There’s a pervasive view that compliance for money laundering remains a cost-centre activity, and is primarily a “check-the-box” exercise to keep the auditors and regulators satisfied. However, that has evolved in recent times.
As business volumes and data complexity increase exponentially, AML compliance has taken on a bigger role. There’s a growing realization that compliance needs to be imbued as a culture from the top-down to the entire organization for it to be effective, and that a wider perspective of tackling financial crime is required, rather than separate siloed risk operations.
Leaders realize that it not only safeguards the institution’s reputation and shields against regulatory pressures, but works in tandem with other risk operations in the financial institution to reduce risks and thereby improve long-term business prospects. The more modern and relevant view now, is that compliance brings real value to the entire organization, rather than being a distraction or inhibition to business.
So, while the nature of compliance and its raison d'être has not changed, its priority and position within an organization has changed.
Money Laundering Techniques: 5 Reasons Why Compliance is More Important Than Ever in 2019
Over the last five years or more, criminals saw that the channels into the financial system were being rapidly digitised. They could do more with less by leveraging technology, and money laundering was moving from being slow and cumbersome to becoming diverse and difficult to trace.
Anti-money laundering systems had to be quickly upgraded to be able to track illicit money flows from huge volumes of customer data, account data and transaction data, and it became impossible for human officers to rely solely on “eyeball” methods to pick up suspicious patterns. Regulators have also pushed for financial institutions to beef up their systems with better algorithms and models to be able to keep up with the criminals riding on a digital wave.
In 2019, criminals are pioneering new ways to leverage technologies for their illegal activities. Deploying ransomware globally, leveraging the anonymity and ubiquity in blockchains, and producing high-quality counterfeit IDs are just some of the ways criminals are adapting.
These issues were all discussed at our recent FICO Asia Pacific Fraud Forum. So let me give you five reasons why modern compliance, driven by artificial intelligence, is more important than ever, especially in the burgeoning and massively populated markets of Asia:
(1) Trade-based Money Laundering: Asian economies are export-oriented, therefore trade-based money laundering (eg. using trade instruments like fraudulent letters of credit, fake invoices, vessel re-routing to pick up illegal goods, so as to mask movements of money) is of great concern. The use of artificial intelligence to find outliers when looking at dual-use goods monitoring, price monitoring, vessel tracking, as well as trading partners screening, will be a pivotal area of focus and development.
(2) eKYC: In 2019, Asian countries are already very advanced in mobile and digital payments. New technologies are being developed to tackle eKYC (different from the standard KYC) so that online-only businesses can onboard customers in a way that is accurate and convenient. This is driving innovation and interest in new forms of ID and biometric verification. Cracking this challenge will be especially important in Asia with its huge populations and pervasive use of mobile and digital.
(3) AI in AML: AI has been a long-discussed topic, but in 2019 there is a race among lenders to tangibly apply it and operationalize it. There is also great pressure to ensure the implementation uses “explainable” AI so that lenders can explain to regulators and others why certain cases were flagged or perhaps missed. Artificial intelligence and its great value will come in reducing the number of false positives and ensuring better detection of financial crime as the data sets grow and become more complex.
(4) Phonetic algorithm: Asia has a very diverse set of languages, many of which don't even use Latin characters. In 2019, global movements make it more likely that money launderers are not from the resident country of the lender. Plus, if we include the diverse business practices and languages in APAC, that too can increase the complexity of money laundering detection. The use of next-generation fuzzy detection capabilities for non-Latin characters will be essential to make sense of this growing complexity at speed.
(5) FRAML: Organized financial crime is an ongoing problem in APAC, as criminals in fraud are found to be likely to launder money, and vice versa. This means lenders will require an enterprise-wide approach. There is a real need to converge the skillset, technology, teams and organizations deployed across fraud and compliance. In 2019, the lenders that develop a combined AML+Fraud perspective will be those who are able to differentiate and stay ahead of the competition.
Money Laundering Techniques: It Is An Ongoing Journey
The journey of compliance started with the basics. Regulators were keen to weed out illegally-obtained funds from entering the financial systems, and financial institutions, in particular, were required to adopt certain procedures by regulators in a bid to thwart such inflows. Expectations were relatively simple and implementation of basic processes and systems were effective in heading off money-laundering attempts.
In 2019, while regulators are still catching up to rush out more relevant legislation, financial institutions are pushing ahead to implement better technologies to keep abreast of the criminals.
So, where does this journey end? Does it have a “…lived happily ever after” conclusion to it, where criminals are defeated, and regulators and financial institutions no longer have to worry about money flows of dubious origins? Unfortunately, this may never happen in the practical world, but a strong and clear recognition that compliance is a journey that requires commitment and effort within the wider organization, will place us in good stead.
Do you have any other predictions for money laundering in 2019? I would love to hear them, so drop me a line in the comments section below.