Terrorism has changed the world over the last five years, andnowhere is that more evident than in the need for anti-moneylaundering (AML) software for financial services companies in theUnited States. Federal regulations have spurred AML solutions inthis country as insurers and other financial services deal withglobal financing issues, some of which help finance terroristactivities.

Neil Katkov, group manager, Asia research for Celent, maintainsthe AML needs of insurance carriers have not been as great as thebanking and brokerage sectors, because transactions forcarriers–policy applications, claims, and payouts–generally are onmultiday batch cycles, which allow carriers more time to analyzesuspicious activity.

Regulators have seen less risk for money laundering in theinsurance sector, points out Katkov, and have not come down as hardon carriers. That has led to a comfort level for insurers,resulting in the implementation of what Katkov views as simplersolutions, often built in-house. He believes the mood of regulatorscould change, though, requiring more stringent procedures from theinsurance sector. Regulators may focus more attention on theinsurance industry, he indicates, as the Financial Action TaskForce and other international bodies have detected increases inmoney-laundering activity in the insurance sector over the past fewyears.

Institutions should be careful to perform due diligence on theclaims made by vendors, advises Katkov. If a solution meets acompany's analytics and scalability requirements, strong casemanagement functionality is crucial. "The biggest headachecompliance departments face is how to sift through the voluminousalerts generated by AML systems, divvy them up among theiranalysts, and investigate them effectively," he says. "This iswhere case management and workflow come in."

In his recent report, "Evaluating theVendors of Anti-MoneyLaundering Solutions 2006," Katkov comments the growth rate for AMLsoftware–5.9 percent–may not excite equities analysts, but he feelsthe number is typical of specialized financial services software.In a similar study in 2003, he observed spending was directedtoward business process and reducing labor costs with a smallproportion spent on software.

The 2003 analysis was based on estimates of how much moneyfinancial institutions would spend. "Many institutions, especiallysmaller ones, managed to cover AML requirements through manualprocesses or evade them altogether," Katkov says. "Some firms,especially in the insurance industry, were building focused, leansolutions in-house."

Celent's new spending projections are based on estimatedrevenues of AML software companies. Katkov asserts this will proveto be a more accurate approach to evaluating the size of themarket. "Our new estimates for software spending are higher thanour estimates three years ago," he says. "More high-profileinstitutions are spending a lot of money on AML due to receivinggreater attention from regulators and [the institutions']sensitivity to reputational risk."

He expects to see continued spending on AML. Recent acquisitionsindicate the AML software industry is being valued rather highly bythe market precisely because of this steady revenue potential,according to Katkov. "The reason this should matter to financialinstitutions is it indicates today's AML vendors will be aroundtomorrow, and institutions can count on continued support fromtheir vendors," he says.

The fact AML vendors are being acquired by large softwareconglomerates indicates the software is entering a stage ofmaturity, explains Katkov. "Firms that may have been shaky on theirown will be all the more stable with these deep-pocketed ownersbehind them," he concludes.