by Frank Staelens
Although the global amount spent on combating financial crime went above $1,3 billion, 2020 saw a record number of enforcement actions in numerous global jurisdictions. Furthermore, estimates suggest between $800 billion and $2 trillion of criminal money flows went through the financial system in 2020, while an overwhelming majority of it remained undetected. In other words, the Financial Crime combat status at the average financial institution today is too high in spending, and too low on results. Although regulators around the world always allowed for financial institutions to design their own risk based approach, review procedures are often copied from one institution to another and/or are standardised by using fixed checklists and risk weights. For instance, the risk weight for involvement with real estate activities is usually the same for all clients, while the specifics around the nature of the real estate activities (professional/private person, renting/promotion/project development, number of transactions and amounts concerned, the regions of activity, risk mitigating factors …) are best taken into account to avoid either over- or under qualification of risks.
Poor quality data sourcing and enrichment continues to result in high numbers of false positives, the disposal, of which some financial institutions are incapable of handling within reasonable delays. Sometimes poor technology choices by either IT people who don’t understand compliance needs and/or compliance people who don’t understand technology capabilities, end up using non-customised rules instead of using artificial intelligence and machine learning algorithms that are capable of supporting a truly dynamic risk based approach.
Most financial crime analysts need to manually collect data from multiple systems over and over again. Further repetitive manual work is put into document and entity link visualisation. More manual work is put in the follow up of policy, training and approval management. Large financial crime teams struggle with task and deadline management. Large groups struggle with duplicate KYC work for clients that open accounts with multiple entities.
On top of this, most financial institutions still use isolated review processes. Risk information about the same entity is spread over different databases (KYC, CDD, transaction monitoring, fraud, CRM …) without having access to holistic risk views. No risk information is collected on the network around the entity and no algorithms are used to detect criminal network behaviour. The follow up on different alert categories is performed by different teams that work in different ways.
Some financial crime analysts have a tendency towards qualifying risks too high out of fear for mistakes, not realising that an over qualification of risks increases the responsibility of their employer. Financial crime analysts are best trained to embrace the concept of risk in a controlled way.
The combined negative effect of the use of standardised review procedures, the lack of holistic risk views, the use of poor quality data sources, the wrong technology choices, and the increasing fear for mistakes result in financial crime departments losing a lot of time on chasing the wrong entities and not securing enough time to unravel complex high risk cases. Add to this the potential efficiency gain that could be obtained through the automation of repetitive data collection/analysis tasks, the implementation of consistent working methods between different teams, and the avoidance of duplicate efforts between different entities and you will understand why I believe part of the exponential growth in resources that we have seen during the past decade could have been avoided.
The key solution to overcome all the above is scalable review procedures with fast multi-disciplinary deployment teams that have access to the right technology. Best efforts in combating financial crime also assume the use of best technologies!
The author, Frank Staelens is a former Big 4 Partner and Head of Financial Crime. He supports the setup of scalable financial crime departments. In case of any questions and / or comments, you can reach Frank by email at firstname.lastname@example.org.