Anti-money laundering is one of the greatest threats to financial institutions today. In a world of instant gratification, consumers have put pressure on banks to deliver solutions that meet their expectations in the financial sector. As banks balance this demand with the need for compliance, many are struggling to meet regulatory requirements, deliver an exceptional customer experience, and secure their transactions.
To overcome these challenges, banks are recognizing a need to revamp the current anti-money laundering process (AML). In this article, we discuss the ins and outs of AML and issues plaguing the industry today — and ultimately, how to improve the system.
What is anti-money laundering?
AML refers to measures used by financial institutions and governments to prevent and combat financial crimes. These include money laundering, drug trafficking financing, human trafficking financing, and terrorist financing. A financial institution’s AML policy is part of its wider AML compliance program, staying compliant with local AML regulations.
What every AML program should include
A typical AML program includes the following elements:
- Know Your Customer (KYC). Many banks confuse the details of KYC for AML, often resulting in weak compliance policies and leading to regulatory fines. KYC is the process of verifying a customer’s identity. Before a customer can use banking features, they must provide valid ID documentation.
- Risk Assessment. Risk assessment gives a full understanding of a customer and the potential risk associated with doing business. Banks can determine if a customer is low-risk or high-risk by gauging with a scoring model. This scoring model must consider several risk factors, like geographical location and the results of the KYC due diligence process, before proceeding with approval.
- AML compliance staff training. More education leads to less ignorance and fewer mistakes, especially in legislation education. An effective AML training program should take into consideration the company’s risk profile and the type of services they offer. Staff training should also include extensive education in financial and legal frameworks and regulatory requirements.
- Internal controls and independent audits. Internal controls are policies created to mitigate the risks of money laundering. They also support staying compliant with AML regulations. Banks are required by law to put controls in place for sharing information within the enterprise for AML purposes.
An independent audit is a detailed review of the company’s risk assessment and compliance program by an auditor. Regulators rely on these audits to discover cases at risk of violating AML regulations over the course of the time the audit covers.
With enough room for additional procedures depending on the bank, these are the basics of every AML program. Cutting corners on creating security and quality in an AML program leads to drastic consequences.
The issues with anti-money laundering
The risk to banks’ reputations and the security threat of criminal activity has the financial sector on edge. According to The Institute of International Finance (IIF), compliance can cost a financial institution up to $1 billion USD in damages. There’s a lot at stake, considering the average value of the top 10 bank brands is currently $45 billion.
Long seen as an outdated process ridden with too many manual customer touchpoints, AML has significant concerns for the economy. The friction leads to a poor user experience, resulting in many customers abandoning the onboarding process. In addition, the rise of third-party risk and the advent of digital transformation has created explosive growth in illegal financial activity at the hands of tech-savvy criminals.
Below, there are three main challenges facing banks today in regard to their anti-money laundering processes:
- Outdated processes. Traditionally, the communication between financial institutions and government authorities has been one-sided, lengthy in time, and relying on manual or paper-intensive processes. A lack of information flow occurring in real-time, along with visibility into illicit transactions, has created loopholes that criminals are exposing at a massive scale. BankNXT says many banks operate like “an island,” meaning the banks don’t talk to one another and work in isolation. This makes it very easy for a launderer to jump from one bank to the next.
- Slow to innovate. Legacy solutions, lack of operational efficiency, and manual, paper-intensive processes still exist in many banks today. What is holding them back? Experts say that while much of the technical facelifts have happened on the front-end (such as mobile app banking), many banks are struggling to extend that to the back office. A combination of multiple legacy systems, paper-based workflows, and a lack of sophisticated IT infrastructure and personnel make digital transformation overwhelming.
- Strict, rapidly-changing policy. Under the growing threat of financial crime, banks are trying to respond to policy expectations at the sacrifice of quality. De-risking, or the process of terminating business relationships with smaller banks in certain parts of the world, is happening more often. Experts from the Human Security Collective and European Center for Not-For-Profit Law believe this struggle is a response to failing to comply with AML regulations.
A new wave of innovation
The need for revamping the AML process has birthed a new breed of companies within the FinTech ecosystem. “RegTech” is an umbrella term for technology that helps banks comply with regulations with the aim to ease compliance processes in an agile way. To take advantage of the benefits of RegTech, banks should consider the following in the search for a quality anti-money laundering automated solution:
Integrations. To input and process large amounts of transaction data, you want to invest in a solution that is easy and quick to implement. Integration capabilities allow your staff to use the tools familiar to them while extending the value of those existing investments. Your legacy solutions, and the data of those solutions, all pass through one centralized database. You’ll be able to stay on top of your business processes with increased speed and transparency.
Flexible reporting. Finding a software management suite that enables deep visibility into the ownership of processes is critical when conducting internal reports between managers. On the compliance side, investing in a tool that connects your legacy solutions on one platform for real-time reporting can make aggregating data easier when audit checks come around. You’ll never have to worry about missing a deadline again.
Automated optimization. Augmenting systems with risk scoring using process optimization helps banks compete in a tight market. Automation to meet compliance, as well as machine learning and digital onboarding, are ways banks reduce administrative costs, increase security, and avoid legal repercussions.
Restoring integrity to the financial sector
It’s evident that anti-money laundering is plaguing the financial sector today. Fraud management professional seeking a solution should harness the potential of digital transformation to combat financial crime.
By investing in automation for AML, financial institutions can improve their efficiency while delivering superior customer experience. The result is a stronger, safer bank able to withstand the challenges overcoming many institutions in the financial market today.
Did you know that ProcessMaker specializes in delivering a hybrid, all-inclusive workflow solutions for the financial industry? Read more about how we helped banks mitigate risk and meet compliance with our latest banking solution brief.
ProcessMaker is a low-code business process management and workflow software. ProcessMaker makes it easy for business analysts to collaborate with IT to automate complex business processes connecting people and existing company systems. Headquartered in Durham, North Carolina in the United States, ProcessMaker has a partner network spread across 35 countries on five continents. Hundreds of commercial customers, including many Fortune 100 companies, rely on ProcessMaker to digitally transform their core business processes enabling faster decision making, improved compliance, and better performance.