Anti-money laundering (AML) compliance requirements of the Bank Secrecy Act (BSA) have marked their prominence in banks and financial organizations since years. Post-9/11 era, government agencies, including law enforcement as well as regulatory, have put much emphasis on BSA compliance. And, such agencies, at local, state and federal levels, are actively taking part in ensuring that financial organizations comply with the BSA.
On the other hand, financial institutions have also acquired substantial expertise in the procedure of compliance. However, there’s always a scope for improvement in order to enhance efficiency, accuracy, and productivity. Innovations can be introduced around Anti-money laundering strategies and the financial organizations that adopt such innovations are bound to be ahead in terms of growth, performance and customer relationships.
Here are the latest trends that can be observed in the AML procedures and requirements:
- Legacy system obstructing growth
There is an evident proliferation of AML point solutions in the financial organizations. Banks and other institutes have realized that although the legacy system allows them to fulfill their regulatory requirements, the system is also obstructing growth and discouraging their expansion to new geographic areas. Hence, the financial institutions are adopting a patchwork of point solutions. However, these are often difficult and not at all cost-effective when it comes to management and maintenance. Also, they cannot accommodate all the data formats. Additionally, multiple solutions also lead to more complexity while venturing into a new geographic market.
1. Increasing false positives
As per the industry statistics, the rate of false positive for suspicious activity alerts is between 75 to 90 percent. Banks deal with thousands of alerts each month and such high amount of false positives could have a drastic impact on the institutions. It may significantly lower the organizational confidence in the process of data and client screening. Also, it increases the chance of missing a valid alert, considering it as a false positive. While working with Anti-money laundering processes, there are a number of ways to increase the efficiency, in terms of reduced cost as well as better outcomes. However, the problem of false positive stands as a huge obstacle.
2.Current process affecting customer relationship
According to a 2016 study, conducted by Thomson Reuters, 89 percent of customers in corporate banking has faced unsatisfactory Know Your Customer (KYC) experience. This has encouraged 13 percent of customers to switch banks. The firms that understand the need to accelerate AML procedures using next-generation analysis and additional automation can, more effectively, strengthen customer relationship and enhance productivity through faster on-boarding.
3.Risk reduction approaches
A method of simplifying the customer due diligence process is to deny banking services to specific business segments. However, this results in loss of revenue even from legitimate businesses. Discouraging this particular practice, the Financial Action Task Force (FATF) on Money Laundering suggests a risk-based approach which includes case-by-case assessment and strong initial customer due diligence (CDD) measures. This approach encompasses identity verification and documentation using independent and reliable data, and robust screening against watch lists. It’s also important to have reporting transparency, proper data analysis and end-to-end documentation of payment flows.
Financial institutions need to carry out heavy procedures in considerably short time frames. However, machine learning has presented new ways to identify and evaluate AML violations. This has, consequently, allowed bankers to allow complex tasks to machines and finding time to focus on other tasks. The algorithms used for machine learning develop procedures for AML compliance. This forms a crucial system for firms that help in saving money and allocate resources in a better way.
With time, the formal BSA regulations and AML requirements continue to evolve. New enforcement priorities are introduced which require new approaches to monitor and analyze the results. Thus, financial institutions need to regularly update and monitor their customer due diligence by understanding the purpose and nature of customer relationship.
For creating a balanced compliance environment, banks and financial institutions need to invest their time and money in a wise manner so that the present, as well as future AML requirements, can be fulfilled. This would also help in risk management and proper governance, in addition to enhanced productivity and strong customer relationship.