In last week’s blog, we explored the challenges which current AML practice is facing. We also touched upon the scale of financial crime globally and the urgency of implementing holistic AML.
This week we shall focus on what the obstacles are, and how they impede AML practice.
Obstacles for AML to overcome
As the saying goes, ‘if it were easy, everyone would be doing it’. The creation and adoption of a more unified approach to combatting money laundering and financial crime is challenging. Complex and ever-changing regulations and the fluid financial environment of our times are certainly contributing obstacles.
However, most of the barriers to achieving holistic AML are internal to firms.
Is a ‘rip and replace’ approach to AML viable?
Current AML systems are too often based on older technologies. These systems are often inflexible and unable to keep pace with exponential increases in the volume of transactions which the financial sector is experiencing. Additionally, these systems tend to stratify into different specializations or lines of business (LOBs).
This can be the result of the organic growth and development of the company or the cut and thrust of mergers and acquisitions. While these factors might make a ‘rip and replace’ approach tempting, it carries risk. Such projects can be time-consuming, expensive, and difficult to implement successfully while maintaining work output.
The problem with a process-driven approach to AML
AML is typically managed using a set of linear processes with little transversal interaction between different process steps. This approach both exacerbates the silo effect and hampers the development of data-driven or customer-centric AML.
Process-driven approaches are followed for the onboarding and ongoing monitoring of customers for KYC purposes. Customer risk reviews most typically occur on a periodic basis, depending on the level of risk attributed to the customer at the point of onboarding. Low-risk customers may not receive a file refresh for as long as five years. This opens a window of opportunity for financial criminals. Money mules, for example, can pass as low-risk customers at the point of onboarding. Money laundering activities can then continue with little chance of detection for up to five years, when KYC file reviews become due.
The same problem occurs with transaction monitoring, which is also largely process-driven. Rule-based systems generate alerts (a large proportion of which are false positives) which are investigated by analysts and either escalated, reported as Suspicious Activity Reports (SARS) or resolved. Rarely are the results of these investigations fed back into the KYC process to trigger a risk review.
The impact of the silo effect on AML
Currently, financial institutions tend to tackle financial crime compliance in a very siloed manner. Operating models for AML typically stratify and specialize according to different requirements of the business. Separate teams and processes develop for different lines of business, which can be as varied as retail banking, wealth management, capital markets and commercial banking. Data is then siloed according to type, which could be customers, accounts, and transactions. Separate teams then utilize the data for purposes governed by their specialization, with little transversal integration.
In her award-winning 2015 book, The Silo Effect, finance journalist, Gillian Tett explains the dangers and risks as follows:
“Silos can sometimes cause damage...isolated departments, or teams of experts, may fail to communicate, and thus overlook dangerous and costly risks. Fragmentation can create information bottlenecks and stifle innovation...silos can create tunnel vision or mental blindness.”
One of the challenges faced by financial institutions in combatting the silo effect in AML is that they need to be able to strike a balance between the specialist expertise required of different lines of business on the one hand, and an integrated, connected vision for the management of financial risk on the other. Fundamental to achieving this goal is bringing together all client-related data into ‘a single view of the customer’, or customer-centricity.
Holistic AML and the customer-centric approach
The holistic AML approach represents the future of both fighting money laundering and the countering of financing of terrorism (CFT). Key to this is understanding customer behaviour.
Next week, Napier will discuss why customer-centricity is key to the successful implementation of holistic AML, and how to achieve a ‘single view of the customer.’
This article is an extract from our larger paper on the importance of a holistic approach to AML.
If you would like to read more about the benefits of a holistic approach to AML, download our eBook Understand your customer: the importance of a holistic view of client activity in AML