Monitoring High Risk Transactions May 11, 2009 Why We Monitor What We Monitor How We Monitor Does it work?

2 MONITORING HIGH RISK TRANSACTIONS WHY? 1.Protect against “Bad Guys”: Money Launderers Sanctioned Parties( OFAC, EU,etc.) Terrorist Financiers

3 MONITORING HIGH RISK TRANSACTIONS 2.Protect against regulators: Policies and procedures Automated systems Manual reviews Training Record keeping Consistency FFIEC Manual WHY?

4 MONITORING HIGH RISK TRANSACTIONS Interdiction: OFAC =“Strict liability” Monitoring: Risk =Reputation, “reputation is priceless” Cost Justification – Riggs Bank, Lloyds Bank – Insurance model: Expected return is negative, but pay a premium you can afford to avoid a loss you cannot afford. Are risk based programs a myth?

5 MONITORING HIGH RISK TRANSACTIONS Funds Transfer( SWIFT & ACH) Capital Markets Trade Finance Liability Management? Checks Third party payments Vendors, employees What?

6 MONITORING HIGH RISK TRANSACTIONS Manual Monitoring Automated systems – Interdiction systems Source lists Algorithms: – Stop descriptors – Phonetic matches – Fuzzy logic – Monitoring systems Rules Based Change based Artificial intelligence How?

7 MONITORING HIGH RISK TRANSACTIONS Interdiction is the more simple task Comparison of three tools on same data Does it work?

8 MONITORING HIGH RISK TRANSACTIONS True Hit Comparison of screening tools Single day Funds Transfer Phonetic (460) Stop Descriptor (1008) Fuzzy Logic (5529)

9 MONITORING HIGH RISK TRANSACTIONS Ratio of alerts to SAR’s;>2000:1 Ratio of interdiction hits to block/reject;=1000:1 Regulators seem satisfied Lack of objective standards – Testing bio labs Does it work?

10 MONITORING HIGH RISK TRANSACTIONS Research & Development Project Staffing – Investigator – Statistician Technology – Database – Business Objects ver. XI (BOXI) Projects – Digit distribution – Business line risk assessment – Vessels – Resource optimization