Money laundering crooks face high-tech sleuths

By Daniel Sorid

BOSTON (Reuters) - Governments around the world have found a high-tech ally in their fight against tax cheats, money launderers, corporate crooks, and perhaps the most pernicious of all bureaucratic enemies, paperwork.

The technology, a computer language developed by accountants, turns financial information into the equivalent of a bar code, allowing software to scan and comprehend information that would otherwise be left for armies of analysts to re-type and sort out.

Extensible business reporting language, as it is called, is gaining a critical following inside the halls of government. Officials from Brussels to Washington have begun encouraging and requiring financial statements to be prepared in XBRL, to counter the cool reception so far in the business community.

"It's the killer technology," said Michael Bartell, the chief information officer of the Federal Deposit Insurance, the U.S. banking regulator, speaking at a conference on the technology held last week. "We are drowning in data. We're buying storage faster than we can cut the purchase orders."

The technology affixes digital "tags" to virtually every kind of financial information, making it possible for software to spot suspicious or erroneous information and flag reports for more thorough review. While all data can be stored electronically, XBRL provides a standard structure that can be run through many types of analytical software.

In October, after a year's delay, the FDIC will become the first federal agency to require XBRL reporting, a change that could cut weeks from the task of reviewing 9,000 quarterly bank reports and sharing them with the investing public.

A similar, but voluntary, programme is underway at the U.S. Securities and Exchange Commission, and the Internal Revenue Service, the U.S. tax authority, is exploring XBRL as a way to speed the hugely time-consuming task of auditing businesses.

The European Union is spending one million euros, or 675,000 pounds, to promote the technology across member states. Markets in Asia are also pressing forward with XBRL, hoping the technology can increase financial transparency in their markets. (Reuters, the news and data company, is also a backer of XBRL.)

The technology has also been put to use for more creative purposes. An anti-money laundering group in Spain wants to use XBRL to spot suspicious financial deals. Canada's environmental agency is exploring the technology for a program designed to highlight the business costs of pollution.

BUSINESSES RELUCTANT

Companies and investors have yet to embrace the technology, frustrating agencies like the U.S. SEC, whose voluntary XBRL program has been largely ignored.

"What we have yet to observe is an embracing of the standard by preparers, analysts and investors," said Peter Derby, the SEC's managing executive for operations.

That could change, as industry groups begin to encourage companies to consider the five-year-old technology.

"We're on the verge of a fundamental transformation of financial reporting," said Colleen Cunningham, the president of Financial Executives International, an association of executives from about 8,000 U.S. and Canadian companies.

"It will take time to gain traction, but once it does I think it will be a steamroller," she said.

The lack of voluntary participation has created a chicken-and-egg problem for XBRL. Since companies do not use it, there is almost no data for investors or regulators to analyse. Since regulators and investors have little chance to use XBRL, they have been slow to push companies to use it.

One possible explanation for the hesitance: XBRL is like a high-definition camera for financial results, as it shows all the wrinkles and bumps of a company's financial results in ways traditional data delivery did not. While some companies might appreciate the increased scrutiny as a way to get market attention, others might shy away from it.

The SEC's Derby said participation will follow once software to create XBRL filings, made by companies including Fujitsu and start-up Rivet Software, becomes easier to use. "XBRL does not yet present an off-the-shelf set of tools that preparers can utilise," he said.

Regulators should take a more aggressive stance by mandating XBRL, said Otmar Winzig, a vice president of Software AG, which is working with a German stock exchange on a pilot program for XBRL that has attracted just eight companies.

Bob Laux, Microsoft's director of external reporting, is one of the few supportive voices from the corporate community. The accounting profession, he said, "hasn't really changed in 75 years."

"Think of the medical industry and what they've done with technology," Laux said. "The accounting profession needs to step up and embrace that kind of change process."

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