Bradley Elliot
Financial institutions are under enormous pressure to grow their businesses, meet higher customer expectations, and navigate shortages of talent and resources. In that context, every organisation needs to optimise compliance costs while remaining one step ahead of evolving regulations and new financial crime threats and tactics.
The regulatory demands the regulated institutions face will only grow, making efficient and effective compliance a key competence. Consider that the United Nations estimates that annual circulated laundered money equals the GDP of France (the world’s 7th largest economy) and that only 2% of these sums are detected and intercepted.
The imperative is urgent in South Africa, with institutions working to remove the country from the Financial Action Task Force (FATF) grey list after recent confirmation that South Africa will remain on the grey list for another year. Gradual migration from legacy technologies is not good enough, and institutions must take bold steps to improve their Anti-money Laundering and Combating the Financing of Terrorism (AML/CFT) programmes.
To match the speed of change in criminal activity and regulations, institutions must overhaul ineffective, expensive AML processes and systems. They need a process that can consistently onboard customers, businesses, third-party services, and vendors and efficiently monitor massive volumes of transactions every day.
The status quo is far from the ideal of frictionless flow of legitimate payments and rapid detection of anomalies. False positives abound due to human effort and legacy investigation systems. Efficiency is further harmed by an average organisation operating six to eight systems for every AML/KYC compliance stage.
New fincrime tools and techniques
Moreover, compiling accurate Suspicious Activity Reports (SARs) requires keeping up with the new tools and technologies, including digital assets and crypto or deep fake technology, that criminals use to launder money, hide their trail and disguise the identity of bad actors.
Most institutions have seen compliance costs rise as frequently understaffed compliance teams scramble to patch operational problems and manage new threats and regulations. The investment required to adhere to FATF’s recommendations for a compliant AML/CFT system is materially high.
But the costs of getting it wrong can be even higher. In addition to the risk of harsh fines and penalties, financial institutions that don’t comply open themselves up to reputational risk. These risks may result in lost business and severe, long-term damage to the brand that is not easily fixed.
A quick adaptation to new cases cannot be solved without an operational reshuffle around risk reporting; without robust automated systems, heavily manual tasks remain, false positives rise, fincrime passes unchecked, and the vicious cycle continues. Although not a panacea, Artificial Intelligence (AI) can also be enormously helpful.
AI can surface suspicious data points in the blink of an eye. However, it still takes investment to integrate AI for data processing into an AML system and train compliance teams to get the most out of the technology. This involves setting up risk thresholds that suit their bespoke needs and focusing investigative time and money on high-risk alerts.
Setting a more streamlined course
A holistic strategy for combating rising compliance costs is still human-led. The financial world has made great strides in embracing Regulatory Technology (RegTech). Still, a stronger link between humans and machines is needed to prevent money-leaking AML processes from continuing.
Understanding where there are inefficiencies in each stage of the AML/CFT process is imperative. Watertight system efficiency has a knock-on effect for more accurate risk reporting. At the same time, compliance teams need to document their practices to instil a company-wide culture around the importance of AML in catching bad actors.
This synergy between people, processes, and tech can help institutions keep up with SAR volumes, reduce false positives, and adapt to future fincrime typologies. As this also safeguards customers and banks in a world where crime should never win, it provides another great payoff for financial institutions.
Bradley Elliot is RelyComply CEO. He writes in his personal capacity.
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