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Unravelling AML Technology to Tackle Compliance and Mitigate Risk

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By Niall Twomey, Chief Technology Officer, Fenergo.

Recent research on financial institution fines revealed that, since 2008 global penalties have reached $36 billion for non-compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. That is a 160% increase since our last fines analysis report, in September 2018, highlighting the unrelenting and costly march of changing regulation.

It’s a tough battleground for financial institutions as they try to stay on top of the multitude of regulatory rules across different jurisdictions. The scale of financial crime also continues to grow, while the methods used by criminals to launder the proceeds of crime evolve. As we enter uncertain and unprecedented times, financial institutions must also consider market volatility. The financial impact of fines could be detrimental.

Never has it been more important to embrace new technologies that automate and streamline the KYC/AML compliance process. Technology offerings that support a best practice approach to detecting and preventing financial crime, while automating low-risk tasks, can help to alleviate the pressure on resources while increasing efficiencies.

Cross-border regulation

One of the biggest challenges facing global financial institutions is ensuring that internal policies are fully in-line with constantly changing regulations across multiple jurisdictions.

London-based think tank JWG estimated that, by the end of 2020 financial regulations will surpass 300 million pages, meaning financial institutions are faced with an insurmountable task that is not only complex, but potentially contradictory too.

This is particularly true of AML, not least because there is no singular framework that applies transnationally. Whilst the Financial Action Task Force (FATF) have seen their AML and counter terrorist financing (CTF) legislative recommendations mirrored in over 180 jurisdictions, including five individual European Union Directives, there are still disparities in the underlying regulations on a country-by-country basis.

According to our 2019 fines analysis, many of the financial institutions penalised lacked appropriate systems and compliance infrastructures that are necessary to identify and address areas of high risk across different jurisdictions. A common knee-jerk reaction to enforcement action for non-compliance is to bolster compliance personnel, extending manual processes even further. This manual approach to compliance prolongs the onboarding process and damages the customer experience. So where should financial institutions be investing for now and the future?

Shaping up your data strategy

We are already seeing a number of global banks introducing technology solutions to ensure that their AML/CTF policies are aligned with regulatory requirements and recommendations.

Private banks and asset management firms are traditionally more manual in nature, largely because their businesses take a more hands-on approach to client management. However, if they start to up their game around risk assessment and digital client onboarding, they could put themselves in a position to start competing for market share. But financial institutions of any size, and within any sector, need to recognise that introducing technology-enabled client onboarding solutions will give them the best possible chance of meeting the continuing regulatory challenges head on.

To start, financial institutions must consider the technological environment within their organisation and consider two things. Firstly, whether your data policy is up to scratch. Often, poor data management is where financial institutions become stuck. The absence of a single client view and the inability to re-use customer data and documentation across business lines and jurisdictions (data laws permitting), or to automate the consumption of customer information, really hampers financial institutions’ abilities to expedite compliance and onboarding.

Moreover, the ability to integrate via APIs with a host of AML screening and entity data providers further enhances the ability to create a 360-degree view of the customer. Collaboration with disruptive regtech and fintech providers will automate the flow of entity and AML screening data to streamline compliance, while digitally transforming customer experiences.

That said, 67% of C-suite executives in banks say that they are not currently partnered with a fintech/regtech provider to improve efficiencies – a worry trend considering the threat of emerging digital-first players with an advantage on customer experience.

The Case for Automation

After data, the second consideration is automation. By automating the KYC process for AML, financial institutions can accelerate onboarding and account opening, increase speed to revenue, improve the customer experience and most importantly, ensure that they remain fully compliant. This ability to automate and perpetuate monitoring of KYC data for AML will allow financial institutions to take a risk-based approach to compliance, and rapidly onboard the low risk cases, while focusing skilled resources on the cases that have been identified by the technology as high-risk.

A range of recent technological advancements – artificial intelligence (AI), robotic process automation (RPA), distributed ledger technology and machine learning (ML) – can be applied to enhance AML automation. For example, an automated AML protocol can effectively monitor dynamic regulatory systems that differ on a jurisdiction-by-jurisdiction basis. Not only does this reduce the risks of manual error, but the technology is able to continuously monitor and scrutinise client and counterparty information in ever-changing market conditions.

In addition to automation and technology, knowledge and a greater understanding of the mechanisms of money laundering, and terrorist financing are key. This understanding better equips us to address the risks faced by the financial industry; and how we, as a community, can address AML/CTF compliance challenges and mitigate those risks.

With the rise of financial crime and the costs associated with compliance, as well as the growing threat of digital disruption, it has never been more important for financial institutions to embrace technologies that streamline compliance processes. Effective regulation technology is no longer a ‘nice to have’, it’s essential for the future of banking and the reduction of financial crime.

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