Global warming heats up risk management

When we think of risk management within a financial institution, we usually associate it with the operational risks related to fraud, money laundering, damage to reputation, etc. But an interesting article recently reminded me that risk presents itself in many forms…including ones that banks must have the foresight to control, such as mitigating the impact of global warming.

A recent report by Canada’s Shareholder Association for Research & Education (SHARE) suggests that banks need to establish a climate change strategy that allows for them to recalibrate risk management quickly as the earth’s surface temperature rises. Why is this important? Because banks are vulnerable to the economic, social and political impacts that are caused by global warming.

For example, financial institutions are usually heavily invested in energy sector, including fossil fuels. As global warming increases, fossil fuels become a less-viable energy resource – increasing the bank’s exposure to risk in carbon-related assets.

Climatic change can also affect a financial insitution’s real estate investments, sometimes in very surprising ways. Warmer temperatures lead to an increase in the number of damaging storms, and while today’s building codes require developments to use materials made to withstand wind, they are usually less resilient to flooding. As temperatures rise, banks need to take into account the changing value of assets located in exposed areas, particularly those along coastlines and other waterways. This may cause a financial institution to proactively alter the geographic location of its asset portfolio to mitigate risk.

According to the World Economic Forum, climate change is a major long-term threat to investment and economic security. In fact, industry observers note that if the world’s largest asset owners (including pension funds and insurance companies) don’t change their risk strategies to correct the imbalance between high and low carbon investments, it could precipate another global financial crisis similar to the one in 2008.

With so many potential risks, including those that come from unexpected natural causes such as global warming, banking institutions today are forced to rely even more heavily on technological advancements to help them navigate the financial waters. It’s a brave – and warmer – new world in the development of financial risk management strategies.

JPMorgan’s London Whale Problem

As a banking behemoth, JPMorgan is frequently the target of lawsuits and allegations of suspicious activities.  None of them have proved as problematic as the London Whale scandal, which entered a new chapter this week.

Since the banking crisis in 2008, JPMorgan has encountered criticism for its poor risk management practices.  The biggest outcry began in 2012, as the flawed risk strategies deployed by trader Bruno Iksil and the bank’s London employees with derivatives trading caused the bank to lose $6.2 billion.  Dubbed the London Whale, this scandal showed that JPMorgan supported Iksil despite understanding the risks involved with his approach to derivative bets.  The bank went so far as to try to cover up the massive losses, initially only acknowledging a loss of $2 billion when restating its 2012 first quarter earnings.

JPMorgan eventually paid more than $1 billion in fines and admitted its mistakes to settle government investigations in the U.S. and U.K.  Former traders have been criminally charged in the U.S., with trials pending.

But it’s not over yet.  Resulting shareholder lawsuits have been dismissed over the years, but this week, the U.S. District Court in Manhatttan ruled that a class action suit could proceed.  Led by shareholders in pension funds in Arkansas, Ohio and Oregon, the suit contends that JPMorgan knowingly hid increased risks.

Just how big is this?  JPMorgan will be facing potentially hundreds of thousands of investors in this suit, some of whom bought shares after the bank’s partial disclosure of the loss.

The lesson to be learned from this story is one of oversight and compliance.  JPMorgan had been using the risk measurement tool known as Value at Risk, or VaR – something the bank itself had helped to develop and popularize.  But despite the fact that its VaR identified the London Whale trades as exceeding the bank’s risk indicators by more than 330 times, no actions were taken.

Risk and compliance guidelines are only as strong as those who implement them.  While it appears JPMorgan has since learned this, that knowledge is coming at what may eventually be an ever-increasing cost.

It’s not that easy to KYC

It sounds pretty straightforward.  Banks should know who they are doing business with in order to halt illegal activities.  But Know Your Customer (KYC) programs as a risk management tool aren’t all that easy to implement.  Quite often, they are at the  polar opposite end of delivering superior customer service – a differentiator that all banks are trying to capitalize on in this competitive market.

Let’s assume you want to open a new account at a private bank.  Before the institution of the U.S. Patriot Act in 2001, you could probably have just walked in the front door, showed the teller or bank officer a passport, driver’s license or even a utility bill, and voila! Your new account is up and running.

It’s a much different picture today.  Anti-money laundering protocols now mean that the bank needs to know the origin of your money.  For example, how did you acquire your savings, and can you prove that it came from your hard work? Off the top of your head, could you list all of your assets and attach a dollar amount to them?  Remember that small parcel of land you inherited from Aunt Edith – exactly how much is it worth?

After this interrogation, which will include a discussion of your family and your politics, you MAY be approved for a bank account.  By this time, you are probably frustrated and out-of-sorts; after all, aren’t you supposed to be the client, and shouldn’t the bank be falling all over itself to get your business?

The key to adhering to KYC regulations and mitigating the impact on customer service is rapid customer onboarding.  This is an agile business practice that uses technology to eliminate manual compliance checks. By leveraging integrated data collection and search, banks can keep approval decisions on the fast track and ensure that the data is simultaneously submitted to its risk management and fraud detection programs.

As an example, here’s a story of how improved KYC processes helped one bank simultaneously save $1.4 million while increasing its focus on customer-facing activities.  Enhanced KYC policies do not necessarily have to mean more client aggravation.

Can the public’s paranoia curb corruption?

by Richard Paxton

“I think our childish, simplistic view of corruption has become, like a youngster’s fascination with zombies, simply a manifestation of our fears. A scary word, yet an essentially vague abstraction. . .”

Heather Marquette, Birmingham University

Corruption is a dirty word, especially at big banks and prestigious Wall Street investment firms. It’s difficult to prove, especially on Wall Street, because the criminals are very smart and use advanced methods and technology to cover their tracks. Of course, corruption is committed in secret where all the players are part of the crime.

In an article published by the Motley Fool and USA Today, columnist John Maxfield argues that Wall Street banks and bankers are corrupt by nature, but then also states in his conclusion that, “of course, it’s impossible to forensically prove that corruption is woven into the fabric of Wall Street banks.”

Maxfield falls into the classic mind-trap in regards to corruption – something is amiss and he knows his world has been impacted negatively, but he doesn’t have the hard evidence needed to truly label the duck a duck. His perception of wrongdoing is driving his opinions and in turn, fueling the content behind his writing. And Maxfield is not alone in relying on his perceptions as they relate to corruption. In fact, a recent data study shows public suspicion of corruption in the Americas and EU is much higher than the actual corruption taking place.
Alacer Group’s data science team crunched two separate pieces of data gathered by Transparency International and discovered that North Americans are the most paranoid citizens in the world in regards to corruption. They’re suspicious of bankers, the government and its representatives even though North America is one of the least corrupt regions of the world, second only to Western Europe in public facing transparency. And those Western Europeans are plenty suspicious, too. The hard data shows that, regionally, citizens in the the European Union and Western Europe gauge corruption to be as severe a problem as citizens in the Middle East and North Africa (3.92 and 3.96 respective averages based on Transparency International’s Global Transparency Barometer – GCB) despite the fact that corruption is a much more severe problem in the Middle East and North Africa (33.9 and 61.84 respective averages based on the Transparency International’s Corruption Percentage Index – CPI).

Citizen perceptions of corruption in the Americas are the highest of any region (4.34 average based on the GCB), even though in reality the Americas, on average, experiences the second lowest level of corruption (55.16 average based on CPI).

Perhaps citizens’ collective corruption paranoia actually helps curb corruption? Or is the data saying that our view of corruption is skewed, and therefore inaccurate? Maybe it is time to change the conversation around corruption.

One proponent of changing the conversation around corruption is Heather Marquette, the Director of research for the Developmental Leadership Programme at Birmingham University in the UK. She recently published an article in The Guardian titled, “Is fighting corruption like fighting zombies?” in which she explores the nature of the global conversation around corruption and compares it with trendy discussions surrounding a potential zombie apocalypse, using her son and his nuclear blaster as the protagonist.

Corruption comes in so many forms, according to Marquette, that it becomes difficult to decipher which corrupt acts to condemn, because in all cases there is collateral damage. She says that when “we understand that the police officers demanding payment to protect their fellow citizens haven’t been paid for six months, condemning corruption no longer looks so straightforward. They also have families to feed, and rent to pay.”

Therefore, do we let up on those banks and Wall Street firms when the evidence is shaky, or where the definition has injured those merely trying to survive a broken system, or do we continue forward with new regulations designed to curb corruption? Do we really take the effort to change the conversation around corruption? I’d say no to letting up and yes to working towards changing the conversation, but in the meantime keep hammering on those we suspect as corrupt and keep pushing a healthy paranoia agenda socially. To date, at least according to the data we’ve analyzed, this paranoia has prevented even further corruption.


The importance of big data for the entire gaming market

I recently had an opportunity to contribute an article on the impact big data could have on the gaming market to the World Online Gambling Law Report. You can download the reprint from the April issue now.

The implementation of big data and data analytics has the ability to save gaming companies millions of dollars per year. The ability to implement automated systems and streamline human-powered analysis are a core benefit of what Alacer can implement for your team.

Aside from protecting assets, big data presents global gaming companies with numerous advantages. The ability to monitor and track customer behavior has led to innovations in marketing technologies and effectively created the concept of loyalty marketing. Facial recognition technologies have long helped casinos prevent theft, and analysis of betting trends have not only prevented fraud but boosted marketing revenues. The opportunities for gaming companies to utilize the terabytes of data available to them are truly endless.

As I explain in this article, the future of big data is firmly planted in analysis and real-time predictive technologies. We no longer want to peer into a crystal ball to tell the future. The future will be told through a spreadsheet on a tablet as the pit boss walks the gaming floor or the computer systems adjust the rake in real time to maximize player participation. Download the article now.

By Richard Paxton

What the future of data-driven marketing means

I am continuously experimenting with big data and learning the intricacies of how data can be used, utilized and integrated into the workflow of nearly any industry, task or project. Which is why I am intrigued by the ability to make slight changes to advertising strategies or content or even slight manipulations to an algorithm that ensure a business is achieving its business goals.

Bryan Heathman

I am looking forward to sharing this fascination on May 28 when I and marketing author Bryan Heathman will be the featured guests for a University of Washington seminar. We will be discussing data-driven marketing with the Foster School of Business’ Master’s Degree candidates and Bryan will be sharing the experiences he’s learned through his work using big data for various marketing initiatives.

In anticipation of this opportunity to meet with the marketing innovators of the future, we put together the following Q&A to explore the role big data plays in marketing:

  •  How do you define data-driven marketing and what makes it different from traditional marketing?
    • Ed Sarausad: Traditional marketing relies more on intuitive “gut feelings” to make decisions on price/product features/promotional initiative/placement choices. Data-driven marketing relies on statistical models (often from econometrics) to make decisions.
    • Bryan Heathman: Traditional marketing, meaning the analysis of historical data from a marketing initiative, often begins 15-60 days after the marketing event (trade show, syndicated ad, coupon drop, direct mailing, etc.). Managing business decisions from the rearview mirror is a thing of the past with up to the minute data-driven marketing tools.
  • What is the key to success? Is it a KPI or is it something that’s intangible?
    • ES: Key is a data-driven culture, one that doesn’t ignore human intuition—but strikes the right balance of utilizing advanced metrics and data but also on checking that the numbers align with a humanized brand.
    • BH: The magic of data driven marketing is in creating visual simplicity with a sea of inbound data. Success comes from the ability to see results combined with subject matter expertise to interpret important mathematical correlations.
  • How does the concept of “big data” factor into today’s marketing campaigns?
    • ES: Signals from social traffic and conversion require processing of high-volume, high-variety and high-velocity data. Turning these data into actionable outcomes for the campaigns is key. If you know a specific segment of customers (identifiable via Facebook demographics) respond well to specific promotional offer versus another, you can continuously feed that learning into the next promotion. Considering a promotional calendar with holidays and multi-cultural events, there’s a reason to have a promotion (Game of Chance, 2 for 1, or 50% off) every month and often times multiple times a month. The intelligent promoter will want to know what promotion to choose for the right segment at the right time. Often times, these offers are made in near real-time to prevent churning of customers.
    • BH: As more commerce moves to ecommerce channels, real-time data analytics of terabytes of data is moving the forefront of the marketing mix.
  • What is possible today that wasn’t possible three years ago?
    • ES: Dealing with terabytes of data in real-time is now possible. Making it actionable with measurable business outcomes (marketing ROI) is the next wave.
    • BH: Real-time data analytics is now on the horizon for marketing departments of B2B and B2C companies. Imagine the power of real-time sales revenue data combined with advertising spend, to track the ROI of a marketing campaign.
  • What will be possible three years from now that is not possible today?
    • ES: The future is about automating decisions based on real-time data collection. Businesses will be able to react to social, market or environmental signals with the best possible response, which real market data will enable.
    • BH: Moving real-time business decisions beyond the realm of ecommerce and into sales channels with traditionally slow reporting, such as warehouse clubs or 3rd party parts distributors.
  • What is the top skill for today’s students to refine before they enter the post-college world?
    • ES: Tying Statistics/Quantitative Methods to Strategy is the most important. We used to talk about “data telling the story”, but the truly convincing Quantitative Marketers tell the story with the data—armed with the know-how of the statistician or econometrician. For example, the results of a complex latent variable model can be summarized in an easy-to-understand infographic, which tells the marketer, “Oh, I’m talking to the wrong customer segment completely, or I’m sending them the wrong message at the wrong time.”
    • BH: Apply your knowledge from the classroom into the corporate world. Companies are hungry for students who bring a fresh perspective to the marketplace. Get an internship while you are studying, which will help give students perspective into post-college pursuits.
  • What is one danger of data-driven marketing?
    • ES: Ignoring human intuition when the data is simply incomplete or appropriate to take business action. This happens when we haven’t accounted for everything in our prediction model.
    • BH: Improper programming/modeling in automated decision making can be detrimental to profits. Also, loose management oversight on complex programming can be equally dangerous.

We’re looking forward to sharing our experiences with the students at the University of Washington. We know that there’s a tremendous future for utilizing not only traditional KPIs in marketing initiatives, but by utilizing historical data sets, integrating algorithm approaches and the ability to make real-time decisions, there’s significant change underway for the marketing world.

By Ed Sarausad

Anti-money laundering processes for gaming companies

Tracking down the trillions of dollars that flow through the virtual and brick and mortar casinos around the world is a monumental task. In a world where seven-figure bets are common, how does a casino ensure that the source of its income is above the boards?

With US regulators on the verge of requiring casinos to verify the source of the funds behind large wagers, the ability to investigate customers sensitively and discreetly is a new skill that gaming companies are developing.

Banks and other financial institutions have long had anti-money laundering processes in place to help prevent fraud. Subject to a litany of regulations, these institutions are accustomed to researching their customers to ensure both party’s assets are protected. The gaming industry has a history of literally and figuratively protecting the sources of its income; potentially it could be challenging to investigate players that disproportionately boost the bottom line. But, through the use of several similar processes and tactics, gaming companies can align with the financial sector and protect themselves and their customers.

A global threat

Gaming companies around the world face the threat of being an unwitting part of a money-laundering scheme. A recent survey from PwC found that 37 percent of companies in Hong Kong and Macau, mainly banks and casinos, had experienced money laundering in the past two years. The global average according to the study was just under 11 percent.

This meant that Hong Kong had the highest reported rate of money laundering in Asia and the ninth highest globally, behind Britain, South Africa, the Czech Republic, Russia, Zambia, Australia, Kenya and Ukraine.

There is significant incentive to ensuring that the funds being gambled in casinos are legit. In August, Sands Casinos incurred a $47 million fine for lapses in its money laundering controls. And reports indicate that additional Vegas companies are under investigation. But, how can gaming companies protect themselves?

Process alignment

In banking, the key assets for research are massive data sets of public and proprietary information that span property records, criminal records and internal databases that the banks utilize. In the gaming industry, the technologies such as facial recognition, RFID monitoring of chips and in-depth record keeping are no secret. But aligning this data collection processes with the investigation teams is where the efficiencies can be identified.

Ensuring that the analysis of the available data is fueled by common data entry technologies, and that the investigation teams are aligned on how to allocate resources and even a standard for which the results are judged are all vital. In addition to that, here are three tips gaming companies can utilize while investigating suspected money laundering activity:

People: a team with members that are at the top of their respective fields is vital. The ability to work with global banks, governments and regulatory agencies to identify risk, fraud and operational weaknesses comes with experience.

Process: eliminating wasted time, resources and money can be achieved through an organized process that plays to the strength of the team. While every institution has unique processes, Alacer has seen great results from its Lean Kaizen approach and Six Sigma expertise that enables streamlined procedures and added efficiency for bottom line results.

Technology: efficient systems rely on process-driven technology. Alacer has built custom system solutions that mirror AML processes, focusing the power of big data technologies and advanced analytics to identify, investigate and combat money laundering and fraud with integrated solutions.

If you’re working in the gaming industry, aligning yourself with not only the latest technologies, but also the most efficient processes possible are vital.

Is your company monitoring for money laundering activities? It should be and the Alacer Group can help do it well. You can learn more about our anti-money laundering activities now.

by Ed Sarausad

UK steps up big data research

The United Kingdom is getting serious about big data. George Osborne, Chancellor of the Exchequer and Second Lord of the Treasury, has announced that the government will establish a fund to ensure Britain leads the way in big data and algorithm research.

The new research center, the Alan Turing Institute, will be funded by the Department for Business, Innovation and Skills and will report to the science minister. The institute will focus on ways to collect, organize and analyze large sets of data.

Just who was Alan Turing? He was a brilliant scientist well-known for his codebreaking work during WWII, including being the person to help break Germany’s “Enigma” codes; it is said that his work shortened the duration of the war by at least two years. His mathematical theories also formalized the concept of algorithms that are the foundation of today’s computer science. But his achievements were overshadowed by a sexual indecency conviction in 1952 which caused him to lose security clearance. He committed suicide in 1954.

His conviction would be considered unjust and discriminatory today (he was gay). After a number of public campaigns, including an e-petition that garnered over 37,000 signatures, he was finally given a royal pardon in December 2013.
Naming the institute in his honor is a small recognition for his enormous contributions to modern computers and today’s explosion of interest in big data. But it’s a start.

Following the Bitcoin trail

The alleged inventor of Bitcoin, who brought the cryptocurrency trend to the mainstream, was revealed last week. Or maybe not.

When Newsweek published its 4,500 word exposé that allegedly doxed Satoshi Nakamoto, there were immediate controversy and questions about both sides of the story. Since the story published, Nakamoto has been chased through the streets of Los Angeles by reporters, eaten a sushi lunch and denied any and all involvement with Bitcoin.

The story in and of itself is a riveting tale. But the financial implications of this make it vital reading for anyone who has invested in or is considering investing in cryptocurrencies. We’ve discussed the impacts cryptocurrencies have had on anti-money laundering regulations, but when the alleged inventor of the technology has the ability to disappear with millions of dollars worth of real money, the questions surrounding this become even more complex.

The continued push to legitimize financial startups and innovations such as cryptocurrencies and payment processors such as Square are not helped when the person who could be a powerful voice chooses to remain anonymous and shrouded in mystery.

In the past, financial regulators and banks that have centuries of managing wealth and processing financial transactions have adapted to new technologies. We have evolved from running gold across the American West on horseback to being able to fund a college education from a smart phone. But the quickened pace of offering new solutions to existing problems has been a challenge.

Some are proposing a safe harbor for financial startups. This would alleviate the steep fees and lengthy regulatory processes companies must endure to secure licensure to offer financial services. It would not eliminate protections, but it would help to foster innovation.

Now, of course there are risks to this innovation. Those risks likely led the Bitcoin inventor(s?) to remain anonymous. But Alacer and other anti-money laundering solution providers are here to protect consumers and financial institutions from those risks. The more we all innovate, the safe and more efficient we can be.

We’ll be at the ACAMS conference this month. Talk to us about your ideas of how we can innovate together.

By Richard Paxton

Want to learn more? Alacer’s AML experts will be attending the 19th Annual AML & Financial Crimes Conference, being held March 16-19 at the Westin Diplomat in Hollywood, FL. Send an email to me at to arrange a chat.

Citigroup faces AML sanctions

And… the this just keep on coming. This week, Citigroup is in the news, revealing that a federal probe is currently underway into its anti-money laundering (AML) compliance. This comes days after it disclosed that there is the possibility of $400 million in fraud at its Mexican subsidiary, Banamex. Thanks in large part to this discrepancy, Citigroup slashed its 2013 profits by $235 million and an immediate drop in its share price on the stock market.

You can be certain that, if Citigroup’s AML policies and controls are found to be deficient, the government will levy a substantial fine on top of the money the financial institution has already lost due to theft. So what happened? In this scenario, the details are still sketchy, but seem to point to a Banamex employee’s suspected involvement in the scheme.

One of the ways financial organizations minimize their risk of internal security breaches is through independent auditing and testing of AML compliance programs. Since compliance regulations are constantly being revised and tightened, it’s essential to closely monitor how well each organization’s programs are mirroring these updates. Oftentimes, independent consultants conducting surveys can pinpoint process inefficiencies that, once corrected, actually more than pay for the reviews.

Perhaps more importantly, a regular schedule of independent audits can help a financial organization identify and correct deficiencies BEFORE they are found by regulatory agents, helping safeguard a bank’s reputation and minimize its risk.

By Richard Paxton

Want to learn more? Alacer’s AML experts will be attending the 19th Annual AML & Financial Crimes Conference, being held March 16-19 at the Westin Diplomat in Hollywood, FL. Send an email to me at to arrange a chat.