Strategic investments needed in anti-money laundering compliance programs for banking and finance

• Deloitte Touche Tohmatsu India LLP report suggests banks are facing increased challenges in meeting heightened regulatory expectations 
• AML compliance is a board level issue with continuing operational challenges and investments not bearing fruit
• Banks are following a risk-based approach for AML compliance, but more needs to be done to extend it to the enterprise level
• Transactions monitoring, and sanctions screening processes need a re-design and increased use of technology to improve their conversion ratio and effectiveness

Deloitte Touche Tohmatsu India LLP (DTTILLP) has released its ‘South Asia Anti Money Laundering Preparedness Survey report 2020’. The survey conducted with leading banks and financial institutions in India, Sri Lanka, and Bangladesh earlier this year, highlights siloed risk management approaches across banking operations, customer due diligence, sanctions screening, and trade-based transactions as the root cause for systemic inefficiencies leading to fraud. 

According to the survey, meeting increased regulatory expectations and enforcing AML compliance pose key operational challenges to banks, even as 77% respondents indicated that their AML program was compliant with all regulatory requirements. These challenges range from insufficient numbers of adequately trained staff, insufficient/outdated technology to manage AML compliance, and budget constraints to implement AML programs alongside increased scrutiny of third-party reviews. 

“Historically, AML programs have been incident-driven with lean teams to manage response to events, or changes in regulatory developments. But that is no longer adequate today. With increased regulatory scrutiny, and expectations being ‘if you could have known, then you should have known,’ banks need to move to a proactive approach to demonstrate their compliance to avoid fines, rather than rely on the traditional reactive approach. This calls for investments in an integrated enterprise wide approach to manage compliance and prevent failures. Such an approach that provides a comprehensive view of customers and transactions can make it difficult for criminals to exploit gaps between business systems, databases and countries,” said K.V. Karthik, Partner, Forensic – Financial Advisory, DTTILLP. 

Overall, survey respondents also highlighted technology-related challenges such as limited integration with core banking systems, incomplete coverage of all products and processes, too many false positive alerts, and issues around data accuracy and unstructured data. This lack of technological maturity, and data governance appears to have had a cascading impact on every aspect of the AML program. 

In the area of sanctions screening, around 63% respondents indicated that they were struggling with issues posed by limited data structure and integration with core banking systems. Too many false positives, limited automation pertaining to the updation of regulatory lists and sanctions lists, and inadequate “fuzzy” name matching capabilities emerged as other major issues amongst the respondents. 

In the area of trade-based money laundering, 83% respondents indicated screening trade finance transactions against internal lists, regulatory lists, and sanctions lists. The respondents also pointed at challenges such as identifying hidden relationships between trade partners and ports, estimating pricing and invoicing of goods, and unavailability of a single automated system that can combine all screening data. 

“In the past, banks have made discretionary investments in technology to meet certain immediate concerns around AML compliance. These have created issues pertaining to the availability and quality of data, systems working in a siloed manner, and inherent module based limitations, leading to significant reliance on manual processes to close gaps in compliance. Regulators today expect banks to have a consolidated view of customer transactions across businesses and jurisdictions, to identify any unusual transactions and behaviours, or potential sanctions violations. The current technology frameworks may pose a challenge to doing that and banks need to take a strategic and longer term view of technology investments,” said Karthik.