In light of evolving threats and stricter regulations, financial institutions are bolstering their anti-money laundering (AML) efforts. As of May 11, covered institutions must implement new beneficial ownership due diligence procedures—and comply with tighter know your customer (KYC) requirements. Additionally, they must establish stricter risk-based procedures to conduct ongoing customer risk profiling and suspicious activity monitoring.
Increased scrutiny can drive criminal activity detection, but it can also lead to an overload of alerts and false positives that require unnecessary, time-consuming investigations. There is also a greater chance of institutions unnecessarily inconveniencing customers who have done nothing wrong.
That established, financial institutions can ensure they have the correct data to better understand customers’ activity patterns and gauge money laundering risks. With improved detection techniques, greater visibility and more fine-tuned procedures, FIs can also improve efficiency with an AML strategy that focuses on a comprehensive view of customer risk and data, more precise alerts and more accurate pinpointing of criminal activity.
Bridging the knowledge gap
Many financial institutions face a knowledge gap. They only see bits and pieces of each customer’s behavior patterns and financial activity. Fortunately, data collected within an organization and from industry groups can provide complete customer profiles. This comes through a combination of customer due diligence (CDD) and transaction monitoring (TM)—and with this information, institutions can see a full picture. The result: increased power and acuity to spot the unusual, shady behavior that betrays money laundering, tax evasion, fraud—and even human trafficking.
Additionally, this data can lay the foundation for solid, valuable alerts and improved decision making. Financial institutions can refine alerts based on predetermined detection scenarios and alert definitions, as well as peer group activity and historical profiles. Such fine-tuning will yield fewer false positives and improved operational efficiency.
New ways to keep score
The constant changes in how customers manage their money and interact with financial institutions have led to an inescapable imperative. That is: Financial institutions must endeavor to fully understand customer behavior regardless of their preferred channel, device or location. In terms of success, there is no substantive or relevant answer to the counter question, “And what if not?”
AML solutions that automatically collect and analyze KYC data enable financial institutions to evaluate customers through a “scorecard system” that quantifies the AML risk associated with each customer. These checks typically happen as financial institutions onboard customers; they help identify immediately whether those customers should continue with the onboarding process or be flagged as high risk. It’s also important to carry out due diligence and look for any unusual activity throughout the customer life cycle. This guarantees accurate labeling of a specific customer as low or high risk, depending on the ongoing perspective.
As regulations require the capture of more detailed ownership and controlling person information, AML solutions become that much more vital. Financial institutions can deploy these tools to aggregate transaction data for regulatory reporting. What’s more, they will expose complex beneficial ownership structures. AML solutions additionally can also leverage big data and analytics to go beyond standard AML scenario monitoring, comparing one customer’s behavior relative to another’s and applying best practices to detect money laundering activities.
Seeing your way to better recognition
Early recognition empowers financial institutions to prevent money laundering, reduce operational costs and minimize the chance of being subject to enforcement actions. By monitoring activity across any account, in any country, it becomes easier to identify something that looks suspicious or out of the norm.
A common infrastructure that displays customer-level risk data allows financial institutions to target and tackle increasingly sophisticated criminal activity. This allows legitimate customers to enjoy their banking experience without disruption—and banks to direct more exact alerts to money laundering investigators.
The combination of CDD and TM creates a comprehensive view of customers and their behaviors. Financial institutions can then identify and flag unusual behavior, regardless of customer location, resulting in money laundering activity that’s detected quicker and more accurately. By going the extra mile to “know their customers,” financial institutions can:
- reduce the effects of money laundering
- elevate customer trust
- protect their own reputation
- support the moral imperative to do the right thing
To the last point: Doing the right thing, as is so often said, boils down to doing the smart thing. But as you weigh your AML options, consider that there are many positive variations on the theme of “right”: that what is right morally can also be right ethically, relationally and financially. Bottom lines rest on top-line best practices—and what you owe to your customers now, you will assuredly collect on later.
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An anti money laundering specialist, Andrew Davies is the Vice President of Global Market Strategy for the Financial Crime Risk Management business at Fiserv.
For more articles like this, check out our recent Executive Report: "Fraud and cybersecurity: Staying steps ahead."