Making Compliance Pay

1. Making Compliance Pay IBA Seminar22nd October 2005 Ian Larkin Head of Risk and Compliance LogicaCMG UK

2. Regulatory Compliance The harsh reality is: • Cost of regulation is huge • Implementation, then operation & maintenance • £200m for a Tier 1 bank, £1bn in 2005 for B2 across Europe • Aim for minimum acceptable compliance • Minimizing spend, cutting scope • Regulatory programmes are “siloed”, despite overlaps • Minimizing the project dependencies • Little coordination, few synergies, multiple hits • Compliance causes business and strategic disruption • Delays strategic business programmes • Impacts business as usual • Is a rubber stamp the only benefit?

3. An Alternative Strategy Regulatory compliance is not just an overhead - it should add value! so… Don’t do it because the regulator says so; do it for business benefit, and comply “en passant”.

4. Two ends of a spectrum Minimumcompliance Benefit-based • Disparate projects to cost, implement & manage • No strategic overview • “Do what we must” • Back-pressure • Repetition of work • Resource intensive • Co-ordinated strategic approach • “Compulsory spend – use it wisely” • Business gain costs less! • Progressive, incremental development • Optimal economic capital allocation

5. Some quotes • Woolly or wise? • “We don’t want MI to provide information internally – only to send reports to satisfy the regulator!” • “We are not spending anything on Basel II! We are enhancing our Credit Risk system, which will be Basel compliant.” (Tier 1 Head of Risk) • “We see B2 as giving us the opportunity to develop risk-based pricing for our retail customers.” • "Spending on Sarbanes-Oxley is an upfront investment in making the processes of the company better," says BP’s Macdonald. "We don’t view it as an intolerable burden.”

6. How to get some benefit… • Re-use information & systems • Sox process maps  B2 OpRisk • AML analysis  CRM • Stress testing  risk navigation • Use aggregated information • Counterparty exposure  limit utilisation, sales authorisation • Shared statistics  model calibration, benchmarking • Use consistent metrics • Enterprise Compliance Data Management • Comparative risk measures  risk-adjusted returns • Finance & Risk Integration

7. Business Issues in AML Manage high volume of alerts from detection systems Identity Fraud Trader Fraud Anti-Money Laundering Financial Crime A multi faceted beast… Prove that the organisation is following the correct processes Investigate crime holistically across the organisation Investigation and Case Management Corporate Fraud Employee Fraud Claim Fraud Use case data proactively to protect the organisation Conduct processes more efficiently and reduce workload

8. money laundering criminals using FIs to make dirty money clean by placement, layering and integration identity theft, ATM fraud, counterfeit cards, cheque kiting, credit-card fraud, skimming marketabuse late trading, market timing, front running parking investments, employee fraud theft of cheques, misappropriation of funds, removing money from customer accounts fraud financial crime Financial crime is more than AML Take a Proactive Holistic Approach to fight the Growing Threat of Financial Crime

9. Combines Multiple Functions and Crime Areas Market Abuse Corruption Reporting Anti- Phishing Card Fraud Check Fraud KYC Identity Fraud AML What is a Holistic Approach? Holistic Solution Stovepipe Solutions

10. The value of a Holistic Approach With a unified, holistic approach, financial institutions benefit from: • increased operational efficiencies and optimized processes • reduced costs • increased profitability • maximized revenues (fraud) • greater business insight into risk Combining Crime Areas Directly Impacts Your Bottom Line

11. Range of solutions Know Your Customer By Name Know Your Customer’s Business Cost Behaviour Detection Solutions Data Integrity and Acquisition Rules based systems Transaction and Customer Watch List Filtering Customer Due Diligence Complexity

12. Profiling • Decision Tree • Neural Networks • Text Mining • Outlier Detection • Link Analysis • Rule Patterns • Sequence Matcher Detection Techniques

13. Rule-Based Detection ATM cash Internet foreign banks wires Rules Engines Good news: Simple to implement, simple to understand, does not require historical data Bad news: Can not detect unknown activity, may miss high risk or ML activity if too narrowly written, or if written too broadly, will increase number of false positives Only Known Scenarios Can Be DetectedLeaving New Schemes to Go Unnoticed

14. Link Analysis • Profiling Many Detection Techniques Profiles of entities are dynamically created based on account activity over time. Used to detect deviations from historical or peer group behaviour. Simpler systems profile only on summarised and discrete account data,e.g. end of day balance. More advanced systems create a statistical fingerprint of multiple account data. The speed of adapting the profile may be linked to the look back period. A shorter look back would result in the profile adapting quicker. Some systems differentiate between Profiles and Outlier Detection. Profiles relate to a customer’s normal behaviour. Outlier Detection relates to activity against Peer Group. Anticipatory profiles require information about how the customer is expected to behave, e.g. max withdrawals, average assets etc. Finds entities that are linked by common transactions,either directly or at a distance. Can also find entities that appear unrelated but have matching account details. In some systems, link analysis will be used to trigger alerts. In others, link analysis can only be used to investigate an entity that is already alerted. Individuals in terrorist cells often have common addresses, KYC id, phone numbers etc.

15. Sequence Matcher • Neural Networks Detection Techniques Used for complex, time-dependent problems and when data is received in a series over time. A network of nodes that are organised into layers. The input layer reads values of data attributes and the output layer identifies the class of risk and risk score. After the network has been trained with defined input data and expected results it can be used to classify new inputs into predefined classes. The drawbacks are lack of transparency into why decisions were made and the need to retrain the network as business and risks change.

16. The best approach ATM cash Internet foreign banks wires A Combined / Hybrid Approach A combined approach that includes filtering, profiling, rules and link analysis will deliver the best results, with the fewest false positives, and greatest chance of finding fraudsters and money launderers A Combined Approach Delivers the Greatest Detection Accuracy and Results

17. NOT SUSPICIOUS NetEconomy ERASE DETECT INVESTIGATE TRACK REPORT AUTOMATIC TRANSACTION DATA ! INVESTIGATE ALERTS REGULATORY REPORTS INVESTIGATION TOOLS ACCOUNT DATA SUSPICIOUS REPORT MANAGER CUSTOMER DATA RISK VIEWS MANAGEMENT REPORTS CASE MANAGEMENT SUSPICIOUS INCIDENTS (NEGATIVE) LISTS

18. 5 Elements of Best Practice Strategy Integrated & Comprehensive Framework Risk Measurement, Reporting and Control Organisation & People Operations Systems

19. Ingredients for success • Create a compliance culture in the organisation • Due diligence in customer identification • Know your customers’ financial behaviour and status • Set the right objectives for automated systems • Establish a comprehensive and integrated risk framework

20. Then Make Compliance Pay • Work your enterprise compliance data • Re-use compliance systems for business benefit • Implement economic measures of performance • Work towards maximizing the value of the enterprise Ian N. Larkin Head of Risk & Compliance LogicaCMG UK ian.larkin@logicacmg.com direct +44 (0)20 7446 5150 mobile +44 (0)7802 462 067

21. Who are we? • Logica cm… who? • LogicaCMG has implemented RTGS for RBI, nation-wide • LogicaCMG is a major international force in IT services to clients across diverse markets • We provide management and IT consultancy, systems integration and outsourcing services • Formed in December 2002, through the merger of Logica and CMG, the company employs around 20,000 staff in offices across 34 countries

22. Fighting Financial Crime • Our watch-list filtering system is used by 8 of the world’s largest 20 banks to scan international payments. It also scans half of the world’s foreign exchange payments every day. • Implementing ABN Amro’s AML system, covering all of ABN’s banking operations in 66 countries. • Assisting Barclays Capital implement its AML and Trading Compliance system globally. • Developed the Fraud Investigation system for CIFAS, the UK’s Retail Credit Fraud Prevention Service. • Delivered investigation and case management systems for the UK Serious Fraud Office, UK Passport Office, and Crown Prosecution Service in England and Wales. • Delivered more than 70 card infrastructure systems since 1984. Driving standardisation and exploitation of smart card and chip card technology including establishing national systems for two countries.

23. AML - some of our clients 8

24. ABN Amro: Global RolloutAll Banking Units – LogicaCMG and Mantas 66 Countries, in 2 years. On Time! On Budget! Multi - Jurisdiction Multi – Business Unit Multiple Data Sources Region Specific Monitoring, with Transparency for the Regulator Rapid Time to Market A New Country in 2 Months, ½ Day User Training Scalable Centralised Processing, Flexible Routing Each hub acts independently against a set of standards published by Head Office. Cost Effective Hub Installation, 5 Countries at a time. Leverage Resources, Share know how Singapore Surveillance Team (Wholesale & Retail) European Surveillance Team (Wholesale and Retail) LatAm Surveillance Team (Retail Only) Client Hub Locations

25. LogicaCMG and NetEconomy • Global alliance partners since 2002 • LogicaCMG brings extensive experience of assisting banks across the globe with implementing appropriate solutions to manage their business risks and the requirements of international AML legislation. • LogicaCMG takes prime contractor responsibility to deliver a system that will meet the regulatory, functional and technical requirements to a committed time and cost. • NetEconomy provides class-leading risk management software addressing money laundering, fraud and trade compliance.

26. Recent implementations • ING Vysya - India • 2 Million accounts • 5 Million transactions/month • IndusInd Bank - India • 2 Million accounts • 5 Million transactions/month • AXA Banque - France • 400,000 accounts • 4 Million transactions/month

27. Contact… Nath Parameshwaran Business Manager Financial Services - South Asia LogicaCMG Express Tower 3rd Floor Nariman Point Mumbai - 400 021 India Tel +91 (22) 5635 2984 Mob +91 98203 15084 Email nath.parameshwaran@logicacmg.com

28. LogicaCMG has taken reasonable care to ensure that the information contained herein is correct at the time of publication. Before using or relying on any content in this presentation, independent verification should be obtained. LogicaCMG accepts no liability nor responsibility for any use of or reliance upon the content of this document.