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Financial crime – Part 1

Financial crime is more pervasive and sophisticated than ever. Fighting it effectively demands leading-edge approaches.

Financial crime is one of the biggest and potentially most intractable challenges financial institutions face today. How successful they are at dealing with it will shape tomorrow: for society, for the integrity of the financial system and for the future of banks themselves.

The scale of the problem and its sophistication are enormous. By their very nature, banks are more vulnerable than any other business: the institutions that handle the world’s money are the natural prime targets for financial criminals.

Now, add to this unwelcome attractiveness two further complicating factors – regulation and legacy systems.

First, institutions face constant and unavoidable pressure from regulators to become more effective at detecting, mitigating and eliminating money laundering and terrorism financing. AMLD4 (anti-money laundering directive) is expected to be implemented by all financial institutions by mid-2017. Meanwhile another directive is already being negotiated, AMLD5, which deals with new alternative financial channels. Detailed and extensive compliance checks on bank customers’ detectable financial behavior are the order of the day.

The onus is firmly on the bank to know your customer (KYC), i.e., know when anomalous and potentially suspicious behavior occurs and initiate appropriate action. Given the proliferation of electronic banking, KYC has long since ceased to be a physical challenge and now is almost totally a digital issue. Even measures such as withdrawal of high denomination banknotes – the one-time preferred currency of criminals – and reduced upper limits for cash-only transactions are likely to have a marginal effect, at best.

Second, in terms of the cybersecurity demands of effective financial crimefighting, many institutions’ technology infrastructure is in very poor shape. Their IT is legacy rather than leading-edge, often inflexible, heavily siloed and lacking the essential cross-organization connectivity that functionally compliant KYC demands. Financial and competitive environmental pressures compound the situation and make radical systemic upgrading or complete replacement of infrastructure a difficult challenge.

In short, banks lack the funds to build systems that effectively follow the money misappropriated and misapplied by criminals and terrorism financing. And the issue is wider than technology alone; in addition to systemic technology improvements, banks need human expertise to interpret regulations and ensure that they correctly apply technology investment to secure an effective and compliant result. This expertise is neither abundant nor cheap.

In this double bind of inescapable regulatory demand and potentially crippling costs, banks need a viable and cost-effective route to effectively fighting financial crime. Principle options include innovating internally – a high-cost and high-risk option and one where project overruns are very common – and hiring external expertise.

External expert partners can support infrastructure upgrades or replacement in ways that mitigate risk and help to minimize costs. They can embrace applications of highly advanced and innovative technologies, or they can provide full outsourcing of the range of complex anti-money laundering (AML), counter terrorism financing (CTF) and KYC processes, on the basis of a managed service model.

In the next blog, we’ll consider the up- and downsides of various approaches to effective and cost-effective innovation in fighting financial crime.

 
 
 
 

About the Author

Renato Ndokaj

Renato Ndokaj is a principal consultant at Capco and has over a decade of experience in regulatory reporting, risk and compliance in financial services.

 
 
 

The content and opinions posted on this blog and any corresponding comments are the personal opinions of the original authors, not those of Capco.