South African Financial Institutions are ineffective at preventing the financing of terrorism and the financing of the proliferation of terrorism. This is according to a report issued by the Financial Action Task Force (FATF), a supra-governmental body that sets the policy frameworks for combating money laundering and the financing of terrorism worldwide. As a result, the terms Terrorist Financing and Proliferation Financing (or TF/PF in Financial Crime Compliance jargon) have been heard with increased frequency in the conference calls and corridors of financial institutions in South Africa.
But what is Terrorist Financing and what is Proliferation Financing? And what is the difference between the two?
Simply put, Terrorist Financing is the provision of funds for terrorist acts, while Proliferation Financing is the provision of funds for the manufacture or acquisition of the weapons used in terrorist acts. For example, a financial institution that opens an account for a non-profit organisation that receives donations that then proceeds to commit terrorist acts, facilitates Terrorist Financing. A financial institution that provides financial services to a chemicals manufacturer that sells its products to a terrorist organisation that uses these chemicals in the manufacturing of bombs, facilitates Proliferation Financing.
Detecting the financing of terrorism or the financing of the proliferation of terrorism sounds easy enough on the face of it: numerous bodies worldwide (the US Office of Foreign Asset Control, or OFAC; the United Nations; the European Union; Her Majesty’s Treasury in the United Kingdom, amongst others) publish lists of known terrorists and terrorist organisations, and the South African FIC Act has incorporated regulations specific to one of these lists (the United Nations Security Council List). However, a simple one-dimensional search of these lists to see if new or existing clients appear on the list is not enough, and the FATF agrees.
Fully aware that they are listed in these databases, these individuals and organisations and their sympathisers and suppliers hide behind opaque organisational structures to avoid detection. To determine whether clients are linked to terrorists or terrorist groups, it is important to keep record of the ownership structure and directorate of business clients and to verify this information against third-party sources. This verification should not only be done during client onboarding but also at regular intervals to ensure that the financial institution’s view of its client’s ownership structure and directorate is up to date and to confirm that none of the owners, parent companies, subsidiaries or directors appear on any of the lists of terrorists and terrorist organisations issued by governments worldwide.
However, the screening of clients’ names against these government-issued lists is not enough. To detect hidden links with terrorists and terrorist organisations, it is crucial that a regular adverse news search is conducted for all clients (or at least for high-risk clients) to find any potential links between clients and known terrorists and terrorist organisations.
While this kind of daily client and related party screening sounds complex and onerous, there are numerous tools available that make use of the latest news scraping, text analysis and machine learning technology to make this kind of screening not only possible, but indefensible to be overlooked by financial institutions’ AML/CFT Compliance Frameworks.
Scraping worldwide news articles and screening lists of known terrorists and terrorist organisations is only the beginning to identify Terrorist Financing and Proliferation Financing Networks. The next and equally crucial step is to identify networks through the information that clients provide and to monitor their transactional activity. Shared contact details, shared addresses, and shared IP addresses will highlight hidden networks between the existing clients of an institution. Monitoring transactional activity, on the other hand, is crucial to identify hidden networks implied by the beneficiaries of payments made and the originators of payments received.
This kind of monitoring of transactions to reveal hidden networks poses its own set of challenges. For starters, the beneficiary and originator name data are not always reliable and even the opposite account details for transfers are not readily available to most financial institutions’ AML/CFT Monitoring Systems. Furthermore, detecting hidden networks by monitoring payment flows requires organisations to pay attention to transaction values far below what their risk appetite and existing operational capacity allows for.
However, these problems have already been solved by the latest financial crime surveillance tools by using advanced analytics and machine learning. By using big data technology to process unstructured data, the latest financial crime surveillance systems can parse hundreds or even thousands of data points to detect payment networks. The machine learning capabilities that are native to these solutions ensure that the alerts that are raised are not a false alarm. Furthermore, by using machine learning, these solutions can detect new transactional patterns that highlight potential terrorist financing or proliferation financing without human intervention.
Addressing the shortcomings identified in the FATF’s report on South African Financial Institutions’ Counter Terrorist Financing and Proliferation Financing measures may at first sound like yet another cost to add to the ever-growing regulatory risk and compliance bill. However, organisations that are brave enough to embrace the latest financial crime surveillance technologies may soon find that the additional benefit gained by introducing RegTech to its stable of surveillance tools far outweighs the cost.
