Financial Crime: Technology can Transform Compliance

Visma Connect recently interviewed Jürgen Krieg, FICO's head of global compliance sales. In this excerpt from that article, Jürgen elaborates on the importance of compliance. 

In September 2019, Fico and Visma announced their partnership to Offer SaaS Anti Financial Crime Solutions in Western Europe. A partnership aimed at helping banks, payment providers and fintechs meet the ever stronger regulatory demands while reducing effort and expense. 

What do you do?
At FICO, I am responsible for planning and implementing growth strategies to develop new markets, and the expansion of our compliance business globally. I also manage the partner channels and programs for our financial crime compliance solutions.

How long have you been in the industry?
For more than two decades I have now been working in the financial services industry. In 2014, I joined Tonbeller as Head of Sales & Channel Operations and became Management Board member shortly thereafter.

With the acquisition of Tonbeller in 2015, FICO expanded its fraud portfolio and moved into the growing market for financial crime and compliance solutions to bring the benefits of advanced analytics to a field dominated by rule-based systems.

What does FICO offer and how does it distinguish from other AFC solutions?
FICO brings AI and advanced analytics to risk management, fraud detection, collections and much more. Concerning AFC, we are reputed for being a world leader in the fight against fraud and money laundering, developing and implementing standardized and individual solutions against financial and white-collar crime and for risk management and monitoring, analysis, and reporting. Our turnkey solutions for end-to-end financial crime compliance have proven their efficacy at over 1,300 customers in over 90 countries and they scale across geographies, industries and organizational sizes. We serve corporates, insurance companies, and banks – be it a retail, private, wealth management, automotive or telecom bank, tier 1 or tier 3 bank. As a one-stop supplier for anti-financial crime, we cover all compliance-related requirements in a truly integrated solution that breaks down financial crime risk management silos. We offer best-in-class multi-tenant capabilities (including multi-language, multi-currency), detailed audit trails, and electronic, automated regulatory reporting and filing in any required format.

We help customers speed up time to compliance by 50%, with lower implementation and maintenance costs and fewer IT and project resources.

Here at FICO, AI is in everything we do. With our advanced analytics you identify complex, not yet known criminal conduct, uncover illicit activities earlier and prioritize alerts and support the investigator’s work.

Our enterprise alert and case management solution handles alerts from various source systems and allows holistic 360° customer views across financial crime domains. RPA capabilities help automate time-consuming, repetitive manual tasks like in the process of alert investigation – for example through auto-prioritization and auto-closing of alerts, auto-dispatch to investigators, auto-assignment of tasks or alert triggered multi-level approval chains to ensure low cost but high-quality processes. By combining advanced AML analytics in scoring processes and robotics in alert and case handling you tremendously improve efficiency and effectiveness in compliance. In our experience these technologies can increase the number of SARs by 20% while at the same time producing efficiency gains of 30% in alert investigation and case management.

What solutions do you have? Which use cases do you address?
Our Anti-Financial Crime solutions suite consistently follows the risk-based approach according to FATF and supports the compliance process with integrated modules. The individual business risk assessment plays an important role and lays the foundation for any institution’s AML/ CTF program, including the IT-based monitoring strategy and software settings.

Our KYC solution supports real-time customer risk classification including UBO and PEP identification.

Transactions are screened in real-time against multiple lists to avoid transacting with sanctioned countries, organizations and individuals, or dealing with embargoed goods.

Our analytics-driven AML solution monitors transactions for unusual behavior and offers advanced link analysis, pattern recognition, profiling based detection.

With our unified Alert and Case Management (ACM) we not only provide one single environment for the management of financial crime alerts and cases, including SAR filing and flexible reporting capabilities, but powerful workflow management.

Our high-performance analytic reporting solution built with latest technology offers a portfolio of data visualization dashboards and processes massive data volumes in no time.

Finally, the suite includes comprehensive Tax Compliance & Reporting capabilities to support FATCA and CRS requirements. This solutions suite is available on-premises and in the cloud.

Why is Anti Financial Crime so important?
The prevention of money laundering and other financial crimes is important – not only from an ethical standpoint but also from a macro- and microeconomic perspective. It has an impact on a nation’s financial stability and economic growth as well as on business success. Financial institutions do not want to be associated with dirty business, human trafficking, arms or drug smuggling. They need to build long-lasting brands, create customer trust and satisfaction, and protect their good reputation to safeguard their business.

Reputational harm due to scandals is much more expensive than penalties resulting from non-compliance, although this can lead to banking license loss in very rare and severe cases. Financial crimes compliance has often been seen as a mere cost-center activity, and a “check-the-box” exercise to keep auditors and regulators satisfied. However, this has changed over time. Technology has the power to significantly improve compliance efficiency, reduce costs, add brand value, and increase the customer experience. By investing in AML, you can actually gain competitive edge.

Why should financial services companies outsource their AFC efforts? Can they not build them in-house?
Implementing and maintaining anti-financial crime solutions can be time-consuming and cost-intensive for financial institutions. Especially if they have to rely on expensive consultancy firms, or have limited qualified resources in-house, or simply have the wrong tools introduced. A SaaS compliance solution is up and running in almost no time, comprehensive functionality is available out of the box, it is always up-to-date, easily extendable and scalable. Configuration to your needs is easy to deliver and pre-configured data is integrated. IT departments are relieved from administrative duties and no longer need to take care of technical details.

You hear all the stories of banks getting fines for breaches in compliance and investing large amounts in AFC but still don’t get it right. Why is it so hard?
Fines for non-compliance have reached an all-time high and the growth rate over the last years is alarming. This shows that the mechanisms and technology in place are not adequate, otherwise this number would not be climbing in such a way. In the U.S. the bulk of fines are due to sanction violations, in Europe most of them are due to AML violations.

Banks are struggling due to many reasons: the flood of regulations, the accelerating pace of revisions, increasing expectations from regulators, the professionalization of money launders with international syndicates, new threats arising from cryptocurrencies, the increasing digitalization of the business with new products and services to emphasize the customer experience – and of course inflexible, outdated technology which is not easy to adapt to new rules, regulations or corporate strategies and which generates huge volumes of alerts and false-positives.

To be able to cope with these challenges and avoid fines financial institutions have heavily expanded their compliance staff in recent years. Just a few weeks ago, a market study estimated the cost of compliance for U.S. and Canadian financial services firms to total $31.5 billion in 2019. When EU’s Fourth AML Directive came into force in 2017, the projected annual costs of compliance for European financial institutions crossed the $80 billion mark. Labor is the most significant component of these costs. Advanced technology, AI and machine learning tools will help reduce workload by largely automating AML, cut the cost of compliance processes again and improve their effectiveness.

Compliance, is not just a toolset. It is also a mindset. How do you get that message across your customers?
Yes, that is true. Investments in technology alone are not sufficient to combat financial crime. It is the human who remains at the center of it all. Creating and maintaining a corporate culture that focuses on reduction of risk and an ethical way of conducting business is critical. A strong culture starts at the top. If top management prioritizes compliance, grants adequate human and technological resources and remains engaged in terms of monitoring and audit, you have a good foundation. It is the culture that ensures that employees operate within the prescribed risk appetite and limits and conduct in a way that will neither cause damage to the client nor the institution’s reputation.

The convergence of fraud and regulatory compliance operations, which includes AML and know-your-customer, or KYC, regulations, is currently seen as one of the biggest trends in the financial crime industry by many experts. Can you elaborate on that?
Fraud and money-laundering are closely connected. Fraudulent activity creates money that needs to be laundered, so where there is fraud there is usually also money laundering. To better address the interconnectedness of financial crimes banks are more and more adopting an integrated approach to financial crime systems. This convergence of Fraud and AML capabilities represents a significant cost savings opportunity as there is an estimated 80% overlap in the data processing, systems maintenance, and ongoing administration of legacy systems needed to support these functions independently.

In a recent survey of 100 banks across 10 countries conducted by Ovum, the majority of banks across all regions surveyed said they plan to converge their fraud and financial crime operations. If you take a look at the survey results by job function, you see that the biggest concern for those involved in financial crime compliance is reputational loss whereas those working in fraud management are much more concerned that customers could become victims. These results reflect the different objectives of the two functions. But protecting reputation as well as customers can both be addressed by improvements in detection accuracy. More than 80% of respondents said that greater overall detection effectiveness will be a significant benefit of the integration of fraud and financial crime compliance. This view was consistent for both functions.

Ensuring high detection still creates major operational challenges in the subsequent operational workloads today. At FICO, we have addressed this convergence trend by using our world-class fraud and AML solutions to offer both from a single cloud-based platform. This allows financial institutions to manage fraud and regulatory compliance operations with unified case management, machine learning analytics and flexible integration and orchestration of data.

How does your software actually work, does it connect to government databases, perform statistical analyses?
The software utilizes sophisticated analytical models to identify high-risk customers and detect suspicious transactions in real-time. To measure customer risk, we use multiple levels of customer data, such as initial KYC information and planned transactional behavior as stated during onboarding as well actual behavior. Third-party data sources enrich the data with information on for example beneficial owners. For most of the public lists (EU, OFAC, UN, HMT, etc.) and commercial lists (Dow Jones, WorldCompliance, Refinitiv World-Check, etc.) the KYC system provides out-of-the-box watch list loaders. The software performs automated checks against the integrated sanction and watch lists, lists of politically exposed persons (PEPs), adverse media and offshore leaks data bases (Panama Papers, Paradise Papers, Bahama Leaks etc.).

The KYC-assigned risk level and due diligence rules determine how closely and frequently each customer will then be scrutinized during ongoing customer monitoring by our AML system. As any single transaction of a customer might have an impact on the customer’s risk situation, we have integrated this data into the customizable KYC risk classification process as well. Our systems ensure that financial institutions always know about the latest risk of any customer at any time. To disrupt terrorist funding, not only persons but also transactions are screened in real-time – by matching transaction data with sanction lists. Transactions with alerts that are triggered by a match with an entry in a sanction list are "frozen" by the system. Transactions without alerts are released immediately and returned to the payment flow. An outstanding fuzzy logic matching algorithm increases the number of matches while lowering the rate of false alarms, thereby minimizing impact on customers and case investigation workloads.

How will AI shape anti financial crime?
AI's ability to interpret, synthesize and correlate huge amounts of data is very valuable in the battle against financial crime. It is still relatively new in financial crime compliance but developments in the explainability of machine learning models makes its use in AML far more acceptable to regulators. They even actively encourage financial institutions to consider newer technologies.

The days of the traditional rules-based approach are numbered – although most banks still operate at this level. They are using monitoring systems based on rules with only basic analytics capabilities. This gives a certain level of compliance and protection from fines. However, the current costs of using these systems are high due to the large number of alerts created.

Some banks have started running an additional AI layer on top of the existing AML process to identify highest priority alerts to be worked first or detect additional crime scenarios. Over time more and more of the suspicious activity detection will come from the machine learning model and less from rules.

When AI will be the primary driver of detecting abnormal behavior and models in production will be retrained automatically – for example when recent SARs influence analytic scores in a very rapid way – then AML has reached a maturity level that is comparable to advanced fraud operations where adaptive analytics is more common already. AI will improve almost any functionality of an AML solution. We will benefit from more intelligent segmentation, more intelligent typologies and more intelligent alerts – and significantly reduced cost of ownership.

What other areas in banking and finance do you see affected by AI?
AI will lead to more tailored products and services, reduced risk, increased productivity and smarter decision-making in all areas of banking and finance – be it fraud prevention, credit risk scoring, insurance underwriting, claims assessment or investment strategies. Many analysts and research firms have forecast cost savings of over $1 trillion by 2030/2035 with the majority of savings stemming from front office operations. Banks will leverage their vast amounts of data more intelligently and increasingly deploy AI driven chat bots, virtual assistants and other digital services and apps to better engage with their customers, personalize the user experience and monetize it – like Amazon does today already.

The consumer of tomorrow is digital and expects things like online onboarding, proactive advice on anticipated needs or financial recommendations in real time. As a convenient and secure means of identity verification and authentication, biometrics will play a larger role and reduce friction in financial services. Using AI-powered tools will free bank employees from routine duties to work on higher-value tasks – and will create more jobs than will be lost by it.

Why do you partner with Visma Connect?
Our partnership with Visma Connect is aimed at helping all kinds of payment providers meet rising regulatory demands with less effort and expense, by using the innovations we are bringing to our compliance solutions. Regulators want financial services providers to do more to prevent financial crime and terrorism financing. FinTechs and new PSD2 third-party providers are increasingly required to continuously monitor their processes. With the advent of SEPA Instant Payments, the current batch-based sanctions screening no longer suffices and needs to be upgraded to 24/7 and real-time screening.

Do you believe that an alliance with a Payment Services Provider is a logical one?
Absolutely. By combining Visma Connect’s advanced payment and infrastructure services with FICO’s best-in-class anti-financial crime solutions in a joint SaaS model, we offer our clients a full-service package under one roof. They can focus on their core business again and rest assured to live in peace with the auditor and be secure from reputational risks and fines.

Read the full interview