AML - A CHALLENGE OF TITANIC PROPORTIONS

Institutions Consistently Underestimate Cost Growth

Between 2011 and 2014, banking respondents to KPMG’s Global Anti-Money Laundering Survey reported an average increase in AML compliance costs of 53%. That average exceeded both their 2011 prediction (40%) and the previous (2007-2011) average of 45%.   In seven years, institutions seem to have made very modest headway in cost-efficiently complying with regulatory changes. Are there reasons and solutions? Read on.

Digging deeper into the survey, three areas of heaviest AML investment emerge – transaction monitoring systems, Know Your Customer (KYC) systems, and recruitment/retention systems for AML staff.  Across all areas of AML investment, fully 28% of respondents predict an increase in compliance costs of more than 25% over the next three years.

What’s Below the Surface …

Like icebergs, compliance is notable for what isn’t seen, rather than what is.  Regulations, domestic and international, change and evolve rapidly – reflecting the tendency for criminals to change tactics to avoid detection. 

Transaction monitoring has been and is predicted to continue as the single area of greatest investment – which shouldn’t surprise.  However, when asked about their level of satisfaction in the investments they’ve made to monitor transactions, KPMG respondents reported lower levels of satisfaction than in 2011.  Clearly, experience with ‘out of the box’ AML solutions suggests comprehensive transaction monitoring is not an immediate cause for hope.

As regulatory focus on KYC has increased – to identify the “Who” behind the “What” revealed in transaction monitoring – the challenges of performing investigations to understand ownership structures have come into clearer focus.  On the plus side, KYC systems have facilitated more timely compliance with rapidly evolving Foreign Account Tax Compliance Act (FATCA) regulations.  On the negative, nearly 50% of respondents think electronic verification leaves their organizations exposed to cybercriminals.

The third area, staffing, reflects a chronic shortage of AML professionals to fill the ranks of institutions and regulators alike.  Training and development would seem to be natural responses, if longer-term opportunities for AML professionals were able to attract greater numbers. A disturbing statistic, KPMG found that only 62% of respondents reported active, Board-level training for AML – not a signal that AML is a fast track to the top.

 … Is What Causes the Damage

The pace of regulation isn’t expected to decelerate.  The number of financial professionals seeking a career in AML/Compliance isn’t expected to explode.  The evolution of criminal organization and tactics is unlikely to stop. Regulators will expect Board-level executives to demonstrate good faith, best-effort strategies to comply.  In short, the forces working against a Disney-outcome are substantial.

In its report, KPMG also cited emerging exposure and regulatory focus on three areas of potential AML exposure – trade financing, insurance, and asset management services.  As mentioned in my previous post, the third area, investment, is about face across-the-board AML oversight.  Economics teaches us that market constraints applied partially tend to drive economic interests to unconstrained areas very rapidly.  Expect criminals and regulators to continue their dance.

Systems need to be smarter – even capable of learning patterns of transaction and ownership.  Staff needs more productive ways of investigating and positively concluding their caseload.  Alerting methods need to generate fewer ‘false positives’ – reducing the need for costly human investigation. New sources of information that can provide evidence need to come online faster and quickly correlate with existing data sources.

Sending Out An SOS…

As we noted above, current solutions don’t adequately meet the expectations or evolving needs of most institutions.  There are deeper reasons why those solutions haven’t provided the ‘magic bullet’, and in the next post, we’ll start to diagnose the problems as a prelude to offering the framework for a better solution.