Entity Resolution

In the first of a new series on financial crime capabilities this article introduces the concept of Entity Resolution and why its a useful tool for banks and other financial institutions to detect and investigate Financial Crime. For obvious reasons I won't go into great detail on the detection techniques I describe but please get in touch via enquiries@positivecontext.co.uk if you'd like to learn more.

Trade-based Money Laundering

Let's imagine you want to disguise some illicit funds through your trade business. According to FATF (https://www.fatf-gafi.org/content/dam/fatf-gafi/brochures/Handout-Trade-Based-Money-Laundering-Private-Sector.pdf) one of the common techniques you might use is to over or under invoice goods. Let's see how this might work. Imagine the goods in this case are gold, still a favourite means of transferring value.

You import gold at £50K/kg and sell it for £100/kg. So far, so good, and legitimate (if in the eyes of a bank rather a high risk business). Then you decide to introduce your illicit funds into the value chain so you pay the exporter for part of the gold purchase using the dirty money.

Fiddling the Books

In your books you record that you negotiated a really good deal and got the gold for £45/kg when in reality you paid the full price, with the difference being subsidised by your extra illegitimate funds. So when you sell the gold at the market price of £100/kg you have made a seemingly an above-the-board extra profit of £5/kg. If questions are asked you can simply say: 'I'm a really good negotiator - that's business - and your books will look legit. The misrepresentation of the price at the point of purchase is the key trick.

Alternatively, instead of manipulating the price you could manipulate the quantity. Instead of importing 100kg as you normally do, you buy an extra 10kg with your illegal money, but record in your books just your normal purchase of just 100kg. You then sell the 110kg of gold for 10% extra but record in your books that it was just the original quantity at an increased price. Again if questions are asked, you simply say - 'hey, I got a good price for my 100kg - I'm a good salesman'. Again your books look legit.

Detecting the Risk

So how do you identify this might be happening? One clue is that at the point of misrepresentation the buyer and the seller are both complicit. Both the exporter and the importer know that either the price or the quantity (or perhaps both) have been manipulated. Both parties are in on the deal and that implies a level of trust and potentially mutual control of both sides.

So what's this got to do with Entity Resolution?

Well imagine you are banking the importer and your KYC records show a beneficial owner for that company. What if that same individual or company also had a controlling stake in the exporter? That might arose your suspicions and cause you to look deeper at the prices paid and the volume of sales. But you'd only know that it was the same controlling entity if you could match them up behind the scenes: the entity in your KYC record of the importer and the controlling entity of the exporter. You need to know they are the same person which presents the opportunity for collusion in an already high-risk business.

Matching things up

However those records won't necessarily come from the same source or naturally join up. The matching capability, to identify that they both refer to the same individual, is called Entity Resolution and can be a vital tool in your armoury to help you work out who is who, connect the dots and determine whether there is a greater risk of illicit behaviour.