Two Irish high-tech companies are pioneering software to tackle money laundering, writes Karlin Lillington
Dirty money is big business. Perhaps as much as 5 per cent of the world's gross domestic product - a figure approaching $3 trillion - is laundered by criminals every year in a complex cycle that puts the proceeds of crime in at one end and produces clean cash ready for investment at the other.
"The objective of most criminals and the organizations they belong to is money and profit," says Detective Inspector Gerry Giblin of the Garda Bureau of Fraud's Money Laundering Investigation Unit. "There's a need for them to convert their proceeds into a usable asset."
The conversion process can range from the relatively simple - small deposits fed into bank accounts over time are eventually withdrawn as a lump sum - to the highly complicated, where assets are moved transnationally in the form of forged credit cards or pirated goods that are only converted to cash after several intermediary stages.
But thanks to increased computing power, sophisticated software and tightening international financial regulations, it's no longer as easy for individuals, criminal gangs or terrorists to clean their money.
The motivation for change has as much to do with advances in technology as it does with risk and liability issues and - more recently - concerns about terrorist funding.
"There are a number of issues, such as preventing terrorist funds from moving around, a push for corporate accountability, and a number of acts passed in the US and EU. Also, there have been several high-profile incidents, particularly in the UK, where regulators have imposed some large fines on very well-known institutions," says Mr Gerard Newman, director of Irish business process software company Zarion.
The acts include, in the US, the Patriot Act; and in Europe, EU Directive 91/308/EEC against money laundering, Basle II agreements, the Forty Recommendations of the OECD's Financial Action Task Force (FATF), and the Republic's Criminal Justice Act 1994.
Zarion supplies software used by large financial institutions to comply with regulations demanding they be able to confirm the identity of customers and create an audit trail of customer and account activity - known in the financial sector as "know your customer" (KYC) requirements.
Mr Newman says the impact on financial institutions found in breach of regulations is severe because of legal, financial and shareholder risks - and damage to the institution's reputation.
"The capital markets are already starting to recognize these pressures and reward banks that have higher reputations," says Mr Paul Kerley, chief executive of Dublin-based Norkom. Norkom develops software that crunches financial data, tracking patterns and anomalies that might indicate laundering or other suspicious activity.
Norkom's data mining software for spotting such activities was developed by first looking at the kinds of customer behaviours that underlie fraudulent activity, then creating software that can do behavioural analysis on millions of transactions, sniffing for suspicious movements.
As with Zarion's processing software, Norkom's detection software must be able to identify and flag problems, investigate them, and provide monitoring capabilities for audit trails.
Mr Kerley says real advances in catching money launderers have come from "a convergence between the technology used to combat fraud, and real-time detection". Digesting those millions of transactions in real time takes enormous computing power - typically, data crunched through financial institution or government mainframes.
For example, the software will look for evidence of "smurfing" -steady deposits into accounts that are closed down early, taking a penalty hit that is of little consequence to launderers (losses of 30-50 per cent of funds are par for the laundering course anyway because cash is so unusable in dirty form, says Mr Kerley).
Other laundering techniques include sudden activity in formerly quiet accounts, especially numerous accounts under one name; accounts that close soon after moving large amounts of money; sudden matching fund transfers in and out of an account; and sudden encashment of unit-linked insurance policies, again taking an early withdrawal penalty.
When suspicious activity is detected by organizations tracking transactions, the organization must file a Suspicious Activity Report (SAR) or Suspicious Transaction Report (STR). One copy goes to the Garda, who must investigate each case - a total of 4,398 incidents in the Republic in 2002 alone, the most recent year for such statistics.
The majority are inconclusive. But leaving the criminal focus aside, the reports can have beneficial value in related investigations, where they can disclose undeclared revenue or other issues.
But there have been spectacular results, too. In a joint investigation with the Criminal Assets Bureau and customs officers in Ireland and the UK, the Money Laundering Investigation Unit secured the largest Proceeds of Crime Order ever granted by the High Court over cash assets worth €22 million. In another operation, 20 kilos of drugs were discovered, cash totalling €660,000 was seized and property valued €300,000 was frozen by the Criminal Assets Bureau.
New regulations requiring casinos, solicitors, accountants and estate agents to report suspect activity involving cash or property will close the laundering net even further, says Mr Newcom.
Companies offering software that tackles laundering tend to be small and specialised, with the big names not yet having got involved in the sector, say both Mr Newcom and Mr Kerley. That suits the Irish companies fine - they both see plenty of opportunity in a niche market beginning to boom in both Europe and the US.
