Monday, July 31, 2023


Phantosmia, which is a medical condition wherein you detect a smell that is not really present in your environment, has a money laundering equivalent: false positives. Every day, compliance officers involved in transaction monitoring observe data that your platform suggests may be a suspicious transaction, and it is up to them to rule it out as not only a reportable event for the purposes of a SAR, but which will cause further inquiry into whether evidence of money laundering, with or without additional financial crimes, is present. Are you smelling burnt toast* when there is none?

I have dubbed this money laundering phantosmia, and it occurs when non-criminal transactions are judged to be worthy of both a SAR, and further investigation, although in truth and in fact there is no money laundering in process. We wonder just how many non-criminal transactions each day cause compliance officers to hit the proverbial SAR panic button, advise their supervisor, and spend far too much time following up, only to eventually conclude that they were wrong. Of course, this is long after a Suspicious Activity report has been started, or even completed and filed. And you wonder why so many SARs never go anywhere.

The treatment for money laundering Phantosmia is as follows:

(1) A BASIC KNOWLEDGE OF YOUR BANK CUSTOMER'S INDUSTRY, ITS CUSTOMS AND IDIOSYNCRASIES: Are there specific traits and practices, involving their financial transactions which are quite normal, and are known to industry insiders, but appear to be otherwise? It's all about Know Your Customer, ladies & gentlemen. When compliance officers do not understand their customers' business, mistakes can occur, especially in this age where one may err on the side of caution.

(2) A COMPLETE WORKING KNOWLEDGE OF MONEY LAUNDERING TRADECRAFT GOES A LONG WAY TO RECOGNIZING MONEY LAUNDERING WHEN YOU SEE IT: If you are confident in your knowledge base of the subject, you know what to look for, and you also know when a fact pattern can't possibly result in a money laundering result or objective. Knowledge, in this instance, is power. Only when you know enough to rule out specific disorganized transactions without a goal can you stop wrong decisions that cause false positives to be reported.

Remembering that knowledge is power, and an educated compliance officer can artfully avoid the flde positive pitfalls. Train your people accordingly, and you will reap the benefits of increased efficiency, and less wild goose chases every day in your compliance department.


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