Almost all reports related to transactions indicating money-laundering activities originate from financial service providers.
The compliance divisions of banks spend a great deal of time and effort on implementing the various regulations and discovering risk-based approaches related to the detection and avoidance of money laundering, the financing of terrorism and corporate fraud. And with good reason: László Sors, criminal deputy chairman of the National Tax and Customs Office (NAV), has previously said the extent of money laundering in Hungary could reach about $15 billion.
“Banks spend billions on the prevention of money laundering in line with international requirements,” OTP Bank director Zsolt Wieland explains. But these efforts do not always bring the expected results, according to a country report by Moneyval, the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism. In Hungary, the main concern of Moneyval evaluators was the low number of convictions for money laundering offenses compared to the large number of convictions for proceeds-generating offenses.
In the first half of 2011, NAV’s Hungarian Financial Intelligence Unit received 3,144 reports related to transactions indicating money laundering and terrorist financing. The HFIU sent 420 reports to initiate new criminal investigations and 632 reports to support ongoing cases. A total of 13 reports were sent to initiate court proceedings, and 738 reports to support ongoing court cases. There were 21 transactions suspended along with the launching of a report.
“The financial sector faces very serious legal requirements and is under continuous state supervision,” OTP Bank senior manager Gábor Kanyó says. According to the HFIU, almost all reports originate from financial service providers, leaving only a minor part, altogether nine reports in the first half of 2011, to non-financial service providers.
As in the past few years, bank reports constitute the majority of reports, with over 86% of the total. A significant number of reports were received from money exchange bureaus, savings banks and insurance companies.
Moneyval points out that as a consequence of its strategic location in Central Europe, a cash-based economy and a well-developed financial services industry, money laundering in Hungary is related to criminal activities such as drug-trafficking, prostitution, trafficking in persons, fraud and organized crime. Other economic and financial crimes include official corruption, tax evasion, real estate fraud and identity theft. However, Moneyval estimates the risk of the country being used as a base for terrorism or for the financing of terrorism as being low.
The core elements of Hungary’s Anti-Money Laundering regime are established in the Hungarian Criminal Code and the Act on the Prevention and Combating of Money Laundering and Terrorist Financing. The act was introduced in 2007, when Hungary implemented the third EU AML Directive into national law, as well as introducing the financing of terrorism into preventive legislation.
To prevent financial crimes like money laundering, terrorist financing or fraud, financial institutions use specialized software. AML software monitors customer transactions using institute-specific research scenarios, historical information and peer group profiles to identify money-laundering activities. Several banks use their own software, while smaller market players monitor suspicious transactions manually. OTP Bank uses the software of market leader Detica NetReveal (formerly Norkom Technologies).
Money laundering usually consists of three steps: placement, layering, and integration.
1) Placement: money is deposited in financial institutions or converted into negotiable instruments. This is the most difficult step.
2) Layering: the money is transferred through a series of accounts in an attempt to hide its origins. This often means transferring funds to countries without strict AML laws. Once deposited in a foreign bank, the funds can be moved through the accounts of “shell” corporations, which exist solely for laundering. The high daily volume of wire transfers makes it difficult to trace these transactions.
3) Integration involves the movement of layered funds, which are no longer traceable to their criminal origin, into the financial world.
“Most Hungarian banks either remotely use the solution bought by their parent bank or have even more limited access to only some parts of the entire system,” SIA Central Europe CEO Fabrizio Canedoli says. Based on its own SIA Eagle software module structure and the Siron AML solution of its strategic partner Tonbeller, SIA Central Europe offers AML solutions for smaller organizations or for those who are just starting to take the first steps for monitoring and preventing dangerous activities.
“Due to the fact that these systems are key elements of daily operations at the risk departments, banks choose solutions for a longer period, most likely for five-six years,” Canedoli says. “Considering the usefulness and effectiveness of AML systems, they should be integrated into any key processes related to customer accounts and money transactions,” he adds.
The cost of operating a compliance and AML system is not a key driver for change, according to Canedoli. Most likely it is the lack of extending system functionality or integration flexibility that can force a decision to look for another solution in the market, he notes.