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CEO’s thoughts: The future of financial crime risk management

Greg Watson, Napier’s CEO’s thoughts on current challenges of financial crime risk management and the future of this sector.

Napier AI
December 19, 2022

We recently spoke to our CEO Greg Watson about the current challenges of financial crime risk management, and what the future looks like in this sector. He also shared his vision to lead Napier into its next phase of growth, building on the past several successful years of rapid expansion.

Greg has a wealth of experience in operational management and business strategy obtained at his time at Fenergo, HSBC and UBS. His tenure at Napier began as Chief Operating Officer, where his role was to align Napier’s growth and vision with trends in the anti-money laundering and financial crime technology industry. He is determined to take Napier to even greater heights with a continued focus on agile technology and enabling a more holistic approach to financial crime risks for our clients.  

What does the ‘current state’ of financial crime compliance look like? And what are the challenges with the existing approach?

Financial institutions continue to invest heavily in both labour and technology to identify and prevent criminal activity but rising financial crime statistics imply that we are fighting an uphill I think times are changing, and the “old-school” paradigm of manual and siloed approaches to financial crime risk management (FCRM) are no longer sufficient to keep pace with the fast-evolving threat landscape. Aside from rising financial crime, the current approach to FCRM leaves firms with three primary challenges:

The cost of compliance

The cost of financial crime compliance has more than doubled since 2019, with most recent figures showing a ~14% increase in investment in the last year alone. The Covid-19 pandemic and geopolitical conflicts have conjured a perfect storm for criminal exploitation and the regulatory environment and threat landscape has diversified massively as a result, placing huge pressure on institutions.  

While more and more firms are turning to technology to bolster their anti-financial crime efforts, institutions still spend around 60% of their compliance budgets on labour, leading to a perpetual cost and efficiency challenge. The most recent Cost of Compliance Report from Thomson Reuters, for example, highlighted that the majority (67%) expect compliance staff costs to rise over the next year, with “access to skilled labour” being a key barrier to success.

For those institutions that are taking a more “tech-first” approach and pursuing automation, we typically see them favouring point solutions to solve components of the financial crime compliance lifecycle. These products leverage very particular datasets to improve certain financial crime functions such as KYC or transaction monitoring.  

While these products are far more effective than manual processes, the challenge is that they often fail to integrate with one another to provide a more holistic view of financial crime risk. As a result, the RegTech landscape as it exists today can only plug some of the gaps and there will always be a need for manual intervention to aggregate data to identify and prevent financial crime risk.  

How does the traditional approach impact the end clients?

Know Your Customer (KYC) processes are the backbone of any customer experience, and while the efficiency and effectiveness of onboarding might set the tone for the relationship, the engagement doesn’t end there. Limitations in traditional approaches to KYC/KYB mean most banks perform manual periodic reviews to ensure customer behaviour aligns with their expectations. The frequency of these periodic reviews is determined by the risk rating attached to each firm.

Whilst this process is, of course, critical from an FCRM perspective, it is within the banks’ best interests to keep these engagements to a minimum so as to avoid burdening the client with unnecessary paperwork. It’s not uncommon for customers to have multiple accounts with the same institution across different service lines. In these cases, institutions relying on manual or fragmented processes risk generating unnecessary friction for clients by requiring them to repeatedly submit the same data to different stakeholders due to a lack of internal exchange.

What do the regulators have to say?

As with any compliance related function, the regulator exists as the ultimate authority. Supervisors around the world are not entirely satisfied with the way that many institutions are currently fighting financial crime. The Financial Conduct Authority (FCA), in particular, has publicly criticised the effectiveness of institutions' existing financial crime controls.

How can we move to a more holistic view of financial crime risk?

It’s clear that the current siloed approach, underpinned by multiple point solutions, doesn’t facilitate a “360-degree view” of customer risk. If firms can converge data across KYC, transaction monitoring and customer screening into a single lens, they will be able to leverage more indicators to obtain a more accurate and real-time view of customer risk.

Why aren’t we there yet?

The concept of data convergence isn’t entirely new, and institutions have employed several different tactics to try and achieve this goal, some more cumbersome than others.

The most common approach to data aggregation is still very manual. If an individual wishes to supplement a KYC review with the transactional behaviour of that client, they would typically obtain a spreadsheet extract from a different team and manually analyse the data to detect anomalies. This approach clearly lacks the necessary scalability to monitor customer risk on a global scale.

Some more sophisticated organisations have attempted to introduce what’s referred to as a “data lake”. This involves pooling customer information into a centralised repository and overlaying analytics to get more insights from the data. However, the immense volume of data and legacy technology can cause them to be inefficient and difficult to implement. Moreover, institutions often lack the technological capabilities to interrogate the data properly to achieve a holistic view of risk.

Where do we want to get to? And how can technology help us get there?

The current approaches to financial crime prevention are not sufficient, but there are novel technologies emerging that enable firms to aggregate their ecosystem of vendors and remove manual bottlenecks.

Solutions such as Napier Continuum are designed to sit at the centre of a firm’s financial crime compliance ecosystem and ingest information from various solutions to identify material risk. By combining data across KYC, Transaction Monitoring, Customer Screening and alike, Continuum produces a dynamic risk score which evolves in real-time throughout the customer lifecycle.  

This dynamic approach provides flexibility, automation and agility and is to be consumed as an additional layer of analysis to existing controls. While individual systems alert users to suspicious behaviours in isolation, Continuum can model customer behaviours against other data inputs and compare it to industry peers to produce more valuable and actionable insights. AI-enabled interpretation, interrogation and presentation will prove critical in surfacing the “so what’s” of suspicious activity while enabling institutions to re-deploy human resources to more value-adding, investigative tasks.  

What is your hope or vision for the future of fighting financial crime?

Financial crime technology vendors represent just one piece of the FCRM puzzle, but their contribution cannot be underestimated. The key to success in the fight against financial crime lies in our ability to feed these solutions with the right data at the right time to uncover criminal actors and their broader networks.  

The current rate of money laundering crimes being brought to light globally is underwhelming to say the least, but we are confident that Napier’s Continuum solution can play a big part in helping to surface pockets of bad actors and ultimately contribute to reducing and eliminating financial crime. Napier Continuum is designed to capture far more instances of illicit activity with greater accuracy, and by leveraging this technology to combine customer data inputs, institutions can filter out the noise of false positives and overcome the challenges of siloed approaches.

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Photo by Aakash Dhage on Unsplash

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