In times of political and economic change, corruption and financial crime tend to rise. That means 2017 should be a risky year from a compliance standpoint. The strain of the Eurozone, the shock of Brexit, the surprise of the American elections, further terrorist attacks, revolutions in the Islamic world and other factors will create an environment that is ready for change.
With that in mind, here are my top 5 predictions for the year.
1. Analytics will be the new black.
Of course, as an analytics provider, we would say that. But it’s not just us – in a recent IDC report, Business Strategy: The Use of Advanced Analytics in the Know-Your-Customer Process, (Sep 2016, Doc # US40137316), Bill Fearnley, research director, IDC Financial Insights, says:
"Regulators and government agencies are working hard to cut off funds supporting terrorism and reduce financial crime and tax avoidance. To help in those efforts, regulators are requiring firms to improve their KYC programs with more detailed data and advanced analytics. Firms should be investing in new sources of data and data aggregation tools to help improve KYC compliance, onboarding, and customer risk profile monitoring."
Analytics clearly provide a better quality of outcome, but that’s not their only advantage. Many banks get so many alerts today about suspicious activity that they can’t prioritize their efforts. Just as in adjacent spaces — fraud, cybersecurity — analytics help investigators pick the most suspicious activities based on study of a wide range of factors.
Today, it’s really only Tier 1 banks that use analytics in AML, KYC and tax compliance areas. We expect that to change.
2. We will see the next Panama Papers revelations.
Panama Papers was only the start. In September 2016, new leaks exposed the people connected to a whopping 175,000 Bahamian companies registered between 1990 and 2016. The political turmoil of 2016 means that there is a lot of gain to be had by exposing politicians who used tax havens, which should drive even more investigations and revelations.
Although businesses in tax havens are not necessarily illegal, some of the geographies involved are also hot sites for money laundering. Announcements of this kind of activity will also drive greater churn in the Know Your Customer space, as banks update their procedures and technology to make sure they know what their applicants and existing customers are getting up to.
3. Laundered funds will finance more terrorist attacks.
The world was a risky place to be in 2016, and the global changes noted above will continue the uncertain environment next year. Hiding and laundering money will be a mission-critical function for terrorists worldwide. Uncovering those efforts can not only halt the flow of funds, it can give anti-terrorism units a boost.
It may seem opportunist to link a global crisis like terrorism to one’s own products. But one of the most effective ways to stop terrorists is still to stop their money. One of our customers, the European offshoot of a North African bank group, had an experience of this shortly before the Paris attack in November 2015, when one of the IS terrorists responsible for the attack tried to transfer money to another known terrorist involved in the attacks. The European bank offshoot in Paris properly blocked this SWIFT transaction with our Siron solution. The customer in Paris complained to the bank’s headquarters in North Africa about the non-execution of his transaction, and the headquarters authorized to proceed. The transaction screening system at the headquarters (which did not then use Siron) did not detect the sanction lists match, and the transfer was released and completed. French authorities are investigating the case, and the headquarters decided to replace its existing filtering system in North Africa and to roll-out Siron across the whole group.
4. Bigger criminal enterprises will take over illicit migration.
At our Siron User Group last month, Kumar C. Kibble, Homeland Security Investigations regional attaché to the Netherlands for the U.S. Department of Homeland Security, reported on “New Challenges in Illicit Migration,” a problem that is being aggravated by the Eurozone’s troubles and Brexit. He foresees that criminal networks will continue to exploit the high demand for facilitation services, and that “small smuggling networks will gradually be taken over by larger criminal networks.”
Illicit migration and human trafficking activities involve a large network of facilitators and collaborators, and criminal funds grease the network. This will increasingly be part of financial crime investigations.
Legitimate migration also creates anomalies that can look like financial crime, even when they aren’t. One of our customers, a German savings bank, detected a suspiciously high volume of money transfers through Luxembourg. On investigation, it turned out refugees arriving in Germany found out that they could apply for a credit card in Luxembourg for free. This kind of unusual behavior can easily be mistaken for money laundering — a sophisticated AML solution allows the user to adapt to these trends in order to avoid false positives.
5. Compliance will break through the “cloud ceiling.”
You can understand why compliance officers have been reluctant to move data and systems to the cloud. They would rather worry about protecting their own environment than theirs, a cloud supplier’s, and the communications between.
This is changing, and 2017 should be the year when compliance breaks through the “cloud ceiling.” This is what we see among our customers and prospects, as cloud security has dramatically improved, and cloud deployment promises to help small compliance operations focus on their core operations, not software maintenance. FICO has customers on our FICO Analytic Cloud (powered by AWS) as well as on private clouds, such as SIBTEL and VITALIS set up in Tunisia. We even see the opportunity for cloud-based consortia of companies, which share their data and experiences much as credit bureaus do, to improve the risk management for all participants.