Financial crime: compliance and failure

Banks worldwide have been struggling in the battle against financial crime. Recent high-profile examples demonstrate that the rate of anti-money laundering compliance enforcement is continuing to rise, write Gavin Neilson and Will Furneaux of PA Consulting Group.

At the same time, the cost of compliance failure is escalating with fines and provisions increasing by at least 300% during the second half of 2012 compared to the first. If the related impact to banks’ bottom line is not damaging enough, the loss of trust among customers and regulators makes the combined effect potentially life-threatening.

As a result, many banks find themselves in an almost impossible situation. They must juggle the requirements of business with increased regulatory pressures and additional complexities around maintaining compliance. They must also maintain associated levels of change across multiple geographies, departments, systems and customer groups. It all adds up, and some estimates expect banks to spend $5.8 billion on activity related to AML compliance in 2013.

In their fight against financial crime, banks need to avoid the temptation to only work on short term fixes and in effect treat the symptoms, instead of implementing long term solutions that tackle the root causes. Drawing on our work with major retail and investment banks, the following steps are recommended:

• To avoid increased regulatory scrutiny and to ensure compliance is achieved quickly, banks should manage remediation efforts as a dedicated recovery programme. In order to be successful, AML initiatives cannot be left to business as usual. Senior management must sponsor AML with remediation being driven by governance, structure and process, and with all change being managed by a dedicated capability. On-going process, technology, organisation and controls must also be fixed in order to limit the remediation effort.
• As new requirements come into force, it is essential that accurate and accessible customer data can be developed and refreshed to ensure on-going compliance. Having a clear picture of your customers is critical. Regulatory bodies require accuracy, transparency and understanding of the customer, and banks themselves need this if they are to respond effectively to consumers’ requirements.
• Operating models needs to support efficient and consistent data capture while delivering an excellent customer experience. Significant change to the way customer data is captured, maintained and reused may be required to improve quality and control. Building separate databases, even to support remediation activities, just adds to the legacy. The customer experience needs to improve and trust regained and banking divisions need to be better aligned for this to happen. Provision of additional information from product-driven requirements should be minimal and banks should change their processes so information and documents are provided once only.
• Technology is essential for fulfilling regulatory requirements and gathering customer knowledge, not just to fix short-term issues but doing so in a manner flexible enough to meet future requirements. Banks and financial services companies that have replaced their legacy systems with dynamic technology will be the ones that truly prosper out of financial crime prevention.

While banks are clearly under pressure to short circuit their paths to compliance, they must, in parallel, ensure that they are tackling the source of problems in order to grow their market position.

Gavin Neilson and Will Furneaux are financial services experts at PA Consulting Group. www.paconsulting.com