Rule 1: Detection of Structuring

Overview: Structuring is the practice of splitting large transactions into smaller ones to circumvent detection by staying below mandatory reporting thresholds. Effective AML protocols must be able to spot patterns of frequent transactions that approach, but do not exceed, these limits within a certain timeframe.

Scenario:

• Reporting Threshold: In a given jurisdiction, financial institutions are required to report any cash transactions over $10,000 to regulatory authorities.
• Customer's Intent: A customer possessing $35,000 in illicit funds intends to deposit this amount into their bank account without triggering regulatory alerts.
• Structuring in Action:
  • Day 1: Deposits $9,500 in cash.
  • Day 3: Deposits $9,800 in cash.
  • Day 7: Deposits $9,200 in cash.
  • Day 10: Deposits $6,500 in cash.
• AML Rule in Play: The bank implements an AML rule to monitor for potential structuring activities. This rule flags any instances where a customer makes multiple cash deposits just below the $10,000 threshold within a 30-day period.

Detection:

• The monitoring system identifies the pattern of these cash deposits and triggers an alert for potential structuring. The compliance team is then prompted to conduct a thorough investigation to assess the legitimacy of these transactions.

Key Takeaways:

1. Prevalence of Structuring: Structuring remains a favored strategy among individuals attempting to launder money, as it helps evade the scrutiny typically triggered by larger transactions.

2. Critical Role of AML Monitoring: Implementing AML rules that specifically target patterns of transactions just below mandatory reporting thresholds is crucial for uncovering attempts at structuring.

2. Effective Rule Design: By setting precise parameters, such as defining the range of transaction amounts and the relevant timeframe for monitoring, AML systems can efficiently detect and flag suspicious activities, facilitating early intervention by compliance teams.

Rule 2: Monitoring Customer Details Update Before a Large Transaction

Overview: Updates to personally identifiable information (PII) just prior to a large transaction can be a warning sign of account takeover or attempts at layering in money laundering. Monitoring these patterns is crucial for identifying and addressing suspicious activities.

Scenario:

• Account History: John Doe has maintained a savings account with XYZ Bank for several years, characterized by minimal activity including occasional small deposits and withdrawals.
• Sudden Change in PII: Unexpectedly, John logs into his online banking and updates several key pieces of his PII, including his phone number, email address, and residential address.
• Large Transaction: Directly following the updates, John initiates a wire transfer of $50,000 to an overseas bank account, which he has never previously used.

AML Rule in Action:

• XYZ Bank employs an AML rule designed to track significant changes in customer PII, particularly when such changes are followed by large or unusual transactions.

Red Flag:

• The AML system flags the sequence of PII updates and subsequent large transaction, prompting an alert for potential account takeover or layering activity. This triggers further investigation by the compliance team.

Possible Explanations:

• Account Takeover: A potential scenario is that a fraudster has accessed John's account, updated the PII to avoid detection, and is attempting to transfer the funds illicitly.
• Layering: Alternatively, John might be involved in laundering money, seeking to disguise the origin of the funds by transferring them to a new, unrelated account after changing his PII.

Key Takeaways:

• PII changes, particularly before significant transactions, are critical indicators of potential illicit activity.
• AML systems that monitor these patterns play an essential role in detecting both account takeovers and sophisticated money laundering schemes.
• By closely analyzing the timing and nature of PII changes in conjunction with transaction details, financial institutions can effectively identify risks and initiate appropriate preventive measures.

Rule 3: Monitoring Unusual Spending Patterns

Overview: This rule is designed to detect transactions that starkly differ from a customer's typical financial behavior, taking into account factors such as income, social status, and occupation. It helps in identifying potential account takeovers or external manipulations.

Scenario:

• Customer Profile: Jane Smith, a school teacher with a modest income, has a banking history that consistently reflects her salary deposits, bills for utilities, grocery expenses, and occasional dining outings.
• Sudden Change in Spending: Suddenly, Jane's bank statement reveals multiple high-value transactions at luxury retailers, bookings for international travel, and substantial cash withdrawals—activities that starkly contrast with her known lifestyle.

AML Rule in Action:

• The bank employs an AML monitoring system that scrutinizes unusual spending patterns by comparing a customer’s present transactions against their historical financial behavior, while also considering their income and occupation.

Red Flag:

• Jane’s atypical spending triggers an alert in the system. The compliance team steps in for a deeper investigation.

Possible Explanations:

• Account Takeover: There might be a chance that a fraudster has accessed Jane’s account and is exploiting it for extravagant expenditures.
• Money Laundering: Alternatively, Jane could be engaged in unlawful activities, using her account to launder money through uncharacteristic purchases that don’t align with her declared income.
• Unexpected Windfall: While less common, it’s conceivable that Jane has received a significant financial windfall (like an inheritance or lottery winnings) that could justify the sudden upscale in spending. Verification would be required.

Key Takeaways:

• Marked deviations from established spending patterns are significant indicators of potential suspicious activity.
• AML regulations that assess factors such as income, occupation, and past transaction behaviors are essential for spotting these anomalies.
• By scrutinizing unusual spending patterns, financial institutions can pinpoint potential cases of account takeovers, identify possible money laundering operations, or even situations where customers may require financial counseling or advice.

Rule 4: Monitoring Low Buyer Diversity

Overview: This rule targets merchant accounts on multi-vendor platforms, identifying instances where payments are concentrated from a limited number of buyers, contrary to expectations of diverse customer interactions. It's a crucial measure to detect potential collusion or the circulation of illicit funds.

Scenario:

• Online Marketplace: ABC Online Marketplace serves as a hub where various sellers can offer their products to a broad audience.
• Merchant Account: Seller XYZ, a recent addition to the marketplace, begins accepting payments for their offerings.
• Unusual Pattern: Over a period of several months, the transaction monitoring system at ABC Online Marketplace observes an unusual pattern in Seller XYZ’s account. Despite a diverse product range, the majority of transactions are traced back to just two or three buyers.

AML Rule in Action:

• The platform implements an AML rule aimed at identifying low buyer diversity, particularly focusing on new merchants. This rule flags instances where a significant portion of a seller's revenue comes from a very limited number of buyers.

Red Flag:

• An alert is triggered for Seller XYZ’s account due to the abnormal buyer concentration. This prompts the compliance team to conduct an in-depth investigation.

Possible Explanations:

• Collusion: There's a possibility that Seller XYZ could be colluding with a few buyers to fabricate transactions, possibly as a means to launder money or artificially inflate sales figures.
• Circulation of Funds: Alternatively, Seller XYZ might be involved in a scheme where a small group of buyers are repeatedly purchasing and potentially reselling the same products to launder money or disguise the true nature of the funds.

Key Takeaways:

• Low buyer diversity, particularly among new merchants on platforms designed for broad customer engagement, signals a high risk of illicit activities such as money laundering.
• AML monitoring tools that scrutinize buyer concentration for individual sellers are critical in uncovering potential schemes involving collusion and fund circulation.
• By meticulously analyzing buyer distributions and transaction patterns, online marketplaces can effectively detect suspicious behaviors and initiate appropriate preventative measures.

Rule 5: Monitoring Disproportionate Flow-Through

Overview: This rule identifies accounts where the incoming and outgoing funds are nearly equal over a short period, which can indicate unusual activity for business operations like marketplaces, where a significant difference is typically expected.

Scenario:

• Online Marketplace: A well-known online marketplace facilitates transactions between various sellers and buyers using a centralized payment system.
• Merchant Account: An established electronics seller on this platform usually exhibits predictable financial activity.
• Unusual Activity: Over a two-week period, the transaction monitoring system detects an anomaly—the total money deposited into the account (payments from buyers) matches closely with the total money withdrawn.

AML Rule in Action:

• The marketplace has a rule that flags accounts showing such disproportionate flow-through, especially within short periods. Normally, credits (from sales) are expected to exceed debits (withdrawals) as sellers typically retain some funds to cover operational contingencies like refunds and disputes.

Red Flag:

• An alert is raised for this particular account due to the equal balance of incoming and outgoing funds, prompting an investigation by the compliance team.

Possible Explanations:

• Pass-Through Account: The account may be operating as a conduit for laundering money, with illicit funds being introduced and then quickly removed.
• Transaction Manipulation: The seller might be creating transactions with matching credits and debits deliberately to conceal the true nature of their financial activities.

Key Takeaways:

• An equal balance of credits and debits over a short period in a marketplace environment can signal suspicious activity.
• AML rules that monitor for disproportionate flow-through are vital for detecting possible fraudulent or money laundering activities.
• Close analysis of the funds flow within accounts is essential for maintaining the integrity of the marketplace and providing a secure financial environment.

Disclaimer:

The rules outlined here serve as a foundational framework; they should be tailored to fit the specific risk profile and regulatory requirements of your institution. It's essential to periodically update and refine these rules to address new threats and typologies that emerge over time.

Utilizing advanced technology and data analytics can greatly enhance the automation and efficiency of monitoring processes. By adopting and continuously adapting these AML rules, transaction monitoring teams can significantly improve their capability to detect and thwart money laundering activities, thereby contributing to a more secure financial ecosystem.

Note: This blog is intended for informational purposes only and is not to be construed as financial or legal advice. Always consult with a qualified professional for advice that is tailored to your specific circumstances.