Regulatory technology (regtech) is an essential part of a modern anti-money laundering (AML) capability.
But technology on its own is not enough to keep ahead of sophisticated financial criminals, with an estimated 99,8% of laundered money flowing through the financial system untraced, writes James Saunders, co-founder and chief technology officer of RelyComply.
With money laundering activity calculated to account for up to 5% of global GDP, human ingenuity still has an essential role to play in addressing money laundering, terrorist financing and other financial crimes. Regulators today expect organisations to have a professionalised AML team and automated platforms in place.
Yet financial institutions of all sizes – from fintech startups to multinational banks – are battling to adapt in a timely manner to the rapid evolution of regulatory requirements. This is not a matter of underinvestment in AML and know your customer (KYC) protocols and platforms, with US banks alone spending $23,5-billion each year on AML compliance.
Challenges in adapting
So, what are the key challenges that institutions face? The makeup of the AML team is one key issue. Traditionally, professionals with legal or accounting backgrounds and experience in manually vetting documents took care of compliance checks. This is not scalable or efficient.
Tighter rules also mean that AML is no longer a routine box-ticking exercise. Adhering to recommendations from global watchdogs (FATF) and complying with local AML legislation such as 6AMLD in Europe or the US Treasury’s 2020 National Strategy for Combating Terrorist and Other Illicit Financing in a stringent task.
Strict rules call for hiring compliance professionals to understand and follow AML/KYC regulations closely. Many firms don’t appoint the right personnel and have not invested in the sophisticated automation tools and technology that have become a necessity for compliance.
It’s thus essential for every firm to appoint a money laundering reporting officer (MLRO) or chief compliance officer who understands the laws, documents and procedures, who is able to conduct staff training and who has strong investigative skills that can be complemented with computational forensics.
In addition to legal and financial skills, a modern AML capability also needs a strong technical team. Systems architects, data scientists and law enforcement specialists all have a vital role to play in helping an organisation to leverage the technical abilities of the modern AML platform.
To turn this situation around, AML functions need to be retooled to take full advantage of next-level platforms and data expertise, which could hold the key to navigating the hurdles in today’s regulatory landscape. The AML compliance function should evolve into a hybrid of human and technological processes with higher levels of automation.
From legacy systems to modern solutions
Regulators are looking to financial institutions of all sizes to put sophisticated AML platforms in place. To keep up with their demands, businesses will need to migrate from inefficient, inflexible rules-based legacy systems that are inexpensive to maintain, prone to disparate data and deliver higher rates of false positives.
The goal should be to ensure that 95%+ of applications are automated, with only exceptional complex cases requiring human intervention. Innovative regtech solutions can help, from KYC to transaction monitoring, screening, and compiling client risk assessments.
Leading firms will look to invest in a modern end-to-end platform that allows for simple integration with existing AML systems and eliminates the challenge of overhauling the compliance function from scratch. Another important point is focusing on data quality across disparate systems to enable better data matching and lower false positives.
Opting for a managed solution can relieve firms of much of the manual burden, with technical partners helping them to streamline AML compliance with digital technology. The technology should be supported with training and culture, seeded by compliance professionals with deep knowledge of establishing and maintaining AML processes.
Looking ahead, we anticipate technology doing more of the heavy lifting even as regulation tightens its grip. Automated processes are improving with time at funneling risk factors. This is a gift to AML departments facing the need to do more with less in the face of budget cuts and rising regulatory complexity.
Artificial intelligence (AI)-powered tools are becoming commonplace, working at levels of speed and accuracy humans cannot match. Verification checks are achieved far more quickly and accurately, while automated transaction monitoring and screening can flag suspicious activity in real-time.
With regulators making their best efforts to combat financial crime, firms shouldn’t be playing catch up. The resources are there for financial companies to fully implement an AML function from start to finish, from a skilled workforce to a technology partner. This combination could prove vital to a safer financial world in the modern age.