customer’s normal behaviour.

Outlier Detection relates to activity against Peer Group. Anticipatory profiles require information about how the

customer is expected to behave, e.g. max withdrawals, average assets etc.

Finds entities that are linked by common transactions,either directly or at a distance. Can also find entities that appear unrelated but have matching account details. In some systems, link analysis will be used to trigger alerts. In others, link analysis can only be used to investigate an entity that is already alerted. Individuals in terrorist cells often have common addresses, KYC id, phone numbers etc.

detection techniques15

Sequence Matcher

  • Neural Networks
Detection Techniques

Used for complex, time-dependent problems and when data is received in a series over time.

A network of nodes that are organised into layers. The input layer reads values of data attributes and the output layer identifies the class of risk and risk score. After the network has been trained with defined input data and expected results it can be used to classify new inputs into predefined classes. The drawbacks are lack of transparency into why decisions were made and the need to retrain the network as business and risks change.

the best approach
The best approach

ATM

cash

Internet

foreign banks

wires

A Combined / Hybrid

Approach

A combined approach that includes filtering, profiling, rules and link analysis will deliver the best results, with the fewest false positives, and greatest chance of finding fraudsters and money launderers

A Combined Approach Delivers the Greatest Detection Accuracy and Results

neteconomy erase

NOT SUSPICIOUS

NetEconomy ERASE

DETECT

INVESTIGATE

TRACK

REPORT

AUTOMATIC

TRANSACTION

DATA

!

INVESTIGATE

ALERTS

REGULATORY

REPORTS

INVESTIGATION

TOOLS

ACCOUNT

DATA

SUSPICIOUS

REPORT

MANAGER

CUSTOMER

DATA

RISK

VIEWS

MANAGEMENT

REPORTS

CASE

MANAGEMENT

SUSPICIOUS

INCIDENTS

(NEGATIVE)

LISTS

5 elements of best practice
5 Elements of Best Practice

Strategy

Integrated & Comprehensive Framework

Risk Measurement, Reporting and Control

Organisation

& People

Operations

Systems

ingredients for success
Ingredients for success
  • Create a compliance culture in the organisation
  • Due diligence in customer identification
  • Know your customers’ financial behaviour and status
  • Set the right objectives for automated systems
  • Establish a comprehensive and integrated risk framework
then make compliance pay
Then Make Compliance Pay
  • Work your enterprise compliance data
  • Re-use compliance systems for business benefit
  • Implement economic measures of performance
  • Work towards maximizing the value of the enterprise

Ian N. Larkin

Head of Risk & Compliance

LogicaCMG UK

[email protected]

direct +44 (0)20 7446 5150

mobile +44 (0)7802 462 067

who are we
Who are we?
  • Logica cm… who?
  • LogicaCMG has implemented RTGS for RBI, nation-wide
  • LogicaCMG is a major international force in IT services to clients across diverse markets
  • We provide management and IT consultancy, systems integration and outsourcing services
  • Formed in December 2002, through the merger of Logica and CMG, the company employs around 20,000 staff in offices across 34 countries
fighting financial crime
Fighting Financial Crime
  • Our watch-list filtering system is used by 8 of the world’s largest 20 banks to scan international payments. It also scans half of the world’s foreign exchange payments every day.
  • Implementing ABN Amro’s AML system, covering all of ABN’s banking operations in 66 countries.
  • Assisting Barclays Capital implement its AML and Trading Compliance system globally.
  • Developed the Fraud Investigation system for CIFAS, the UK’s Retail Credit Fraud Prevention Service.
  • Delivered investigation and case management systems for the UK Serious Fraud Office, UK Passport Office, and Crown Prosecution Service in England and Wales.
  • Delivered more than 70 card infrastructure systems since 1984. Driving standardisation and exploitation of smart card and chip card technology including establishing national systems for two countries.
abn amro global rollout all banking units logicacmg and mantas
ABN Amro: Global RolloutAll Banking Units – LogicaCMG and Mantas

66 Countries, in 2 years. On Time! On Budget!

Multi - Jurisdiction

Multi – Business Unit

Multiple Data Sources

Region Specific Monitoring, with Transparency for the Regulator

Rapid Time to Market

A New Country in 2 Months,

½ Day User Training

Scalable

Centralised Processing, Flexible Routing

Each hub acts independently against a set of standards published by Head Office.

Cost Effective

Hub Installation, 5 Countries at a time.

Leverage Resources, Share know how

Singapore Surveillance Team (Wholesale & Retail)

European Surveillance Team (Wholesale and Retail)

LatAm Surveillance Team (Retail Only)

Client Hub Locations

logicacmg and neteconomy
LogicaCMG and NetEconomy
  • Global alliance partners since 2002
  • LogicaCMG brings extensive experience of assisting banks across the globe with implementing appropriate solutions to manage their business risks and the requirements of international AML legislation.
  • LogicaCMG takes prime contractor responsibility to deliver a system that will meet the regulatory, functional and technical requirements to a committed time and cost.
  • NetEconomy provides class-leading risk management software addressing money laundering, fraud and trade compliance.
recent implementations
Recent implementations
  • ING Vysya - India
    • 2 Million accounts
    • 5 Million transactions/month
  • IndusInd Bank - India
    • 2 Million accounts
    • 5 Million transactions/month
  • AXA Banque - France
    • 400,000 accounts
    • 4 Million transactions/month
contact
Contact…

Nath Parameshwaran

Business Manager

Financial Services - South Asia

LogicaCMG

Express Tower

3rd Floor

Nariman Point

Mumbai - 400 021

India

Tel +91 (22) 5635 2984

Mob +91 98203 15084

Email [email protected]

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LogicaCMG has taken reasonable care to ensure that the information contained herein is correct at the time of publication. Before using or relying on any content in this presentation, independent verification should be obtained. LogicaCMG accepts no liability nor responsibility for any use of or reliance upon the content of this document.

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