Nithun Ajeeth.K & Senathipathi.R
Department of Banking Technology, Pondicherry University, India ABSTRACT
Money laundering is the big problem which is getting even more complex than before. The designing the system for prevention of money laundering and fraud detection is a complex task since money launderers have kept pace with the changing times, becoming more technically adept than ever, making the existing systems more vulnerable to financial crimes. In the process of money laundering and fraud detection there exist s three important stages such as identification of the suspicious financial transactions, criminals, providing evidence for the crime committed, freezing of suspicious account and reporting the same to the financial intelligent units or regulators. Unfortunately most anti money laundering systems which are all exists today have no integration between the Know Your Customer information ( KYC- data collected during opening of the account) & customer due diligence process and hidden network issues. There exists a separate solution for money laundering and fraud detection. To address these issues, novel system is proposed in this paper to enhancing effectiveness with anomaly detection, rules and link analysis, sequence matching, integration of KYC in customer due diligence process, integrating the regulatory compliance & fraud detection elements and a common solution for both money laundering and fraud detection with the help of data mining techniques. Overall the proposed system helps banks and other financial institution to identify the threat of money laundering & fraud in all stages of the process such as placement, layering and integration.
Key words: Money laundering, suspicious activity reporting, customer due diligence, hidden network, KYC, anomaly detection, link analysis, sequence matching, data mining. 1. INTRODUCTION
Every year anti-money laundering (AML) continues to evolve and expand across multiple dimensions in the financial services industry. Money laundering (ML) is a process of disguising the illicit origin of "dirty" money and makes them appear legitimate. It has been defined by Genzman as an activity that "knowingly engage in a financial transaction with the proceeds of some unlawful activity with the intent of promoting or carrying on that unlawful activity or to conceal or disguise the nature location, source, ownership, or control of these proceeds" . Through money laundering, criminals try to convert monetary proceeds derived from illicit activities into “clean” funds using a legal medium such as large investment or pension funds hosted in retail or investment banks. This type of criminal activity is getting more and more sophisticated and seems to have moved from the cliché of drug trafficking to financing terrorism and surely not forgetting personal gain.
Money laundering is usually described as having three sequential elements— placement, layering, and integration—as defined in a report by the Board of Governors of the Federal Reserve System (2002, 7): The first stage in the process is placement. The placement stage involves the physical movement of currency or other funds derived from illegal activities to a place or into a form that is less suspicious to law enforcement authorities and more convenient to the criminal. The proceeds are introduced into traditional or non traditional financial institutions or into the retail economy. The second stage is layering. The layering stage involves the separation of proceeds from their illegal source by using multiple complex financial transactions (e.g., wire transfers, monetary instruments) to obscure the audit trail and hide the proceeds. The third stage in the money laundering process is integration. During the integration stage, illegal proceeds are converted into apparently legitimate business earnings through normal financial or commercial operations. Not all money-laundering...