Despite advances in customer due diligence, including the addition of advanced analytics to compliance officers’ toolkits, the scandals of 2018 confirmed that many banks are struggling to bring their operations up to regulators’ standards, to say nothing of best practices. While my colleagues have offered predictions in areas such as payments fraud and cybersecurity, I’m going to focus on what needs to happen in financial crime compliance next year, in two major areas.
Know Your Customer
What’s happening now:The AML scandal in the Baltics has shown that banks do not know their customers as well as they should. A Russian customer illegally laundered money through trading securities, the bank did not have proper awareness and the reputational damage was so significant that it hit the bank’s stock price.
Another scandal related to KYC underscored the fact that banks do not use all available data sources (like the Panama Papers) to know their customers. It also showed that monitoring internal activities is vital, since the bank’s employees facilitated the client’s tax evasion. The bank will have to re-check their clients, as required by the regulator BaFin.
What needs to happen:
International committees like FATF and the Basel Committee on Banking Supervision as well as national regulations like BSA (USA) and EU directives all require a sound KYC program. Many financial institutions have already implemented such one, but there is room for improvement.
What will happen in 2019:
I foresee that the pressure from regulatory fines and the publications of leaks will force financial institutions to enhance their KYC processes. That includes an automatic risk classification due to the risk-based approach leveraging any available data source, with full integration into the bank’s processes, especially its compliance processes.
Detection and Alert Handling
What’s happening now:Banks are being overwhelmed by a huge volume of false positive alerts. The natural response to this is to hire an army of AML investigators — but this approach is not scalable, and won’t fix the problem. When it came to Credit Suisse, FINMA (the regulator of Switzerland) recognized that and urged the bank to improve their financial crime compliance processes. Many financial institutions, however, still take this manual approach.
What needs to happen:
A more sophisticated process is required. AI is helping to improve the result of transaction monitoring in two ways:
- It can prioritize the huge volume of alerts by ranking them in order of risk, making sure investigators can deal with the alert volume.
- It can detect previously undetected patterns, using a combination of supervised and unsupervised machine learning models.
Due to all the fines and scandals in 2018, I am convinced that AI will play a more important role in financial crime compliance. We at FICO have taken the lead in this area, and believe that it’s absolutely critical if we’re going to help compliance departments cope with tight or reduced budgets, new regulations and money laundering activities.
Last year we saw many financial institutions choose an automated system leveraging robotics and a configurable case management system. In 2019 that trend will accelerate and more and more financial institutions will benefit from that improved solution set. Watch this space for more on financial crime compliance!
