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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 l.jpg

Making Compliance Pay

IBA Seminar22nd October 2005

Ian Larkin

Head of Risk and Compliance LogicaCMG UK


Regulatory compliance l.jpg

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?


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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”.


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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


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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.”


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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 l.jpg

    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 l.jpg

    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 l.jpg

    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


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    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


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    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


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    • Profiling

    • Decision Tree

    • Neural Networks

    • Text Mining

    • Outlier Detection

    • Link Analysis

    • Rule Patterns

    • Sequence Matcher

    Detection Techniques


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    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


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    • 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 l.jpg

    • 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 l.jpg

    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


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    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


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    5 Elements of Best Practice

    Strategy

    Integrated & Comprehensive Framework

    Risk Measurement, Reporting and Control

    Organisation

    & People

    Operations

    Systems


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    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


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    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


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    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


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    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.


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    AML - some of our clients

    8


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    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


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    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.


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    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


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    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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