Recently, in a webinar hosted by RegTech Associates as part of their Digital Regulation Series, I joined fellow industry experts to discuss a holistic approach to anti money-laundering (AML), the associated challenges and what technology can (and can’t) do to help.
Fighting financial crime is not easy. People working in transaction monitoring, client onboarding and KYC; or customer risk assessment know that managing AML within a financial organisation is very complex.
Setting the scene, Dr Sian Lewin, Co-founder and Head of Client Delivery at RegTech Associates explained that this is often because “the Financial Crime Universe involves a lot of people, a lot of data, a lot of systems, a lot of processes and actually these can be activities that are happening in a very fragmented way.”
Why do we need a more holistic approach to AML?
Matthew Redhead, Associate Fellow at the Royal United Services Institute (RUSI) had a simple answer to this question, saying “any solution needs to reflect and respond to the characteristics of the problem it’s seeking to solve.”
In his view, current AML solutions are falling short in solving the financial crime problem, and when it comes to the global level of financial crime, the statistics are incredibly worrying:
“There is a range of good academic estimates which tend to suggest that around two to five per cent of all global output every year is actually proceeds of crime”. If we take the International Monetary Fund (IMF) statistics from last year, that means that somewhere between 1.7 and 4.3 trillion US Dollars are the proceeds of crime in any given year.
“So, why are criminals doing so well? For criminals, the options for laundering funds are multiplying as the economy becomes more sophisticated, and at the same time, money laundering itself has become more professional. Money laundering as a service is now big business and even networks who do their own laundering know how to ensure that they use multiple schemes, multiple platforms, multiple banks and if they can manage it, multiple jurisdictions as well, in which to launder their funds.”
On the other side, the financial industry (and others subject to AML regulations) and law enforcement aren’t doing quite so well in response to this level of financial crime.
A Europol study in 2016 suggested that only 1.1% of the proceeds of crime are being recovered or frozen in the EU. At the root of this problem is the static nature of the regulatory framework targeting this problem, which is effectively a committee that has changed its overall approach only about four times in three decades.
Against this is financial criminality, which is extremely dynamic, developing and growing like an organism frequently testing its boundaries.
To fight financial crime, we need to be more flexible, nimble and proactive.
Challenges in combining KYC and Transaction Monitoring
We heard from Wendy Langridge (Head of Compliance at BCS) and Livia Benisty (Global Head of Business AML at Banking Circle) about some of the challenges facing financial institutions in tackling AML more holistically.
Wendy said “The ongoing day-to-day client relationship – the so-called traditional transaction monitoring – has always been more important than some sort of point in time KYC check. You do need both, but in the absence of linking them together you basically end up monitoring in a vacuum.”
Wendy and Liv agreed that there is an organisational and cultural shift that needs to be made.
“Understanding that link between the different elements of your AML process is one thing. What is also important, is getting those external to your team – front office, senior management, but also the team heads involved when you’re first vying a programme like this,” said Liv.
“The other big issue is data”, said Wendy. “The data challenge is enormous, so you do need to invest carefully and wisely, and plan ahead to make sure you’ve got a scalable system that you can move forward with in the future. You need to move away from siloed individual system monitoring approach.”
Liv agreed that data is key to getting transaction monitoring right, but that key controls such as the deep dive investigation is also critical.
Notwithstanding these sorts of challenges, attendees collectively acknowledged the need for a more integrated approach to AML, with 70% stating they are already on this journey.
How can firms approach their journey to holistic AML?
Culture really comes from the Board level down. There are many silos in large organisations, and everyone needs to get together to improve the anti-money laundering approach holistically, across the organisation. Only then will you begin to move up the maturity level.
Even more critical though, is the use of technology. Thinking about costs, efficiencies and doing things better - technology really is the only way to go.
At Napier, we have developed an out-of-the-box solution that allows firms to perform holistic reviews of clients. We always advise firms to choose the right technology - to make sure it’s extensible so it can change rapidly to the wall of regulation that we have seen, and we will see going forward.
Anna Slodka-Turner, Global LoB Head of Risk & Compliance at Evalueserve agreed, saying “the answer has to be technology and more technology... but technology has two interactions with people. One is to remove people, but then you also need smarter people to drive smarter technology”.
In terms of the journey towards a more holistic approach, we introduced the Napier Maturity Model which allows firms to analyse where they stack up against the ambition to have a Leading AML framework and approach.
Participants were asked to assess where their firms were on this model, 43% said they were improving, 29% were at the ‘managed’ level and 21% indicated their approach was mature.
There is clearly some more work to be done industry-wide, but things are definitely moving in the right direction.
We will be continuing the discussion about holistic AML with an industry roundtable later in the year.
In the meantime, you can learn more about our maturity model here, or get in touch if you are looking to implement a more holistic approach to AML in your organisation, as we would love to see how we can help you.