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Financial criminals are constantly innovating. The same can’t be said of financial institutions (FIs). There has been an unsustainable status quo within AML and Sanctions compliance. There are financial crime problems today that existed 15-20 years ago, and banks and financial services companies (BFS) have been slow to find innovative ways to solve them.
According to a recent blog from the IMF, “Banks, as gatekeepers to the financial system, battle unceasingly against money laundering and terrorist financing. But national anti-money laundering efforts focus primarily on domestic risks, and as a result they often lag. Bank regulators also play a crucial role, but often don’t make the best use of limited resources, and divergent approaches hamper effective global collaboration.”
In the first half of 2023, global financial regulators levied 97 fines totaling $189 million for non-compliance with Anti-Money Laundering (AML) regulations, including Know Your Customer (KYC) and client due diligence (CDD), as well as sanctions violations. U.S. institutions paid out 83% of the world’s monetary fines from only 10% of enforcement.
According to LexisNexis® Risk Solutions’ True Cost of Financial Crime Compliance Report, globally, 78% of organizations and specifically 80% in EMEA indicate that the intricate network of regulations and sanctions acts as a constraint on their business operations. The report also states that there is an economic burden to remaining compliant, with 98% of institutions reporting an increase in financial crime compliance (FCC) costs.
The good news is that the technology exists to bring automation into AML and Sanctions compliance programs, and now more than ever, regulators want FIs to innovate and look for new ways to perform these old processes. The AML Act of 2020 made this abundantly clear, especially coupled with FinCEN’s Innovation Initiative, and the recent release of the Wolfsberg Group’s principles on artificial intelligence (AI) and machine learning (ML).
Five AML compliance issues ripe for innovation:
- Alleviating sanctions strain
More than half of challenger banks have admitted to only performing occasional sanctions checks, according to a recent survey. And, according to LexisNexis’s True Cost of Financial Crime Report, 77% of respondents said complex sanctions urge them to seek alternative, more cost effective and efficient compliance processes. Sanctions compliance puts an enormous and growing burden on banking and financial services companies. Staying current on ever-increasing and evolving sanctions is challenging and involves spikes in the alert volumes needing review, as seen during the Russian invasion of Ukraine last year.
- Enforcing payments compliance
According to SWIFT, “Banks today screen transactions individually to check that there are no sanctioned entities involved, and because each manages its own technology and operations, this has significant costs for the industry overall. This approach has come under scrutiny as banks move towards instant processing to create better experiences for their customers.” Fast and accurate processing of all transactions, including real-time payments (RTP), requires a deep understanding of the current state of sanctions and internal processes to ensure that all sanctions risks and alerts are being addressed – while ensuring a quality customer experience.
- Moving from KYC to Perpetual KYC (pKYC)
The problem with pKYC implementations is their focus on acquiring events without automating the actual handling of these events. This creates an order of magnitude increase in the workload, so it becomes impractical to keep up and completely undermines the potential benefits. A partial solution is thus worse than useless, and these projects cannot really be considered pKYC. For pKYC to become successful and mainstream, every aspect of the process must be automated and only involve people when it is necessary to seek secondary opinions, escalate, or handle unknown situations.
- Overcoming the Staffing Treadmill
LexisNexis estimated the global cost of compliance was nearly $275B in 2022, with 60% of that tied to labor (direct and outsourced). To that end, organizations are still struggling to find candidates to overcome inadequate employee headcounts and employee departures. We have heard from several customers that they have had open AML and Sanctions positions for months. This hiring challenge creates more work for an already overworked staff, which causes more people to leave from burnout, a lack of any job satisfaction, and the feeling that they are on a constantly moving treadmill.
- Reducing brain drain and burnout
As the world transitioned post-pandemic, companies faced a new labor market that included quite a bit of employee movement, resulting in a brain drain of institutional knowledge. This is one factor that makes recruitment and retention more challenging. According to the 2023 Crowe Bank Compensation and Benefits Survey, nearly 65% of respondents noted it’s been somewhat or very challenging to remain competitive among the younger workforce population. Crowe’s 2022 survey found that bank turnover at the nonofficer level reached 23.4%—its highest level since 2019. Research states that the primary issues impacting employee attrition are stress and increased workload.
Along with reducing attrition, lowering job stress is critical for banking and financial services companies, since having overworked employees can easily lead to errors, missed escalations, and longer-term regulatory issues for a firm. For example, an analyst reviewing 500 sanction alerts every day stands a good chance of making an error, especially when all or nearly all of those alerts are false positives, which leads to missing that rare true positive. Adding more work to an already overworked staff is a surefire way for burnout and errors.
Start with small innovation wins to go big
Fortunately, innovative technology solutions are being implemented to help mitigate risk, reduce employee fatigue and burnout, and improve operational effectiveness and efficiency, combined with a push from regulators to leverage this technology to improve compliance. Regulators want technology to liberate and improve human intervention and judgment. And they want to know that not only are the FIs doing the same with less, but they are doing more with less, all while effectively managing and mitigating their risks.
Innovating to improve financial crime compliance operations is a big step for most BFS companies, but you don’t have to start big. Start small and get some quick wins. Talk to your peers who have already innovated with AI and ML and use your Model Risk Management (MRM) framework to manage and mitigate the risks. Small wins will build up and ultimately create the transformation that is needed for a modern AML and Sanctions compliance program.
WorkFusion’s AI Digital Workers automate much of the work for level one analysts in sanctions and AML compliance. Our highly skilled and experienced AI-enabled digital workforce enables your organization to be more productive, with a better employee experience and improved customer satisfaction.
To learn more, request a demo. You can also learn more about this blog topic in our latest eBook, It’s Time to Innovate Your AML and Sanctions Compliance: How AI is Modernizing Financial Crime Fighting.