HSBC brings in AI to help spot money laundering

By Martin Arnold

HSBC is bringing in robots to help it spot money laundering, fraud and terrorist funding, as the latest bank to harness artificial intelligence to tackle financial crime more quickly and cheaply than with armies of compliance staff.

Europe’s biggest bank is planning to integrate the AI software of Quantexa, a UK-based start-up, to screen the vast amounts of data it holds on customers and their transactions against publicly available data, in the search for suspicious activity.

Stung by multibillion-dollar fines in the past decade for failing to stop illegal finance flowing through their accounts, many large banks are partnering with AI specialists as part of efforts to clean up their act.

Using AI to sift through vast amounts of data also offers the opportunity to save money — banks spend £5bn a year on combating financial crime in the UK alone, according to the Financial Conduct Authority.

The move comes just months after HSBC froze an account connected to an alleged $500m fraud by the son of Angola’s former president, a development the bank says is a sign its tougher compliance systems are working.

Jennifer Calvery, the bank’s global head of financial crime threat mitigation, said in a recent video on Quantexa’s website that the bank believed in “harnessing technology and data . . . to get to a place in the future where we understand and can see criminal behaviour in as near real time as possible”.

HSBC has invested billions of pounds to improve its compliance controls after a $1.9bn settlement in 2012 to avoid criminal charges for allegedly laundering at least $881m for Mexican drug barons and breaching US sanctions on countries including Iran and Sudan.

As part of its clean-up efforts, the bank sold more than 100 businesses and pulled out of more than 20 countries under Stuart Gulliver, its chief executive from 2011 until this year. John Flint, his successor, is considering pulling out of some of the other 67 countries it still operates in, such as Uruguay, Bermuda and Malta.

Quantexa was founded in 2016. Its software scans structured and unstructured data on transactions from different sources, such as phone numbers, addresses, company directors and news reports, to look for suspicious connections. Vishal Marria, founder and chief executive of Quantexa, said: “It is about understanding the flows of money: we build that picture for every customer in real time.” The company last year raised $3.3m in funding from HSBC and Albion Ventures. HSBC has also partnered with Ayasdi, an AI specialist, to automate parts of its anti-money laundering investigations.

Regulators are monitoring banks’ use of AI to spot financial crime. Rob Gruppetta, head of the FCA’s financial crime department, said in a recent speech: “Any bank hoping for a black box in the corner that will sniff out the launderers will be disappointed, but the technology has the capability to better achieve what we all want: keeping finance clean.”

Other banks have also partnered with technology providers to combat financial crime, including Royal Bank of Scotland, which last week said it had teamed up with Vocalink to scan small business transactions for fake invoices and attempted fraud.

Denmark’s Danske Bank recently joined forces with Teradata’s Think Big Analytics unit to scan tens of thousands of transactions in real time, while Singapore’s OCBC agreed a partnership last year with BlackSwan Technologies and Silent Eight to improve and speed up its detection and investigation of suspicious transactions.

Sex, Money Laundering and Blockchain: 11 States Look at FinTech


When Nebraska State legislator Carol Blood started thinking about cryptocurrencies and blockchain, she focused on sex trafficking and money laundering. During two significant events held in Omaha — the NCAA College World Series and the Berkshire Hathaway Annual Meeting — law enforcement reported that sex trafficking had increased in the state.

“These are high-profile events that draw a lot of people,” she said.

When she became a legislator, she wrote a law that would punish wrongdoing when using virtual currencies.

Even before the bitcoin value run-up in the fall, states were slowly recognizing that virtual currencies and the cybersecurity potential of blockchain technologies could enhance economic development for states looking to grow. They also recognized that the swift growth of cryptocurrencies might also drive criminality within their states. In January, 11 states introduced bills that would regulate or encourage the growth of financial tech (fintech).

One of those legislators was Sen. Blood, who found herself concerned that crime could grow in her state, but she was also excited about the possibilities for fintech to attract companies and jobs.

You might think Nebraska is a rural state where sex trafficking would be anathema, but you would be wrong. Every month, at least 900 individuals are trafficked, often multiple times — this according to the Nebraska Human Trafficking Initiative.

As a member of the Bellevue City Council and a board member of the Bellevue Public Safety Foundation, Blood says she heard horror stories about the sex trade. “Several people were caught in a sting utilizing bitcoin for sex trafficking,” she said. “With this law, we could hold them accountable.”

The proposed law would give peace officers enough ammunition to charge and fine those who disguise the nature, location, source or ownership of cryptocurrencies. The same holds true for money laundering. The bill also provides for fines for those who try to avoid transaction reporting as required under state law.

But despite her desire to reinforce laws on the books against illegal gains by crooks, Blood would like to encourage the fintech industry to take advantage of Nebraska’s laws. “I wanted to take care of the dark side of bitcoin,” she said. “We also wanted to create a welcoming atmosphere for” those engaged in legitimate business with cryptocurrencies and blockchain technologies.

She has authored two other laws that would prohibit taxation of cryptocurrencies and define  distributed ledgers used for smart contracts. She believes that blockchain technologies will revolutionize financial transactions and government record storage. Over-regulation of these businesses is something she wants to avoid. “Nebraska wants these businesses to know that we are open for business.”

In 10 other states, legislators have introduced bills that would define the use of blockchain and its applications in the fintech space. These include:

Arizona: Republicans Sen. Warren Petersen and Rep. Jeff Weninger introduced SB 1091 to allow Arizonans to pay their taxes with cryptocurrency and directs the Arizona Department of Revenue to convert cryptocurrency payments to U.S. dollars at the prevailing rate within 24 hours. Another bill introduced by the duo would push the Arizona Department of Revenue to tax capital gains made by cryptocurrency traders.

In previous actions, Arizona Gov. Doug Ducey signed HB 2417 into law in 2017. This bill clarifies the use of smart contracts using blockchain.

Colorado: Introduced by a bipartisan group of lawmakers, SB 18-086 proposes utilizing a distributed ledger to keep state data secure. The bill empowers the chief information security officer in the Colorado State Office of Information Technology to look at the benefits and costs of adopting and applying blockchain in all state agencies to secure state records. According to the bill, attempted data breaches to Colorado government records in 2017 reached between 6 million and 8 million per day.

Florida: Buried in a bill on the implementation of digital drivers’ licenses, Florida Republican Rep. James Grant has included clarifying language about blockchain and its uses for smart contracts and electronic signatures.

Hawaii: The Hawaiian Senate introduced two bills governing cryptocurrencies in January that would require virtual currency transmission to be licensed and to include a definition of virtual currency in the state’s Money Transmitters Act.

Illinois:  On Jan. 31, the Illinois Blockchain Task Force released its first report on blockchain technology and its uses for safely storing government documents. The committee concluded that blockchain would enable the state to advance its digital transformation and enhance economic development. The task force was formed in November 2016.

New York: New York Assemblyman Clyde Vanel introduced four bills to secure voting records and government record storage; create a digital currency taskforce to analyze the impact of cryptocurrencies on New York financial markets and amend the state’s technology law to include a definition of blockchain technology; smart contracts and provide a legal understanding for digital signatures stored on a blockchain.

Tennessee: Rep. Jason Powell introduced HB 1507 a measure that would permit the use of distributed ledger smart contracts.

Vermont: Sen. Alison Clarkson introduced a bill that would allow distributed ledger startups to create limited liability companies; allow companies to create personal identity trust companies; allow for the taxation of cryptocurrencies; and explore the creation of an e-residency program.

Virginia: Introduced by Sen. Glen Sturtevant, SB 864 directs the State Corporation Commission to study cryptocurrencies and how they are currently used in Virginia to determine whether the Virginia General Assembly should establish laws to protected citizens from fraud when making transactions using virtual currencies. The commission will issue its report by Dec. 1, 2018.

Wyoming: Legislators led the Wyoming Blockchain Coalition, a grass-roots group seeking to turn the state into a haven for cryptocurrencies and blockchain technology, and have introduced several bills that should see a vote this month. All three bills would create a platform for fintech by allowing LLCs (limited liability companies) to register ownership on blockchain and exempt cryptocurrency token purveyors from security regulation.