Financial Crime Risk Management in Banking

James Robertson, Banking CIO Outlook | Monday, December 28, 2020

Bank surveillance activities should have tools and solutions that can acquire data from disparate systems and automate business processes so that analysts can be more productive and make a more informed decision.

Fremont, CA: Technology and digitalization are reshaping the financial services sector as well as people's perceptions of it. Digital transactions replace cash and shift the way customers and companies exchange money. While this development is generally good for society, it also significantly affects the fight against financial crime.

Leveraging Technology to Build Efficiencies

Artificial intelligence and machine-based learning solutions, such as Nasdaq Automated Investigator for AML, allow surveillance teams to recognize problems and either help or reject them. The solution analyzes false warnings to assess which ones are deserving of further investigation and which are not. Importantly, it should provide facts to justify the decision taken. As such, a lot of noise can be transferred to the background, and researchers can concentrate on detecting and researching specific threats and generating production that is useful to law enforcement and regulators.

Drivers in Anti-Financial Crime Management

The fragmentation of the intelligence picture and the pace at which payments are made, disbursed, laundered, and out of control, has become a nightmare situation for both banks and law enforcement. Banks' financial crime units cannot interfere in real-time because their systems are still in batch mode. Too much time is spent investigating false positive alerts generated by transaction monitoring systems, chasing innocent people around the system, and documenting why the activity is not a financial crime. Meanwhile, law enforcement and regulators are overwhelmed with hundreds of thousands of suspected defensive activity reports (SARs) that banks file to avoid penalties and fines.

Convergence across Compliance Silos

Banks have a model for combating financial crime called the Three Lines Security Model. Management control is the first line. The second line consists of a range of risk control and enforcement oversight roles defined by management. The third line is autonomous confirmation. Each line plays a distinct position within the larger governance structure of the organization. It's a good model, but it's not always foolproof.

The present state of play is not sustainable. The industry needs to converge in the face of changing threats. Financial institutions need to collaborate with law enforcement, and resources need to be dedicated to programs and tools that proactively deter financial crime and increase operational performance.

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