The Future of Financial Crime Risk Management in Banking

Technology and digitization are completely reshaping the financial services industry as well as people’s expectations of it. Digital transactions are replacing cash and changing the way consumers and businesses exchange value. While that trend is overall positive for society, it’s also having a huge impact on the fight against financial crime. A recent cartoon image says it all. It shows a masked bank robber pointing a gun at a teller, and the teller is saying: “You do realize, sir, it’s much easier to do that online.”

That’s how a group of panelists from the banking, law enforcement, consultancy and technology sectors kicked off a recent XLoD Global discussion about The Future of Financial Crime Risk Management in Banking. Up for discussion were key trends influencing financial crime risk management – from common challenges to the importance of convergence across both compliance silos and disparate data sources.

Drivers in Anti-Financial Crime Management 

Gone are the days when a core group of banks around the world contained most of the data on international transactions that was worth knowing. Today, an enormous amount of payments and other financial data is being produced by a wide variety of actors across multiple platforms. Transactions also happen much faster than they used to. 

The fragmentation of the intelligence picture, as well as the speed at which payments are made, disbursed, laundered and moved out of reach, has become a nightmare scenario for banks and law enforcement alike. Banks’ financial crime units can’t intervene in real time because their processes still operate in batch mode. Too much time is consumed by investigating false positive alerts generated by transaction monitoring systems, chasing the innocent around the system, and documenting why activity is not financial crime. Meanwhile, law enforcement and regulators are overloaded with hundreds of thousands of defensive suspicious activity reports (SARs) that banks submit to prevent sanctions and fines.

Convergence across compliance silos 

Banks have a model for fighting financial crime called the Three Lines of Defense model. The first line is management control. The second line comprises various risk control and compliance oversight functions established by management. Then the third line is independent assurance. Each line plays a distinct role within the organization’s wider governance framework. It’s a good model, but it is not always fool-proof. One example is when a centralized, shared service for transaction monitoring and suspicious activity reporting won’t tell a business unit’s money laundering reporting officer whether it had submitted a SAR because it was considered to be tipping off. One panelist said that’s a case of the tail wagging the dog. The people who are accountable for the decisions that are being made should be in control of those decisions and the setting of the risk appetite.

The current state of play isn’t sustainable. The industry needs to converge around the changing threats. Financial institutions need to partner with law enforcement, as they have done in fusion cells with National Economic Crime Centre in the U.K. Moreover, resources need to be allocated to initiatives and tools that will proactively prevent financial crime and improve both operational efficiency and effectiveness. 

Leveraging technology to build efficiencies

Banks’ surveillance operations tend to be conducted in silos, and they can’t or won’t share data across the organization. Ideally, they should have tools and solutions that can gather data from disparate systems and automate business processes so analysts can be more productive and make more effective decisions. 

Artificial intelligence and machine learning-based solutions, such as Nasdaq Automated Investigator for AML, allow surveillance teams to identify a problem and either support or dismiss it. The solution analyzes false alerts to determine which ones are worth investigating further and which are not. Importantly, it can provide evidence to support why a decision was made. As such, a lot of the noise can be moved to the background, and analysts can focus on identifying and investigating real risks as well as producing output that is beneficial to law enforcement and regulators. 

The panelists agreed that it’s time for banks to stop firefighting and reacting to thousands of potential threats and instead deploy holistic, real-time, continuous monitoring solutions that can identify and prioritize real threats. In doing so, banks can fully understand who their customers are and what their customers’ relationships are with other entities and individuals. Logically, if they understand good actors’ behavior and their relationships, they can be more effective in identifying bad actors’ behavior and relationships. 

Other Topics

Technology FinTech

MarketInsite

Nasdaq

Nasdaq’s Marketinsite offers actionable insights on a variety of market-moving topics. Learn from our thought leaders who are driving the capital markets of tomorrow.

Read MarketInsite's Bio