To uncover flaws in their anti-money-laundering systems before regulators do, more banks are forming financial intelligence units.

These units monitor, mine, and analyze bank transactions with the goal of detecting a problem early and seeing to it that any issue is self-reported and corrected promptly, which could help avoid negative publicity and a reputation-crushing fine.

"The biggest thing is to ensure we stay on the bleeding edge of terrorism and AML," said Tom Lickiss, director of the financial intelligence unit Wells Fargo & Co. established last summer. "We are creating a prediction model to not only track trends, but see what's up ahead."

The units also help banks keep pace with regulatory developments. "It's always been a challenge for the financial industry to meet the changing regulatory environment and demand, because it takes large financial institutions sometimes years to implement systems changes," said Jim Richards, an executive vice president at Wells Fargo and its Bank Secrecy Act officer.

"If you are building out information systems rather than anti-money-laundering systems," he said, "you'll always be able to ... implement those regulatory changes much quicker if you have an FIU."

Mr. Richards is believed to have created the first FIU in 1999, at FleetBoston Financial Group. He created one at Bank of America Corp. after it bought FleetBoston, moved to Wells Fargo in October 2005, and had Wells' FIU up and running last summer.

Mr. Richards said every one of the 50 largest banks and some smaller banks have their own units. The one that Western Union Co. created early this year is thought to be the first started by a money-services business.

"It was the next logical step for Western Union," said Kevin Favreau, the money transmitter's vice president of global AML compliance. "We're seeing the biggest growth To uncover flaws in their anti-money-laundering systems before regulators do, more banks are forming financial intelligence units.

These units monitor, mine, and analyze bank transactions with the goal of detecting a problem early and seeing to it that any issue is self-reported and corrected promptly, which could help avoid negative publicity and a reputation-crushing fine. "The biggest thing is to ensure we stay on the bleeding edge of terrorism and AML," said Tom Lickiss, director of the financial intelligence unit Wells Fargo & Co. established last summer. "We are creating a prediction model to not only track trends, but see what's up ahead."

The units also help banks keep pace with regulatory developments. "It's always been a challenge for the financial industry to meet the changing regulatory environment and demand, because it takes large financial institutions sometimes years to implement systems changes," said Jim Richards, an executive vice president at Wells Fargo and its Bank Secrecy Act officer.

"If you are building out information systems rather than anti-money-laundering systems," he said, "you'll always be able to ... implement those regulatory changes much quicker if you have an FIU."

Mr. Richards is believed to have created the first FIU in 1999, at FleetBoston Financial Group. He created one at Bank of America Corp. after it bought FleetBoston, moved to Wells Fargo in October 2005, and had Wells' FIU up and running last summer.

Mr. Richards said every one of the 50 largest banks and some smaller banks have their own units. The one that Western Union Co. created early this year is thought to be the first started by a money-services business.

"It was the next logical step for Western Union," said Kevin Favreau, the money transmitter's vice president of global AML compliance. "We're seeing the biggest growth in this concept in the last year. ... There's a lot of people that want to explore exactly what an FIU is."

In September, Mr. Favreau is hosting a workshop in New York on Western Union's 10- employee unit and how others can start a financial intelligence unit.

The issue is particularly critical for money-services because several banks have stopped doing business with them, complaining that regulatory scrutiny makes such accounts too costly to monitor. Mr. Favreau said that as MSBs and other nonbank institutions set up financial intelligence units, more banks will do business with them.

"It would help me if I was the bank looking at Western Union," he said. "Everybody can say that they look at transactions, they file SARs and CTRs, but as a compliance officer and as an attorney, I don't think that's a good answer anymore. Everybody does that. What we need to do is really understand our business - how do we evaluate the controls we put in place? That comes right out of the FIU."

The popularity of FIUs is spreading as regulators apply pressure on banks to file suspicious activity reports and punish violators with multimillion-dollar fines. William Fox, a former director of the Treasury Department's Financial Crimes Enforcement Network and now the head of Bank of America's anti-laundering compliance unit, said large institutions have no alternative but to create and operate a financial intelligence unit.

"If you didn't have that process set up in a large bank, I can't personally envision how one can comply with our obligations under the Bank Secrecy Act," Mr. Fox said in a recent interview. "If you don't do this or don't do it well at a large bank ... I really don't think you could end up complying."

Other experts agree.

"It's very important for banks," said Stephen Kroll, a former Fincen official and Democratic counsel for the Senate Banking Committee. "I think a big bank has to have that."

Though some banks followed FleetBoston's lead back in 1999, more adopted these units after the Sept. 11, 2001, terrorist attacks.

David Caruso, the chief executive officer and managing director of Dominion Advisory Group LLC, an anti-laundering consulting firm in Centreville, Va., said the money- laundering problems in 2004 at Riggs Bank and AmSouth Bancorp. also spurred banks to form these units to detect suspicious activity. Both banks received multimillion-dollar fines for failure to file SARs.

"This is what keeps bankers up at night - are we identifying suspicious activity, do we have the right unit, do we have the right technology?" Mr. Caruso said. "This is the core issue and it's the one where most resources, both human and financial, are devoted." FleetBoston made the move after a series of anti-laundering issues surfaced. In April 1998 the bank disclosed that one of its private banking executives had channeled $73 million of fraudulent loans to a known criminal in Argentina. In December of that year a branch employee was arrested and charged with helping to launder $2.7 million of drug money through accounts at the banks.

It was a similar story at Wells Fargo. An anonymous employee at the Office of the Comptroller of the Currency leaked documents to Capitol Hill in July 2005 that showed senior OCC officials overturned the recommendations of field staff to hit Wells Fargo with a formal cease-and-desist order for anti-laundering lapses.

Instead, the OCC took an informal enforcement action, despite agency examiners' citations of "weak internal controls over the program, inadequate independent testing of business lines, lack of BSA oversight, and failure to file suspicious activity reports in accordance with regulations and program requirements."

Mr. Richards was brought in to revamp Wells Fargo's AML compliance. One of his first goals, he said, was to establish a financial intelligence unit, which started operating last June.

Wells' 19-employee FIU is modeled in part after the Financial Crimes Enforcement Network, which collects bank filings and other data that it pores over for signs of criminal financial activity. But Mr. Richards said his unit is more selective in the data it collects.

Rather than looking at every transaction, the unit introduces criteria to narrow the number of accounts being scrutinized. It is designed to go beyond investigating suspicious activity identified by employees, and comb through transactions.

These units "proactively identify things that may need to be investigated," Mr. Richards said. "It's that proactive identification, using very flexible dynamic tools in a creative way, that provides banks with speed and flexibility to meet and exceed their regulatory and compliance requirements."

Mr. Richards said Wells' unit is built in particular to detect signs of structuring, in which a customer makes a series of deposits or withdraws to avoid automatic reporting requirements.

Where Fincen must examine information from thousands of financial institutions, an FIU looks at data within one institution, Mr. Fox said. He said B of A's unit has about 100 employees sift through transactional data from across the company's domestic and international businesses.

Such units also help AML investigations and examinations. They can be used to gather information more quickly for regulators and to react to and analyze data faster. Of course, creating them costs money. Mr. Richards, Mr. Fox, and Mr. Favreau would not say what their companies spent, but Mr. Richards said the amount depends on a bank's size, location, customer base, and product set.

"Establishing an FIU should save an organization money in the long run through its risk mitigation and identifying opportunities to improve the way the institution conducts its business," he said in an e-mail following up the interview.

Mr. Caruso said it is a better path than going outside.

"As much as it may cost to build and maintain these groups, it would be far more expensive to hire outside consultants," he said. "In addition, outsiders don't have the knowledge on internal systems."

Carmina Hughes, executive director of Daylight Forensic and Advisory LLC and a former Federal Reserve Board anti-laundering official, agreed an FIU should be an internal function. "As compliance has become a more centralized function, I think it's recognized you need experienced people to conduct investigations and decide what types of activities are suspicious and what types are common bank activity," she said. "The monitoring and identification and investigation has become large enough as a centralized function that an FIU can take on its own identity."

Mr. Richards said that as these programs grow, the cost is liable to rise but probably would never eclipse an AML fine and the public fallout that would follow.

When he was asked at the Money Laundering Alert conference in Hollywood, Fla., two months ago how feasible it would be for a bank to form an FIU, Mr. Richards responded: "I think a better question is, Is it feasible to not have one? Even small institutions should have someone thinking outside the box."