Industry
Banking
Banking Services Transformation: Unlocking Exponential Value
Highlights
- By leveraging the inherent interconnectedness between fraud detection and money laundering risks, the fraud detection and anti-money laundering (FRAML) approach unifies fraud management and AML efforts, delivering a more holistic and effective strategy for managing financial crime compliance.
- Banks largely handle fraud and AML processes in silos—fraud detection is executed in real-time, whereas AML monitoring remains predominantly batch-driven.
- Financial institutions should revisit their policies and processes to adopt FRAML as an integrated, long-term strategy that is cost-effective and operationally efficient.
FRAML framework
FRAML framework is gaining momentum for its operational efficiency and cost effectiveness, and strong regulatory alignment.
The Financial Crimes Enforcement Network (FinCEN)’s national priorities for financial crime management underscore the critical link between fraud and money laundering. A significant amount of the SARs (Suspicious Activity Reports) filed by the financial institutions emanate from fraud-related crimes as well.
The FRAML approach integrates fraud and AML by unifying financial crime compliance resources, monitoring processes, and data management, moving away from traditional siloed operations.
The critical benefits of the approach include faster, enhanced, and more efficient financial crime investigation with deeper insights that can more effectively identify risks. It ensures better collaboration between fraud prevention and AML teams, allowing for better information sharing and risk identification, thereby facilitating better informed decision-making. Additionally, the integration of data, analytics and monitoring etc. can help financial institutions handle complex financial crimes. This approach can reduce duplication, thereby containing human resource costs. From the systems perspective, this integration can potentially reduce maintenance costs. A unified fraud-AML platform provides better insights for AI/ML based process improvement initiatives in financial crime including process automation and false positive management.
Implementation blocks
The widespread adoption of the FRAML approach remains limited as many financial institutions continue to operate in silos.
The financial institutions face significant challenges in implementing a unified approach to financial crime compliance:
- Fraud and AML have separate procedural requirements; AML processes are still largely batch-oriented, whereas fraud detection operates in real-time.
- There is resistance within the team towards an integrated fraud and AML approach as resources are often not cross trained and tend to remain within their specialized domains.
- From the technology perspective, it is challenging to integrate legacy systems as they are inflexible for integration, change management and modification.
- Many FCC platforms do not support integrated fraud and AML process requirements. In some cases, this also necessitates the implementation of a new FCC platform.
- The cost of implementing this approach may offset the expected savings from integration.
- Financial institutions are often wary of modifying processes with significant regulatory implications, as missteps can expose them to legal, financial and reputational risks.
Solution
Financial institutions can adopt the following approaches to implement the FRAML framework effectively.
- Selective integration: An integrated approach should be applied selectively, focusing on areas where it adds real value. The institution should, therefore, through policy integration, identify and clearly document the areas that require an integrated approach. For instance, first level AML alert reviews may require integration; institutions can address these alerts with minimum checks through a risk-based review. This targeted approach is especially prudent given that the industry continues to face a huge number of false-positive alerts. An integrated approach should be applied where a 360-degree view of a suspicious customer is needed, such as for second-level or escalated reviews. This targeted implementation is easier, requires fewer resources, and can be simpler from a technological standpoint.
- Technology strategy: Despite short-term implementation challenges, an integrated approach is efficient and cost-effective over the long-term. Financial institutions should leverage data synergy between AML and fraud processes to streamline data management and reduce operational burden.
- Platform capability approach: Institutions should consider platform solutions that provide an integrated view and incorporate AI/ML capabilities. Features such as automated AML support, combined AML-fraud alert creation, and the ability to close alerts below a defined risk threshold add to the process efficiency.
- The approach can facilitate real-time monitoring of AML alerts, representing a significant shift from current batch-oriented processes.
The roadmap for financial institutions needs to encompass policy updates and integration, technology convergence with platform optimization, streamlined data management, advanced analytics, workforce transformation and continuous adaptation.
Way forward
Given the growing complexity of AML and fraud management and their interconnectivity, the FRAML approach represents the way forward. Its long-term benefits outweigh short-term implementation challenges. This approach, when applied from a risk-based perspective, can be managed without major disruption. Discover how a unified FRAML approach can transform your financial crime risk management.
