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Tue 12 Feb 2008 04:00 AM

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The events of Sept. 11, 2001 placed the regions' financial sector under increased scrutiny.

The events of Sept. 11, 2001 placed the regions' financial sector under increased scrutiny.

Middle East financial institutions are often under suspicion before they even make a transaction, purely due to negative connotations about the region.

However unfair this may seem, it makes it even more important for institutions here to ensure they have international standards in place when it comes to anti-money laundering processes.

The market is definitely going towards solution-based AML.

The events of September 11, 2001, and the subsequent PATRIOT legislation by the US, have put the Middle East financial sector under greater scrutiny than ever before.

Although Western markets are subject to tough regulation and Know Your Customer guidelines, banks in the Arab world face added difficulties.

Middle East banks are likely to come under heavy scrutiny, as Arab Bank found out last year when transactions it channelled between Saudi customers and Palestinian groups were queried by the US Justice Department.

The state-owned Commercial Bank of Syria was blacklisted by the US in 2006, forcing all American banks to sever their ties with it.

In 2006, SWIFT, the international banking network, was forced to admit that it had been handing over details of specific transactions to the US Treasury for the past five years as part of the government's ongoing anti-terrorism investigation.

It did not specify whether any particular countries were under scrutiny, but it would be a surprise if financial transactions involving the Middle East were not the main focus.

And at the end of last year, banks were forced to cut their ties with Iran's financial institutions.

The banking and finance sector may not have much control over the political climate, but institutions can do their best to ensure they are untainted by criminal money.

Around 50 Middle East institutions use AML filtering software from SIDE International, a company acquired by Eastnets last year.

It fits on top of the SWIFT interface, which is also operated by Eastnets.

It is also developing a more sophisticated profiling product targeted at small to medium sized institutions. "Profiling is usually based on artificial intelligence because it detects the profile of the transfer itself," says Hazim Mulhim, CEO, Eastnets.

"If someone is sending a certain amount to an account and this account has never received such an amount, it will automatically trigger an alert within the bank and the back office so that this transfer can be traced when it goes to other accounts."

Let's say I give you $1m and then you put it in 10 accounts, and then again you consolidate it in one account, automatically it will trace all the movements of this transfer."

Mulhim thinks it is vital for AML solution providers to discuss with local regulators the best way to encourage the take-up of better AML policies and procedures among financial institutions.

This is a major issue in a region where some financial institutions do not have automated solutions in place.

Harry Pretorius, business development director, risk intelligence (Middle East and Africa), head of risk practice at SAS, says: "There are still a lot of potential financial institutions who are running on old school, in-house Excel spreadsheets or other banking solutions, but we have been asked for a lot of new proposals, looking at 2008 and 2009, so the market is definitely going towards solution-based AML."

Although some of the Middle East's financial institutions have been late to adopt AML solutions, there are several glowing examples of implementations. Pretorius says: "They have been one of the first adopters."

"One of our key clients is Samba in Saudi Arabia, which is one of the oldest AML implementations for SAS."

"The kind of analytics they do with the solution is just phenomenal." He even takes prospective clients to see how Samba is using SAS solutions, as an example of what can be achieved."

The AML solutions from SAS focus on analytics, rather than taking a purely transactional approach.

This means the software can configure itself and ‘learn' from experience which behaviours are suspicious.

Pretorius explains: "You define your upper and lower levels, and as you define your scenarios, we continue to loop off actual results that have happened within the organisation and/or externally and feed that back into a scenario so your predictive power statistically becomes a lot better."

"That's the key differentiator, in that some of our competitors don't complete the loop."

"They are very good at the first line: coming up with the triggers, coming up with the false negatives, coming up with the actual scenario, but with the return loop of learning and optimising your predictive power from an analytical perspective, I think that's where we differentiate ourselves."
He anticipates the analytical side of anti-money laundering and operational risk management growing in the next few years.

"There is a definite trend where companies and financial institutions are using AML not just for AML," he says.

Financial institutions are using AML not just for AML.

"They're going into fraud detection, they're optimising processes, they're integrating it into utility-based costing solutions to price their product."

"They're also starting looking at the Basel requirements from an operational risk perspective."

"We've integrated AML results within operational risk scenarios as KRIs (key risk indicators) and we're now measuring on top of an AML the actual operational risk, and that's reducing your capital adequacy even more."

Pretorius adds: "The future of AML is the potential basis for a lot of integration into advanced analytics and the technology itself will grow.

"We're seeing the rise of bureaus providing anonymous scenario-based data for new implementations as well as existing and old implementations to streamline your scenario modelling."

For smaller institutions who may have less IT expertise in-house or may not need such a complex solution, SAS offers MLD (Money Laundering Detection).

"Depending on the kind of data you have and the level of anti-money laundering you actually want to do, we've got SAS MLD which is not as customisable, but it's cheaper and easier to implement," says Pretorius. "It's a lot less maintenance- and IT-intensive."

Finetuning can be vital in helping AML software to be more effective for a financial institution's particular needs, and the requirements of the jurisdictions where its transactions are conducted.

"Whilst technology can provide the tools for banks to effectively manage their AML strategy, different regions often have to comply with unique regulations," says Tim Dawes, commercial director, ACE Software Solutions.

"For example, if a country is dealing with the US and there are specific regulations that apply to conducting business between the two countries or sanctions have been applied, banks are responsible for ensuring they adhere to those regulatory requirements.

"Software allows banks to build in their own unique requirements using rules that the software will adhere to as it runs the systems."

"An off-the-shelf product can provide a large percentage of the requirements, it's just the extra few percent which may need to be modified to suit the bank's requirements as the regional or global requirements change from time to time."

Dawes says that developments in technology are helping to reduce the rate of false positives. "ACE's AML solution uses conceptual management and parsing," he explains.

"It looks at the whole message and not the individual word. For example if a message contains the word ‘Baghdad', the system will look at the whole message, all of the information before and after the word ‘Baghdad' to ensure it is flagging the message for attention because it is potentially a problem and requires manual intervention to deal with it appropriately."

One area where the Middle East lags more mature economies is in the use of AML solutions by corporations and legal practitioners.

In markets such as Europe, for example, notary publics have to check the various blacklists prior to approving certain documents.

"As any market matures, the evolution happens throughout the market," says Pretorius of SAS. "I expect within the next year or two to start seeing more than just the financial services industry taking up the solution."

If automated AML solutions can be adopted at the legal and corporate levels, it should mean that the financial sector no longer has to take all the burden of identifying shady characters and transactions, since they may be picked up in other transactions.

That said, AML solution providers are putting a convincing business case for financial institutions in this region to move to automation if they have not already done so, and to develop in sophistication those systems that they already have in place.

Never mind the potential downside if a bank is found liable for a blacklisted individual's transactions - the integration of AML with other risk analytics could allow a financial institution to keep less capital on hand.

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