In general, regulators around the globe expect financial institutions (FIs) to have a holistic, company-wide approach to financial crime compliance (FCC). Accordingly, the FIs have focused on aspects such as money laundering, terrorism financing, sanctions, tax evasion, fraud and cybercrime. This has led to the creation of compliance monitoring processes largely managed through individual teams and departments. The segregation of processes to deal with different issues is definitely not in the best interest of an organization. For instance, handling anti money-laundering (AML) and fraud investigation by separate teams with neither communicating with the other, nor sharing monitoring platforms or resources would be a duplication of efforts and a drain on the resources. In addition, these separate teams would be competing for budgets, resources and, senior management review time and can also potentially end-up individually investigating the same customer for fraud and money laundering deviations.
Advantages of an Integrated Compliance Model
A unified scheme to include monitoring of all types of financial crimes under a unified FCC model has its advantages. This would make the surveillance process holistic and comprehensive and ensure visibility into different types of financial crimes that may be connected. For instance, FIs can manage the connection between fraud and money laundering through convergence and subsequently better manage financial crime risks. Further, with the various regulatory and data privacy requirements in operation, a converged FCC model with increased sharing of data and collaboration among compliance teams would not only help stay completely compliant but also be prepared ahead of the crime.
Further, as KYC/CDD (Know Your Customer/Customer Due Diligence) compliance documentation is common for all these FCC areas, it would be advisable to bring KYC also under the overall FCC umbrella. Advantages of such an arrangement are multi-fold. Many duplicate activities between KYC and AML can be avoided, customer risk profiling would be enhanced based on money laundering feedback, overall customer experience can be enhanced and, most importantly, the cost of compliance would come down.
However, the implementation of a converged and unified FCC model also comes with its own set of challenges. This will be a complex process given convergence of FCC requires a better understanding of financial crime risks and intelligent capturing of data across products, channels and line of business.
How should an FI approach the subject?
The most critical aspects to developing such a model include resourcing, well laid down roles and responsibilities and appropriate governance and oversight model. Considering the departments in a FI, responsible for each component of the FCC model, often have different objectives they will need resources with different skillsets. Hence, resource fungibility will be a critical requirement of the model. Additionally, we will need to clearly set out the specification for the roles and responsibilities of each unit for effective operation of a converged FCC model. The roles and responsibilities should take into account the FI’s internal requirements and the expected regulatory compliance standards.
The second focus item would be technology. Relevant technology with good quality data has to be made available for effective management of FCC risks. Technology solution allowing integrated compliance can enable monitoring of money laundering deviations, non-compliance with mandatory KYC requirements, cross verification of names on negative lists and suspicious activity etc. The scope of such a platform has to be drawn taking into account the requirements around the above aspects and data required to facilitate it. The platform should also be integrated with all the source systems of the FI to ensure seamless and appropriate data flows to the platform. Importantly, avoiding information silos and minimizing security gaps is a pre-requisite for the model.
Thirdly, technology aspects will need to be extended to artificial intelligence and data analytics deployment to improve the efficiency of the operational programs. For instance, false positive management in AML using analytics can help reduce false positives in fraud operations and name screening. Similarly, customer segmentation using analytics for KYC compliance can improve program efficiency in AML and fraud.
Lastly, for a converged FCC model to work effectively, a good system of keeping records will need to be developed. This would ensure that data and records in the hands of each compliance team are properly maintained and are available to all teams operating under the model.
Given the above arguments, the benefits of a converged model are quite evident across multiple areas of compliance. The model can be implemented with ease and reap long-term benefits for the financial institutions. More importantly, the model would have regulatory concurrence if the financial institutions can sort out the major challenges and have the will to implement it.