Major vendor now bids to throw neural-net over money launderers

COLUMBIA, S.C. – A software company whose products help screen 85% of all U.S. credit card transactions now wants to throw its neural net over money laundering. HNC Software (www.hnc.com) of San Diego, Calif., now is offering Falcon for Money Laundering to the financial-services industry. Falcon software uses neural network-based predictive methods to detect possibly fraudulent transaction patterns. Ironically, the money-laundering software launch was announced the morning of Sept. 11. And just as the world has changed since then, so has the focus on money laundering, HNC officials say. “When we released this product that day, the stereotypical money launderer was a drug dealer. But now a lot of attention is being focused on how terrorists are funding their activities, and it turns that they, too, are heavily involved in money laundering,” says Rob Jensen, HNC Software’s public relations manager. Using information gathered from experience, neural networks create layers of relationships that make predictions and alert the operator when something goes against them. “For instance, something as simple as a coin laundry that suddenly is depositing a lot of hundred-dollar bills – that’s the sort of thing that will stand out as being contrary to normal patterns,” Jensen says. The networks also “learn” from their own experience, becoming more robust over time. More than 400 million credit card accounts worldwide, accounting for 65% of all transactions, already are protected by Falcon software and the company felt the time was right to move into the money-laundering realm, Jensen says. Money laundering has become a major international business, with about $1 trillion each year laundered worldwide, according to a report from TowerGroup (www.towergroup.com), the Needham, Mass., based financial-services think tank. Half of that is moving through bank accounts in the U.S. and are the result of a wide range of nefarious activities, according to the report’s author, Breffni McGuire. She says advancing technology and a shrinking world may only worsen the problem. “Technology and the interconnectedness of global banking organizations have increased the international effects of money laundering,” McGuire says. “In particular, emerging Internet and payment technologies, such as smart cards, digital cash and payment automations, are likely to accelerate development of new types of money-laundering activities.” There are a variety of tools for combating the threat, McGuire says, “ranging from simple record-keeping and reporting products to rules-based products to intelligent systems” which can serve the needs of any-sized financial institution. Those “intelligent systems” include neural-net products such has HNC’s Falcon solution. “Neural network solutions, especially those incorporating rules-based engines, offer financial institutions a very powerful tool to understand customer behavior and differentiate between legitimate and potentially criminal activity,” the TowerGroup analyst says. HNC Software says its technology can be used in other ways that also could be useful in the fight against terrorism. “We just struck a deal that will help a company pick out suspicious ticket-purchasing patterns for airlines,” Jensen says. “For instance, if one person bought up a whole bunch of tickets, that along with other factors would stick out and raise suspicions.” Besides fighting crime and protecting members and customers, banks and credit unions need to be able to identify unusual activity in a timely manner to be able to comply with regulatory requirements. And yet stiffer money-laundering rules are among the items on Congress’ anti-terrorism agenda. Penalties against U.S. banks have for money-laundering violations already have ranged from a few hundred dollars to up to $5 million and against international banks operating in the U.S., they’ve been as high as $15.3 million. As for the new rules, CUNA is anticipating some changes, “but we don’t want to see wholesale, new regulations that don’t make sense,” says Mary Dunn, the trade group’s associate general counsel in Washington, D.C. “We are interested in seeing every effort made to make the process more efficient. That’s something that credit unions would support,” she says. Of course, the money-laundering situation for credit unions is somewhat different than banks, because of size, and because of affiliation, but that also could be changing somewhat. “An advantage that credit unions have is that they sort of know their customers,” says Jim Eckenrode of TowerGroup and the Credit Union Technology Advisory Centre (www.cutac.com), a joint venture of CUNA and TowerGroup. “You can’t just have anyone come in off the street and buy a money order. You have to be member,” Eckenrode says, adding, however, that the increase in community charters may “make things a little more wide open in that case.” – [email protected]