Geographic risk is an important component to leverage when assessing customer and transaction anti-money laundering (AML) risk. The number of geographic risk indicators cited by regulators and other governmental bodies have increased significantly over the years and are subject to change.
The United States (US) government uses geographic risk as a method to help identify and combat serious crimes that require attention such as drug trafficking, human trafficking, human smuggling, bulk cash smuggling, and other forms of money laundering.
Types of Geographic Risk Data
Financial institutions are required to include geographic risk in their AML programs. There are several categories of higher-risk geographic locations in the US used for law enforcement and investigative purposes such as High Intensity Drug Trafficking Area (HIDTA) and High Intensity Financial Crimes Area (HIFCA).
The Financial Crimes Enforcement Network (FinCEN) issues orders known as a Geographic Targeting Order (GTO). The purpose of the GTO is to impose additional recordkeeping and reporting requirements on one or more domestic financial institutions or nonfinancial trades or businesses in a geographic area. In the US, there are several hundred ports of entry which can be accessed by land, air, and sea. Customers and transactions close to ports of entry could pose additional AML risk.
The Southwest border, or the US-Mexico border, poses AML risk to financial institutions as it is the primary region from which illegal drugs are smuggled into the US. There are significant human trafficking operations occurring along the Southwest border and firearms smuggling from the US into Mexico.
The International boundary, or the US-Canada border, is emerging as an area of increased geographic risk because of the growth in synthetic drug consumption. Canada has become a global leader into synthetic drug production and some of those drugs will move south to the US.
Executives are looking to contain costs related to the maintenance, improvement, and monitoring of their AML compliance programs while mitigating the risk of regulatory actions due to inadequate oversight and controls.
Geographic risk is leveraged in AML compliance programs, but it is usually limited to country wide risk designations. Some financial institutions do not incorporate domestic geographic risk into their AML compliance programs because of the difficulty of maintaining the data.
Another challenge is that some geographic risk locations are designated at the county level. However, most financial intuitions collect the city, state, and zip code for addresses when onboarding customers, but not the county.
Data Derivatives has collected all the relevant HIDTA, HIFCA, GTO, Ports of Entry, Southwest border, and International boundary data sources and created a data file that can be integrated into an organization's AML, know your customer, customer due diligence, enhanced due diligence, transaction monitoring, and risk assessment program. The geographic risk data can be leveraged in the customer risk rating process or when monitoring transactions for suspicious activity.
Geographic risk data can help add context to an organization’s customer base. For example, private automated teller machine owners who operate close to the Southwest border could pose additional AML risk to financial institutions. Further, the customer’s proximity to the Southwest border should be based on address data, which can change over time, and not on responses given during the onboarding process.
Identifying customers and transactions in higher-risk geographic locations has a host of benefits for reporting, detection scenarios, uncovering unknown unknowns, and helping to expose hidden links among networks of bad actors. Also, as artificial intelligence and machine learning begin to play a more central role in AML compliance, then it becomes more important for financial institutions to develop a long-term data strategy.
All the types of geographic risk data are identified by zip code. The distance (in miles or kilometers) of cities and zip codes from the Southwest border and International boundary have been calculated and included in the data file. Also, temporary orders such as GTOs are included to centralize and streamline the integration of geographic risk data for financial institutions.