6 minute read 17 Sep 2020
Why combatting financial crime remains a key challenge for the financial services industry

Why combatting financial crime remains a key challenge for the financial services industry

By Sylvie Goethals

EY Belgium Financial Services Risk Partner

Dedicated to Financial Services. Focused on quality in delivery and client satisfaction.

6 minute read 17 Sep 2020

In times of continuous disruption and renewed crime regulations, financial institutions must take heed of all challenges and respond adequately. To alleviate their increasingly challenging tasks, we provide some useful insights.

Three questions to ask

  • What is driving the need for financial crime solutions and operations?
  • How to implement new approaches and technologies to combat money laundering?
  • How can financial institutions mitigate risks?

Since 2008, the fines imposed for money laundering and sanctions violations have reached – and even surpassed – a staggering $ 28 billion. Also, tier one banks spend about $ 1 billion per annum on financial crime operations. The financial crime regulations are subject to continuous evolution, and new ones are being implemented, requiring financial institutions to take extra steps to remain in compliance. Regulators are increasingly prioritizing financial crime compliance, with more and more formal regulatory reviews being imposed on financial institutions.

Know Your Customer (“KYC”), screening and Anti-Money Laundering (“AML”) monitoring & investigations are the key controls to prevent financial institutions from being misused for financial crime. Despite the evolution of these processes in the past decade, their effectiveness and efficiency often remains an issue. Whilst individuals and organizations moved to digital and interconnected solutions, financial crime operations remained reliant on outdated controls.

The following visual illustrates the key controls maintained by financial institutions throughout the customer journey to prevent financial crime and the typical issues impacting their performance:

Graph: the key controls maintained by financial institutions to prevent financial crime

Financial institutions are struggling to meet their financial crime compliance obligations in the face of increasing regulatory demands, increasing cost pressure and a legacy of inefficient technology and operations, which leads to significant compliance risk and the threat of regulatory censure/fines, but also increased focus on administrative tasks rather than risk management.

Financial institutions need a cost-effective, sustainable (and scalable) solution to financial crime risk detection and investigation, which uses innovative technology, including workflow, analytics, Robotic Process Automation (RPA) and machine learning to improve and accelerate risk detection and remediation. They also require a close follow-up on the regulatory framework and changes.

Combatting financial crime: a new rulebook at EU level?

On 7 May 2020, the European Commission released its action plan to strengthen the EU’s framework on the fight against money laundering and terrorist financing and to prevent that financial institutions be used for financial crime purposes. The newly proposed measures will significantly alter the current EU AML/Counter-Terrorist Financing (“CTF”) legislative and supervisory framework. If they are to remain compliant, financial organizations should assess how these measures could change their operations, and should do so prior to their adoption.

The Commission has chosen to focus on the continued monitoring of the 4th and 5th Anti-Money Laundering Directives (4AMLD and 5AMLD) and stated that the European Banking Authority (“EBA”) should make full use of its new powers, of which they are fully supportive. In order to have a more consistent AML regime across the EU, a new rulebook should be introduced as a directly applicable regulation rather than a directive, as directives allow for differences in the way they are transposed into Member States’ national laws.

Proposals to improve the effectiveness of supervision by reinforcing the EBA’s use of its new powers and creating an EU-level supervisor, will mean that National Regulating Authorities will be monitored more intensively with regard to their enforcement actions. The approach to AML/CTF supervision will likely become more streamlined and rigorous as well. This could increase regulatory oversight and pressure on financial institutions, so preparations should be made for more frequent visits and questions from the regulator, as well as for a change in the overall AML/CTF supervisory approach. In some cases, the EBA itself could conduct an on-site inspection of a bank’s premises as part of its new powers.

With the harmonization of the existing rules through a single rulebook, many financial institutions could see changes happen to regulatory expectations around their AML/CTF control environments in circumstances where existing national legislation and guidance deviates from this new rulebook. This is why, for some financial institutions, significant adjustments to controls may be required, which could impact not only the costs, but also the structure itself. Financial institutions will likely be under more pressure to demonstrate the effectiveness of their AML/CTF control environment and compliance to the regulators.

The time is now to explore the capabilities of artificial intelligence, which has the potential to enable a notable change in AML capability and provide a means to combat the modern threat of money laundering.
Sylvie Goethals
EY Belgium Financial Services Risk Partner

We need new approaches and technologies to combat money laundering

Current AML compliance processes are dominated by high levels of manual, repetitive and data-intensive tasks that are perceived as inefficient at disrupting money laundering activity. Given the relatively low impact of current AML efforts, combined with the increasing complexity of threats and growing volume of data to analyze, the time is now to explore the capabilities of artificial intelligence (AI), which has the potential to enable a notable change in AML capability and provide a means to scale and adapt to the modern threat of money laundering.

AI capabilities have grown in recent years, as demonstrated by real-life examples such as virtual assistants and robotics. Their transformative potential has thus stimulated the imagination of businesses that are seeking to reduce costs, more effectively manage risk and increase productivity. AI’s potential to support regulatory compliance has been noted by risk and compliance managers. AI can drive significant efficiencies in typical operational hotspots, such as customer due diligence, screening and transaction monitoring controls. For example, incumbent AML transaction monitoring controls typically generate high levels of false positive alerts and significant operational workloads.

AI offers immediate opportunities to significantly reduce operational costs with no detriment to effectiveness by introducing machine learning techniques at different levels of the transaction monitoring process. AI is also being applied to customer due diligence and screening controls using natural language processing and text mining techniques.

Navigating the impact and incurred challenges of the COVID-19 pandemic

The COVID-19 pandemic has triggered unprecedented change, forcing major lifestyle adjustments and turbulence in financial markets. While financial institutions are providing essential services, they must consider the impact on operations, employees and customers while remaining compliant with key KYC, AML and Sanctions obligations.

COVID-19 events are impacting customer and payment transaction patterns, and AML systems are calibrated to handle the emerging risks and typologies. These risks originate from a sudden increase in transaction volumes due to:

  1. government stimulus packages being routed through banking channels,
  2. emergency aid-related fund flow to government bodies, spurious aid agencies and existing non-governmental organizations (NGOs), and
  3. a surge in faceless digital transactions.

Additionally, with the onset of the pandemic, financial institutions face operational challenges resulting from closure, limited services or suspension of conventional account opening and servicing channels such as branches. Coupled with lockdowns and social distancing measures in various areas, this also poses challenges in executing conventional KYC and Customer Due Diligence (CDD) measures. For financial institutions, which onboard and interact with their customers in-person, the business disruption can pose critical risks. For corporate clients, the challenges are compounded by limitation in client outreach for completing complex tasks such as identification of beneficial owners, for which all regulators may not tread the same path.

Limitations in client outreach, disruptions to day-to-day operations and losses are expected to impact the KYC processes.
Sylvie Goethals
EY Belgium Financial Services Risk Partner

What can financial institutions do to mitigate these risks?

Firstly, financial institutions must carefully evaluate client risk-rating decisions due to disruptions in KYC processes for new and ongoing clients. Limitations in client outreach, disruptions to day-to-day operations and losses are expected to impact the KYC processes. In the short term, there is a need to assess whether the AML and KYC refresh have resulted in backlogs during the pandemic period due to limited access to the system, potential low productivity of the remote workforce and unusual transaction patterns. In the long term, the teams should recalibrate financial crime change initiatives and tune the financial crime monitoring processes and systems to the “new normal”.

Secondly, with regular banking operations facing disruptions, ongoing financial crime monitoring strategies must pivot to take disrupted transaction patterns into consideration. Transactions monitoring strategies will need calibration to align with relevant risks and effective parameters. Scenarios which are rendered ineffective, because of change in customer behavior patterns or product/service usage during the COVID-19 impact period, can be recalibrated or set aside. Focus should be devoted to the more relevant existing or new scenarios.

Lastly, institutions should transition to or increase their reliance on digital onboarding solutions to minimize the extent of disruptions in customer onboarding processes.

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Combatting financial crime has been a major a challenge for financial services, for many years already. Yet, 2020 has brought on even more game-changing elements that need to be taken into account: regulatory changes, COVID-19, etc. Financial institutions have to urgently explore and take advantage of new technology, AI, digitization and share information between financial institutions to become more effective and more efficient.

About this article

By Sylvie Goethals

EY Belgium Financial Services Risk Partner

Dedicated to Financial Services. Focused on quality in delivery and client satisfaction.