The Patriot Act will oblige Wall Street investment banks to invest $700 million improving their anti-money laundering technology over the next two years. Or so says the Tower Group, in a new report entitled The USA Patriot Act: Brokers Face Many Challenges in Anti-Money Laundering Compliance.
Tower Group says that, until the passage of the Patriot Act, the investment banking industry had not traditionally had to worry about money laundering. So, unlike their retail banking counterparts, investment banks are starting largely from scratch in deploying technology that can flag and track transactions that may be linked with unlawful activity. TowerGroup estimates that the US brokerage industry will spend nearly US$700 million through 2005 on technology solutions to comply with the Patriot Act, three quarters of it on software and integration.
The new research from the TowerGroup examines how investment banks have chosen to comply. The biggest challenge, it concludes, is to identify, interpret and integrate data residing in multiple locations. While the level of effort and investment required in will depend on the number of business units a particular firm has, most of the actual expense will stem from gathering data into a centralized location, normalizing it and “scrubbing” it to ensure consistency.
Tower Group points out that, for broker/dealers, non-compliance with anti-money laundering rules carries huge downsides, including exposing firms to monetary and reputational risk. “So while compliance may require substantial investments in technology and process changes, these investments should not be judged strictly on the basis of traditional return on investment (ROI),”warns Tower Group. “In the wake of repeated blows to public trust, the industry can ill afford citations for not complying with such a public and patriotic effort.”
Tower Group says top-tier brokerage houses are already addressing the problem aggressively. Firms such as Merrill Lynch, Citigroup and UBS have purchased external software, and committed tens of millions of dollars to meet short-term objectives, while continuing to prepare for the longer haul.
“These AML regulations represent the early breezes of an impending hurricane of broker compliance,” says Robert Iati, director of the TowerGroup Securities & Capital Markets practice and author of the research. “Given the recent damage to the industry caused by fraud, insider trading, and other unethical practices, the impact of regulation will get larger before it gets smaller and the institutions which develop the most effective underlying technology infrastructure will be best able to meet compliance initiatives.”
Iati noted that sell-side institutions need to address the bigger picture of data collection, data mining and analytics on an enterprise-wide level, using both internal and external resources to connect the dots and detect the suspicious behavior patterns. “Current investments will pay off in upcoming years by increasing intrafirm communication, as well as serving as a catalyst for individual firms to improve their enterprise-wide compliance systems – bringing customer data together with trade monitoring and surveillance,” he says.