In this week’s Financial Crime Wave we get a 10-point guide on how anti-money laundering and artificial intelligence will marry, improving know-your-customer depth and details and lower labor costs, the United States pressures South Korean banks and virtual currency exchanges about sanctions busting by the North, the European Union updates Fifth Directive, garnering more sectors and beneficial ownership details, and more.


AI and automation in AML: A 10-point guide to the future of KYC

The term Artificial Intelligence (AI) has been around for a while and has myriad uses from creating more informed search terms and results to potential revolutionizing the very labor-intensive roles of financial crime compliance professionals. Not surprisingly, the banking industry is typically quick to adopt new technologies that can improve results and lower costs. In the next few years, we expect an “AI-first” approach in many banks across the globe. Let’s examine how AI and machine-learning can potentially impact KYC/AML processes:

  • AI and machine-learning can really impact KYC compliance process in helping identify high-risk customers who need to be screened with an Enhanced Due Diligence (EDD) process. Based on pattern recognition techniques coupled with unstructured text analysis, it is made more efficient to identify relevant customers for EDD, particularly tied to finding hidden ultimate beneficial owners.
  • AI bots are really useful to perform repetitive tasks. Using chat bots to communicate with customers, analyzing their responses using Natural Language Processing (NLP), can critically save time and staffing needs to run KYC process.
  • AIs are even trained to understand ever evolving regulatory changes. They are used to identifying gaps in the collection of customer information and generate alerts for KYC process completion, (via Trulioo).


U.S. pressing South Korean banks to investigate transactions tied to crypto exchanges, fearing North could use virtual value to evade sanctions

Fearing North Korea could be using virtual currencies to evade U.S. sanctions, the New York State Department of Financial Services (DFS) has asked six South Korean banks and their New York branches to report on the current conditions of digital currency transactions in South Korea and their measures to prevent money laundering. North Korea has been linked to the global, historic WannaCry cyberattack and other crypto exchange hacks.

According to investment banking (IB) industry sources on Jan. 26, the New York DFS recently asked New York branches of six local banks, including Woori Bank, Industrial Bank of Korea (IBK), Shinhan Bank, KB Kookmin Bank, NH Nonghyup Bank and Korea Development Bank (KDB), to report on the current situation of cryptocurrency transactions in its main office and the result of on-site inspections conducted by the Financial Supervisory Service (FSS) and the Financial Intelligence Unit (FIU) to check whether they have fulfilled their anti-money laundering obligations, (via Business Korea).


EU legislators reach agreement on revised AML Directive, expand focus to riskier regions, opaque ownership structures

The EU Parliament and Council have recently reached an agreement on the Fifth Anti-Money Laundering Directive, a broad package of measures aimed at strengthening the blocs financial crime countermeasures against organized criminal, terror and other illicit groups. As part of the updates, the directive expands AML obligations and monitoring to virtual currency exchanges and giving financial intelligence units the ability to request the true identities of the individuals tied to the virtual currencies.

The directive is also pushing financial institutions and other obliged entities subject to AML rules to engage in more extensive due diligence when dealing with higher risk regions, particularly those offering secrecy as a selling point or those identified by global AML watchdog body, the Paris-based Financial Action Task Force (FATF), as having lax fincrime standards or effectiveness. The directive also attempts to make it harder for terror groups to use general purpose, anonymous prepaid cards to fund small scale and lone wolf terror attacks by lowering the ID threshold to 50 euros, (via the EU).


Ransomware still a major attack vector for U.S. government

A look at how the U.S. government can better protect itself against ransomware attacks, (via GT).

Virtual curencies

Regulators subpoenaing two crypto exchanges, some believe due to inability to prove reserves tied to fiat currency, (via

Corporate transparency

U.S. jumps to No. 2, Switzerland retains top spot in international secrecy index

The United States has become the second largest tax haven in the world, according to a new report published Tuesday by the Tax Justice Network, trailing only historical opacity bastion Switzerland. Updated for the first time since November 2015, TJN’s 2018 Financial Secrecy Index (FSI) finds that the U.S. has surpassed the Cayman Islands as the second largest secrecy jurisdiction and now trails only Switzerland.

“This is not a ranking in which the U.S. wants to be number one or even number two,” said Gary Kalman, Executive Director of the FACT Coalition, one of the partner organizations of the report, adding that the secrecy, strength and stability of this country is a “perfect recipe for attracting the proceeds of crime, corruption, and tax evasion. Internationally, this secrecy facilitates corruption that drains wealth from developing countries” and shields a bevy of potential criminal activities, including money laundering, sanctions evasion and terror financing, (via TJN).

Money laundering

Crooked bankers central to U.K. ‘cuckoo smurfing’ money laundering scheme victimizing customers

In the United Kingdom, investigators have crushed a Liverpool-based drug money laundering ring that used a sophisticated technique to cleanse illicit profits called “cuckoo smurfing,” that employed crooked bankers to game third-party payment systems for their benefit. In the scheme, professional launderers would bring bags stuffed with cash to a bank, then engage in the “cuckoo smurfing” by using third-party payments to move money domestically and internationally, typically involving unknowing personal and corporate banking customers. In the system, clean names not tied to the criminal group are passed to dirty members who, say, need to pay for drugs or other services overseas.

The banker, or “controller,” would then identify transactions or invoices between legitimate individuals or businesses to weave into the scheme. But instead of attempting to move dirty money across borders, the banker coaches the criminal, for example one who needs to pay a debt, to deposit a specific amount of dirty cash into the account of a company due to receive the exact amount of clean money. In the country of the company sending the clean money, the banker re-routes the clean cash into accounts controlled by the gangs owed a debt by their criminal partners – usually for drugs. The skill of the controller is in matching criminal transactions to similar legal transactions, meaning the innocent parties are unlikely to notice expected incoming payments are not in fact from their business partners or customers, (via Echo).


UBS, Deutsche Bank and HSBC to pay nearly $50 million in spoofing settlement, says U.S. CFTC

Deutsche Bank will pay $30 million, UBS $15 million and HSBC $1.6 million to settle civil charges that some of their traders engaged in spoofing in the precious metals market, according to government regulators and investigators. The U.S. Commodities Futures Trading Commission (CFTC) charged six individuals, and the Department of Justice charged eight with crimes related to deceptive trading in a wide-ranging investigation. “Spoofing” had historically been associated with two-bit commodities outfits and lone wolf traders operating in the shadows of the markets.

But prosecutors revealed on Monday that their investigations have hit the big time. Deutsche Bank, UBS and HSBC will collectively pay nearly $47 million to settle civil regulatory charges that some of their traders engaged in spoofing in precious metals. Spoofing involves placing buy and sell orders with the intent to cancel them before completing the transactions. The orders create the illusion of demand, which distorts prices in a way that benefits the trader’s positions. So-called high-frequency trading, in which traders use computers to rapidly trade in and out of positions, has been a focus of investigators, (via CNBC).


U.S. names, shames Russian elite

U.S. Treasury issues report on powerful, influential Russian oligarchs, senior political figures, a must-read for bank compliance staffers, (via IELR Blog).

Terror financing

Can limiting large bills thwart terror groups in the EU?

Check out a great analysis debating EU cash limitation suggestions geared to thwarting terrorists, (via Nikos Passas).

Cyber/virtual currency

Hackers hit Japan crypto firm for more than half a billion dollars in biggest virtual exchange theft ever

Japanese authorities stated they would investigate all cryptocurrency exchanges in the country for security gaps and ordered exchanger Coincheck to raise its standards after hackers stole $530 million of digital money from the Tokyo-based exchange in what many are calling a historic virtual value haul. The Financial Services Agency (FSA), the country’s chief financial regulator, on Monday ordered improvements to operations at Coincheck, which on Friday suspended trading in all cryptocurrencies except bitcoin after hackers stole 58 billion yen ($534 million) of NEM coins, among the most popular digital currencies in the world. The theft highlights the vulnerabilities in trading an asset that policymakers are struggling to regulate, as well as the broader risks for Japan as it aims to leverage the fintech industry to stimulate economic growth.

Coincheck said on Sunday it would repay about 90 percent, though it has yet to figure out how or when. The NEM coins were stored in a “hot wallet” instead of the more secure “cold wallet”, which operates on platforms not directly connected to the internet, Coincheck said. It also does not use an extra layer of security known as a multi-signature system. The hack has drawn into focus Japan’s approach to regulating cryptocurrency exchanges. Last year, it became the first country to regulate exchanges at the national level – a move that won praise for boosting innovation and protecting consumers, contrasting sharply with crackdowns in South Korea and China, (via Reuters).


DOJ can’t use enforcement authority when individuals, entities trip guidance, only actual laws: U.S. Associate Attorney General

The U.S. government has issued a new memorandum that prohibits the Department of Justice from penalizing individuals and entities with its civil enforcement authority when they have violated guidance – effectively making guidance documents non-binding – but didn’t actually break laws on the books. The Office of the Associate Attorney General issued a new policy that prohibits the department’s civil litigators from using guidance documents—or noncompliance with guidance documents—to establish violations of law in affirmative civil enforcement actions.

On November 17, 2017, Attorney General Jeff Sessions issued a memo prohibiting the Department of Justice from issuing guidance documents that have the effect of adopting new regulatory requirements or amending the law binding on persons or entities outside the Executive Branch. The memo prevents the Department of Justice from evading required rulemaking processes by using guidance memos to create de facto regulations. In the past, the Department of Justice and other agencies had blurred the distinction between regulations and guidance documents, (via DOJ).


Hackers using ATM ‘jackpotting’ to cause machines to cough thousands in cash

U.S. federal investigators are warning automatic teller machine (ATM) operators that they are being targeted by sophisticated hackers who are able to use a combination of chicanery, hardware and software to dupe systems into spitting out their greenback innards. The US Secret Service has warned ATM makers Diebold Nixdorf and NCR that “jackpotting” hacks, where crooks force machine to cough up large sums of cash, have reached the US after years of creating problems in Asia, Europe and Mexico. The attacks have focused largely on Diebold’s front-loading Opteva ATMs in stand-alone locations, such as retail stores and drive-thrus, and have relied on a combination of malware and hardware to pull off heists.

In previous attacks, the thieves disguised themselves as technicians to avoid drawing attention. After that, they hooked up a laptop with a mirror image of the ATM’s operating system and malware, including replacing a hard drive outright. Security researcher Brian Krebs understands American ATMs have been hit with Ploutus.D, a variant of “jackpotting” malware that first launched in 2013. The mirror image needs to be paired with the ATM to work, but that’s not as difficult as you might think — the intruders used endoscopes to find and press the necessary reset button inside the machine. Once done, they attached keyboards and used activation codes to clean out ATMs within a matter of minutes, (via Engagdet).


DOJ prosecutor turns prosecuted when trying to steal whistleblower secrets

Former DOJ lawyer tried to sell sealed documents tied to whistleblower lawsuits to potential targets, (via the Hill).


Fuel fueling drug epidemic in Mexico

Mexico’s violent drug cartels now turning to stealing, selling illicit fuel, rather than drugs, to the tune of $1 billion a year, (via Reuters).


U.S. pressuring Lebanon to cut out terror ties

Lebanon, under more pressure from global authorities to cut out illicit groups and their financiers, must cut Iran-backed Hezbollah from the financial sector, a U.S. official said, in the wake of Washington beginning a new push to disrupt the militant group’s global financing routes, (via Reuters).


More sophisticated software needed on AML

Huge growth expected for U.S. AML software market, (via WhaTech).


Accountants steal, double deal to prevent government oversight investigations

U.S. federal authorities have charged six accountants with stealing confidential information about the Public Company Accounting Oversight Board’s (PCAOB) planned inspections of KPMG, including three former board officials and three former consultancy partners, (via the FCPA Blog).


Federal authorities hit HSBC with hefty penalty for illegal ‘front running’ scheme

Federal prosecutors hit HSBC with more than $100 million combined penalty, forfeiture, for fraudulent “front running” scheme, misusing confidential foreign exchange information, in multi-billion dollar forex deals, (via DOJ).