5 minute read 16 Jul. 2020
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COVID-19 pandemic: How banks can increase resilience against financial crime

A more agile, efficient and resilient approach to financial crime compliance can give banks the confidence to recover faster and stronger.

Around the world, governments, industries and communities have rallied to combat the devastating impacts of the COVID-19 crisis on our health, economy and way of life.

At the same time, others have seized the opportunities presented by the crisis to exploit vulnerabilities in a financial system under extreme pressure. Evidence of a rise in financial crime during the pandemic is still being gathered, but anecdotal reports suggest some forms of criminal activity, including money laundering and rogue trading, have increased.

Now: moving fast to mitigate immediate threats

Many regulators, including the US Securities and Exchange Commission and European Banking Authority (pdf), have alerted banks to the risks of financial crime during the pandemic while at the same time reiterating that they must continue to monitor and report suspicious transactions even as some supervision, reporting deadlines and due diligence have been relaxed in order to keep money moving throughout the system. Banks have a big role to play in ensuring government support and stimulus packages are delivered quickly and efficiently to those who need it but doing so while remaining vigilant to crime is not always easy.

In the midst of the pandemic, the priority for banks is to act fast to control immediate threats. Some financial institutions are accelerating their use of digital tools, particularly data analytics, to identify suspicious activity. Others, with internal resources stretched, are engaging managed services partners for additional support and their specialist talent and technology to ride out the peak.

Next: strengthening the approach to financial crime disruption   

When conditions begin to stabilize, financial institutions should consider how to build in more resilient strategies to detect and prevent financial crime in a post-pandemic world. Europol has predicted that the easing of lockdowns is likely to see levels of financial crime return to normal, but warn that the crisis will have created new opportunities for criminals. Prolonged economic hardship and the vulnerability of some segments of the community may drive a rise in illicit activity including money laundering and cyber-related fraud.

As banks consider how to protect against a potential surge in financial crime after the COVID-19 crisis, they are likely to learn lessons from their performance during its peak. On the whole, the banking sector has responded remarkably well to the disruption, maintaining business continuity and ensuring the robustness of the world’s financial systems throughout. Even so, many banks have recognized gaps in their current approach to financial crime. Actions to plug these are likely to include:

1. Accelerating digital transformation

Prior to the COVID-19 pandemic, while banks had been increasing their use of data and analytics to detect and prevent financial crime, deployment of digital was relatively conservative. Now, lockdowns have forced banks to take the customer experience almost entirely online – onboarding and servicing customers via digital platforms – with many hoping to maintain this digital customer journey in recovery. For this digital transformation to deliver genuine progress, banks must also look at what is required to digitalize KYC and transaction monitoring as part of the onboarding and ongoing servicing of customers. This will require both a major shift forward in the use of data and analytics in these domains but also a signification uptake in the adoption of next generation technologies such as computer vision, dynamic customer risk rating and biometrics. 

Digital technology can drive a step change in the fight against illicit financial activity, provided financial crime is given equal priority with customer experience in the digital transformation roadmap.

2. Rethinking the balance between resilience, agility and efficiency

In a dilemma broader than the fight against financial crime, banks will find themselves grappling with the challenge of needing to move fast in a crisis while ensuring security and keeping operational costs down. Lockdowns in major offshoring hubs such as India have revealed pitfalls in some offshoring/outsourcing models and has prompted some banks to consider bringing their financial crime functions back onshore/in-house, even if it means higher costs for the bank. Others are aggressively pursuing their use of digital tools to reduce manual effort and therefore the reliance on humans to perform compliance functions, while being mindful of the need to embed security and regulatory approval across technology.

3. Reviewing and redesigning operating models

Already we are seeing banks evaluating the performance of current operating models during the COVID-19 pandemic and considering how to build greater resilience, including through the prevention of financial crime. What’s become very clear during this pandemic is that today’s global economy is a highly complicated, interconnected environment. Withstanding disruption during a major global event requires an operating model with the flexibility to respond rapidly to change – to move people around, shift strategies and draw on technology to do things differently. With this in mind, we expect many banks to increase their use of external partners and utilize a managed services approach – the importance of a strong ecosystem has never been greater.

Banks considering a move to some form of managed services to enhance their financial crime function should ensure providers have the right ingredients to enable an approach that can balance resilience, agility and efficiency.

  • Key questions for boards to ask managed services providers

    • Do you have a global standard operating model to ensure consistency of approach across regions?
    • Do you have multiple delivery centers or third-party operating partners to mitigate against disruption in a particular country?
    • Do you have a strong working relationship with regulators? Can you ensure their confidence in your approach to financial crime?
    • Will you manage the risk of delivery across the function?
    • Can you call upon a trusted network of partners including Regtechs to ensure access to the latest digital solutions? 

Confidence to recover faster

The COVID-19 pandemic has taught us many lessons but for banks one of the biggest has been around the need to maintain confidence amid uncertainty. As the global economy begins to move past the immediate threat of the pandemic, many institutions may consider reshaping their approach to financial crime compliance to help deliver this confidence, and the freedom to begin planning for recovery earlier.

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As banks prepare for an expected uptick in financial crime and consider how to increase resilience in readiness for future volatility, more are rethinking their operating model. Building a strong ecosystem of partners, including managed services providers, is key to a more confident recovery.