Anti-money laundering banking systems under scrutiny

The UK's banking regulator is to examine the use of anti-money laundering systems amid concerns from financial firms that monitoring technology is too expensive and ineffective.

The Financial Services Authority (FSA) is asking banks and other financial institutions to share information on the cost and effectiveness of various anti-money laundering techniques, including the automated monitoring of transactions.

The FSA fears that the enforced use of monitoring systems, which range from several thousand to several millions of pounds, will be too costly and reduce the competitiveness of UK firms.

The paper said: "In the case of anti-money-laundering controls, without a risk-based approach firms' costs will be disproportionate, the effectiveness of the UK's regime will be diluted and the regime will also be overly burdensome for customers."

Research by the FSA found that the crackdown on terrorist financing, the scale of many firms' customer base and advances in technology were drivers for those financial institutions that have adopted anti-money laundering IT systems.

But the FSA acknowledges the costs involved may outweigh the potential benefits to both the company and the wider fight against crime.

"After the initial investment there will be additional and ongoing costs, such as ongoing support and upgrades; licensing; staff training to recognise suspicious activity; staff costs in operating the system; and any costs of dealing with additional internal reports and suspicious activity reports (SARs)," the paper said.

The efficiency of monitoring systems also needs to improve, with staff-generated alerts currently having a higher conversion rate into formal reports than automated system alerts, according to the FSA.

But Peter Dorrington, head of fraud at analytics software company SAS, warned of the consequences of ignoring the threat of money laundering.

"Whilst money laundering doesn't affect financial institutions' own business, many need to realise that it is often committed by the same criminals who also commit fraud, which costs the industry over £2bn per annum and society much more in illegal activity," he said. "By proactively implementing reforms, the industry can work together to reduce the growing money laundering and fraud problems."

Firms have until 30 January next year to comment on the Reducing money laundering risk discussion paper, which the FSA will use as a basis for deciding whether more formal rules need to be included in its handbook.