Money Laundering facilitates economic crime and nefarious activities such as corruption, terrorism, tax evasion, and drug & human trafficking, by hiding and transferring the funds necessary to commit these crimes. It can be detrimental to an organization’s reputation, profit and its future.
With growing links between money laundering and terrorist financing, crime & corruption, there has been a renewed regulatory focus on Anti-Money Laundering (AML) globally. This leads to multi-million and billion dollar fines & penalties, levied on financial institutions, including ‘cease and desist’ orders, and even the closure of businesses in some cases.
According to figures from WealthInsight, the global spending on AML compliance is expected to grow 9% per annum till the end of 2017, in order to avoid costly enforcement actions and large-scale penalties resulting from compliance failures.
In 2016, FinCEN proposed new regulations, extending the AML requirements, to financial institutions, products & services, previously not subjected to Federal Regulatory oversight. This has resulted in regulatory expectations becoming extra-territorial, requiring financial institutions to adopt & enforce globally consistent standards, and driving up the AML Compliance Program expenditure.
A bird’s eye view of AML Regulations
The Anti-Money Laundering (AML) policy consists of three interlaced layers: Know Your Customer (KYC), Name Screening and Transaction Monitoring (TM).
Customer Identification Program (CIP), Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) are the key components of a sound KYC policy. Together, they can prevent or limit money laundering, terrorism funding, corruption and other illegal activities, by requiring the individuals who conduct financial transactions, to provide sufficient personal information. They require them to be classified, based on defined risk assessment criteria, and are verified through a tiered due diligence process, according to the customer risk level.
Name screening is the second layer of AML policy. Its purpose is to screen customer names against a wide range of sanction lists. Over the years, and especially post the enactment of US Patriot Act, there has been a significant proliferation and expansion of sanction lists, including Publicly Exposed Persons (PEP) and country-specific designated persons lists.
Transaction Monitoring (TM) is the last layer of AML policy. It is responsible for screening the customer financial transactions, to detect suspicious activities, based on defined rules and thresholds. The suspicious activity detection is often done through specialized vendor products. Its ultimate goal is to file suspicious transaction or activity reports with the appropriate regulators.
Key Business Challenges throughout the AML Space
- Runaway program and operational costs.
- Aging solutions, inadequate to meet today’s business challenges and unprepared for tomorrow’s needs.
- Growing data sources, volume and complexity, causing firms to allocate increasing time & funds to data preparation.
- Large number of false positives, which significantly increase investigation, and the overall AML program cost.
- Investigation process mostly comprises repetitive and manual tasks, which are costly and error- prone.
- High attrition ratio in the investigation team and long training periods for investigators.
AML Solution Challenges
AML Detection Platforms from traditional and established product vendors have been generating a large number of false positives, and the existing risk scoring mechanisms fall short of preventing or addressing this issue. These solutions also lack sufficient cognitive capability.
The traditional case management and workflow solutions, implemented with in-house developed code or vendor products, have been focusing excessively on presentation and navigation, with most tasks performed manually. Lack of automation, analytical capability and visualization, causes traditional solutions to be inefficient and error-prone.
Over the years, financial institutions have developed and maintained a large number of silo AML solutions, each designed for a specific layer (e.g. CIP, CDD, EDD, Screening, TM, etc.) of AML regulations. The use of disconnected AML solutions has been the primary cause of costly and long development cycle, excessive and complex interfaces, data replications, increased user training cycle and error rate.
Traditional AML solutions lack integrated planning and centralized data management policy, and, as a result, often lead to data availability, quality and replication challenges.
Driven by the evolving financial crime threats and tactics, financial institutions will continue to be challenged in their effort to implement and maintain a robust AML Compliance program in a cost-effective manner.
To disrupt and close the widening gap between AML regulations and AML solution capability, financial institutions need to ensure there is AML compliance solution strategy at the enterprise level, with comprehensive and centralized planning. They also need to invest in data preparation and management, and introduce technology innovations to address the shortcomings with traditional AML solutions.
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