Financial institutions are up against a growing foe – financial crime. The UK’s National Crime Agency recently reported a record number of reports flagging potential money laundering, terrorist financing and other suspicious financial activity between April 2018 and March 2019. The Financial Conduct Authority, the National Fraud Intelligence Bureau and HM Treasury went so far as to suggest that London is becoming the ‘money laundering capital of the world’. But these types of numbers aren’t limited to the borders of the UK and are being felt across the globe.
At Fenergo we recently announced the latest numbers around fines given out to financial institutions for non-compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. Global penalties have reached a total of $36 billion and have increased by 160 per cent since the $3.8 billion in fines we reported in our 2018 analysis. It also revealed that 12 of the world’s top 50 banks were fined for non-compliance with AML, KYC and sanctions violations in 2019. These numbers are representative of the tough regulatory landscape and the rise in financial crime.
It’s not just the numbers that are driving the issue of regulatory compliance up the agenda. Scandals featuring big name financial institutions are on the up, hitting headlines of global news outlets. The scale of the issue has led the EU to announce that it will be exploring the creation of a central authority to crack down on money laundering activity.
Lack of technological infrastructure is contributing to increase in fines
A big part of the reason financial institutions are struggling to comply and facing regulatory fines is a lack of appropriate systems and compliance infrastructures. The UK Treasury Committee reported that the UK’s system to prevent money laundering is “highly fragmented” with 25 separate organisations supervising the checks. This description could also be applied to financial institutions which are struggling to create the streamlined, connected approach that they need in order to tackle these issues.
With the rise of financial crime and the costs associated with compliance as well as the growing threat of digital disruption, it has never been more important for financial institutions to embrace technologies that streamline AML compliance. Technology solutions that support a best practice approach to detecting and preventing financial crime while automating low-risk tasks can help to alleviate the pressure on resources. This will also allow subject matter experts to focus on areas of high risk, creating efficiencies and more effective environments.
The key is to ensure that AML and Know Your Customer (KYC) compliance processes and procedures do not hamper the client experience. Financial institutions have traditionally responded to regulatory investigations and fines by adding more bodies to remediate and collect information for KYC regulations, further driving up the overall cost of compliance.
Financial institutions also need to remember that it is not about developing siloed solutions for each individual regulation, but rather a holistic rules-based solution that can adapt to changing international and domestic regulatory requirements over time.
When considering the technological environment within their organisation, financial institutions need to ask themselves:
- Is our data policy up to scratch?
- Do we have multiple disparate systems with siloed data or are they all talking to each other?
Using one central system which provides a single client view will ensure quality and consistency across applications while streamlining compliance processes
There are two primary goals to creating a robust technology environment. The first focusses on ensuring compliance. This is about ensuring the correct processes are in place and the prescribed data and documentation requirements are met. The second goal is to facilitate compliance across the organisation and multiple jurisdictions. A rules-based technology solution will ensure compliance with domestic and global regulations during the initial onboarding process and throughout the client lifecycle. With increasing regulatory scrutiny, financial institutions can’t afford to get it wrong.
AML/CTF procedures should be reviewed regularly, regardless of whether there is an upcoming regulation, but with so many legislative changes being introduced in such a short time frame and with very little guidance, it’s more important than ever. The use of technology can help financial institutions to implement processes that will make compliance more achievable.
Compliance, a strong competitive advantage
As mentioned previously, this need to comply is not just about money. For many financial organisations that have been issued a fine or caught up in a scandal, they know full well the impact on reputation. So much so, that good compliance can also be a competitive advantage. We are already seeing several global banks bolstering their resources and introduce technology solutions to ensure that their AML and counter terrorist financing (CTF) policies are aligned with legislative requirements and Financial Action Taskforce (FATF) guidance.
Private banks, wealth and asset management firms are traditionally more manual in nature, in the most part because their business takes a more hands-on approach to client management. If they start to up their game around risk assessment and digital client onboarding, they could put themselves in a position to start competing for market share: but only if they have the technology to support these changes. Robust technology will leave room for more value-add tasks that will achieve competitive edge in the race to win on customer experience and reputation.
The pressure to comply is going to in no way lessen for financial institutions in 2020. 2019 was the second biggest year in our analysis for fines and if nothing changes, we expect to see a similar trend continuing. Bearing in mind the sheer number of new regulations that have been introduced over recent years, including MiFID II and GDPR, regulators have been providing a certain amount of leeway to allow organisations to embed their controls and demonstrate efforts to comply. But, the honeymoon period is waning and if financial institutions don’t get their technology infrastructures and processes in a good place, we expect to see more penalties from non-compliance this year for MiFID II and GDPR. 2019 also saw several high-profile money laundering investigations involving large scale banks and 2020 could be another record year for fines as regulators begin issuing enforcement actions. In today’s climate where financial crime is on the rise, effective regulation technology is imperative if financial institutions want to achieve regulatory certainty avoid punitive fines while providing differentiating customer experiences.
Niall Twomey, Chief Technology Officer, Fenergo