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As cheque fraud, money laundering and kiting schemes grow more sophisticated, new laws ratchet up the pressure on banks to detect such crimes. Fortunately, new technology may help them do that better than ever.

Banks have always exerted considerable effort in stemming check fraud and kiting schemes - after all, such activities can cost a bank millions of dollars. Today, money laundering is getting equal attention. New federal regulations intended to curb terrorist activities include anti-money laundering guidelines for banks, and considerable liabilities for those whose anti-money laundering efforts are deemed insufficient.

The Department of the Treasury recently announced regulations implementing the anti-money laundering and anti-terrorism provisions of the USA PATRIOT Act. The regulations take advantage of the existing communication resources of the DOT's Financial Crimes Enforcement Network (FinCEN) to maintain communications between financial institutions, and between the institutions and federal law enforcement, on the subjects of accounts and transactions that may involve terrorist activity and/or money laundering. Another regulation states that certain financial institutions will be able to share information for the purpose of identifying and reporting suspected terrorism and money laundering, once they have notified FinCEN that they intend to share the information, and assuming they have taken adequate steps to maintain confidentiality.

"Banks and other financial institutions are facing an increasing need for better tools and technology to deter and detect check fraud and money laundering," said Breffni McGuire, Senior Analyst, Global Payments, for TowerGroup (a leading research and advisory firm specializing in the impact and direction of technology within the financial services industry). "Both the increasing sophistication of criminals, and regulations like the USA PATRIOT Act, have substantially increased the risks and financial impact for institutions of all sizes."

Two other pieces of federal legislation have had a major impact on the way banks conduct business and attempt to combat white collar crime. Under the Expedited Funds Availability Act, bank funds must be made available to account holders, before the bank knows whether the check which was deposited was good or not. Check fraud perpetrators have learned to make use of this time "window" to cash out on bad checks. And regulations which are part of the Bank Secrecy Act (BSA) require institutions to employ efforts to spot and deter money laundering. Penalties for violations of the BSA can be significant. This has led many banks to adopt a "know your customer" policy designed to help detect and prevent fraud losses, and guard against money laundering.

Money laundering is the process by which illegally-obtained money (from drug trafficking, terrorist activity or other crimes) is given the appearance of having originated from a legitimate source. A 1993 United Nations report listed the significant characteristics of modern money laundering as its "global nature, the flexibility and adaptability of its operations, the use of the latest technological means and professional assistance, the ingenuity of its operators and the vast resources at their disposal." In fact, some experts rank money laundering as the world's third largest industry by value. Obviously, such activities can be notoriously difficult for banks to get a handle on.

The Office of the Comptroller of the Currency (OCC) has identified three independent money laundering steps:

Placement: physically placing bulk cash proceeds from criminal activity in an account.

Layering: separating the proceeds from their origins in illegal activity through layers of complex financial transactions.

Integration: providing an apparently-legitimate explanation for the illicit proceeds.

Money laundering often occurs in new accounts (24 months old or less). Money launderers are continually opening accounts while they make others dormant. The perpetrators typically conduct normal transactions on a new account for 90 days to six months, then the transaction patterns (both cash in and cash out) change. Funds are usually withdrawn from the account in the form of money orders or cashier's checks. Funds are often then filtered to another account - called a "secondary wash instrument." In fact, three or four such levels may exist, making it very easy for banks and law enforcement to "lose the trail."

Check fraud and money laundering perpetrators have often targeted large banks because of the relative anonymity they can maintain as customers of large organizations with thousands of customers and millions of checks processed each day.

That focus may be shifting now as more and more of the large banks put anti-fraud and money laundering software tools into place. The crooks have learned to perform transactions on an account that are unusual but not illegal. If those transaction get the bank's attention, the perpetrators pack up and move elsewhere. If not, they feel comfortable they can begin using that account for their schemes.

And if they do move, the crooks seem to be moving increasingly to smaller banks, who have perhaps not put anti-fraud and money laundering technology in place. They go to the small banks, quite simply, because the pickings are easier. It certainly seems that the banks who have not taken every possible precaution better do so quickly, or the criminals will find them.

Banks who have recently undergone mergers and acquisitions may also have increased exposure, because they are operating in new markets they may not have a complete knowledge of.

Money laundering and fraud schemes come in a wide variety of forms, and every day they become more sophisticated, with more complicated financial relationships and more circuitous paths through worldwide financial institutions. The following list, compiled by the Office of the Comptroller of the Currency, may help bankers recognize a fraud or laundering scheme. Watch out for:

Activity not consistent with the customer's business.

Unusual characteristics or activities.

Attempts to avoid reporting or record-keeping requirements.

Certain funds transfer activities.

A customer who provides insufficient or suspicious information.

Certain bank employees.

Changes in bank transactions.

These activities are judged suspicious because they are inconsistent with normal customer behavior. Many such transactions will be found, upon closer examination, to result from legitimate business activity.

Cover all the bases. That's the approach to keep in mind for any bank looking to attack the problems of white collar crime. Any well-rounded solution which combats fraud, kiting and money laundering successfully will include both changes in the way a bank conducts business, and the addition of products which will help uncover suspect activity.

Banks who have implemented a successful anti-crime strategy list the following as key attributes of a good solution:

A change of mindset for the bank: a realization that anti-fraud activities are a priority.

An acknowledgement that no bank is immune. Small banks, large banks, big-city banks, small-town banks - all are vulnerable.

Moving fraud detection to a centralized area in the ""back office,"" which no longer makes new account officers solely responsible for spotting suspect activity.

A capability to perform stratification and percentiles on various customer transaction activities, which will isolate unusual activity and the most likely suspects.

A capability to monitor deposit fraud and check kiting schemes as well as check fraud.

The ability to monitor for electronic fraud (that which is taking place through ATMs, e-payments systems, etc.).

Software solutions now available have helped many banks do a pretty good job of combating check and deposit fraud by improving the focus on ""most suspicious"" activity. They use flexible suspect criteria and perform account behavioral analysis. With centralized control, these solutions can accelerate analysis and research, and they also issue extensive reports. Some of these products can even analyze printer information from a bank's corporate customers who print their own checks. This makes it much easier to spot counterfeit, out-of-range and/or stolen checks.

The best of these software solutions fight check fraud by examining every one of a bank's on-us checks, every day -- using parameters defined by the bank. This process creates detailed account activity information. Regardless of a transaction's entry point - whether it's paper-based or electronic - this makes unusual activity relatively easy to spot via an integrated teller interface.

These software tools can be equally effective in spotting deposit fraud, using behavioral analysis to evaluate every deposit, every day. They can monitor and track accounts for unusual deposit and withdrawal activity, deposit-less-cash activity, ATM, ACH, over-the-counter and return items, as well as multiple deposit schemes.

How accounts are monitored

b>Grounding the kiters

The leading software solutions monitor deposit patterns and account activities to detect suspicious activity. Different parameters can be set up for particular categories of accounts, but the crux is when a pattern changes, the red flag goes up.

Check writing patterns can be monitored based on the following factors:

When during the month a check is written.

How many checks are written.

Amount ranges and changes in those ranges.

Check number ranges.

The teller interfaces these solutions include also monitor activity based on these parameters:

A change in behavior.

An attempt to cash a check when the account is closed.

Management directive.

The leading software systems on the market uncover kiting schemes by analyzing input data from a wide range of sources. They use basic rules processing to view customer activity, not just statistics. They may use actual account transactions to validate kite activity. The data they compile is generally easily accessed via a standard web browser, sometimes with an interface to the bank's check image archive.

The most sophisticated of the anti-fraud, kiting and money laundering software tools use digital analysis to rank account activity by degree of suspiciousness. In fact, one leading solution uses over 25 formulas to monitor deposit activity, and amazingly, can find detectable human patterns even when a conscious effort is being made by the crooks not to create a pattern.

For instance, kiters tend to ""make up"" random amounts for the checks they pass. They know round figures create suspicion, so if they want to move about $5,000 they will write a check for, say, $5,116. But apparently, the human mind works in predictable ways, even when creating random amounts, and these software products can detect those patterns as well.

Prioritization is an important element of all successful anti-fraud, kiting and money laundering solutions. It focuses a bank's efforts on the most likely suspects - and banks using the newest software solutions report that this filtering process can improve analyst productivity by 30-40%.

These products include a priority module which isolates critical accounts, identifies the most likely suspects and prioritizes suspect research. This highly-focused review process means that less accounts are reviewed, but more accurately. In fact, some banks report that 98% of all kiting activity is displayed in the top 10% of the priority report.

Between the new emphasis on terrorism within the U.S., the advent of check fraud ""gangs,"" new laws requiring greater accountability from banks, and new litigation on the horizon, banks have never faced more incentive to implement effective solutions against fraud, kiting and money laundering. Along with a change in attitude and procedures within the banks, today's software products offer new capabilities that can assist banks immeasurably in developing effective solutions. And the implementation of a fraud protection product is something bank regulators take into consideration in an investigation, possibly mitigating the severity of any penalties.

As fraud, money laundering and kiting schemes have grown more sophisticated, so have the tools used to combat them. Today, banks have these tools at their disposal. Fortunately, their implementation can have immediate and tangible results. Many banks who have adopted the leading solution report having saved million of dollars annually - and these results began immediately upon installation.