‘Focus on Fundamentals’ Could be Financial Crime Achilles Heel

New research suggests more meaningful financial crime prevention may be achieved with targeted investments in higher risk areas.

Like 2020, 2021 proved to be a busy year of disruption and unexpected events. The ever-evolving risk landscape – driven by a backdrop of pandemic-related restrictions, geopolitical tensions, and economic uncertainty – exposed financial institutions across the APAC region to a multitude of new vulnerabilities.

According to new research from NICE Actimize and Regulation Asia, when it comes to addressing financial crime risks specifically, financial institutions have demonstrated an increasing willingness to leverage technology to meet the challenges in the ongoing battle against criminal actors looking to exploit the financial system.

The research analysed survey and interview data collected from 216 financial crime and fraud professionals across APAC to provide a unique snapshot of their top technology and business priorities, the challenges they face in technology adoption, and their outlook for the year ahead.

To be expected, all of the respondents pointed to new sources of financial crime risk amid the pandemic, and challenges balancing complex regulatory requirements against market realities. For the most part, financial institutions remain focused on advancing the most fundamental areas of their AML programmes to meet regulatory requirements, first and foremost.

From a technology standpoint, these areas include transaction monitoring, sanctions screening, and KYC compliance – areas where regulators have high expectations and which would present a high cost for banks to address without innovative tools to help.

A key issue identified in the research, however, is that the ‘focus on fundamentals’ does not necessarily address the most significant sources of financial crime; rather it appears to point towards a “tick-the-box” approach to compliance, simply because it is what the regulations require.

Transaction monitoring, sanctions screening, KYC – these areas are not new; they are the basic building blocks of any financial crime compliance programme. While these are the main areas where financial institutions are investing, the respondents to the research made a compelling case that more meaningful financial crime prevention might be achieved with targeted investments in high risk areas such as fraud, cyber and trade-related activities.

A case in point, network risk assessment was identified as a relatively low priority area for financial institutions from both a business and technology perspective, despite its proven effectiveness in uncovering hidden connections between bad actors and potential criminal networks. This is expected to change, however, as regulators start to encourage the use of new tools and more advanced techniques to address financial crime risks.

In comments contributed to the research, the HKMA (Hong Kong Monetary Authority), MAS (Monetary Authority of Singapore), and AUSTRAC (Australian Transaction Reports and Analysis Centre) all pointed to a need for financial institutions to increase focus on network analysis in their AML programmes to uncover hidden relationships.

The research also identified an increased awareness that traditional organisational silos are self-made, rather than a compliance necessity, and that no such boundaries exist for bad actors. In particular, the respondents broadly expressed recognition that there is scope for greater convergence between AML, fraud, and cybersecurity functions.

TBML (trade-based money laundering) was highlighted as an area that is being increasingly prioritised, given rising concerns from regulators and growth in global trade volumes. Financial institutions will be increasingly looking to deploy new technology tools in this area in the years to come. Still, a key bottleneck in TBML that needs to be addressed is the lack of specialised expertise.

Other areas where more specialised expertise and knowledge is needed include illegal wildlife trade and human trafficking for document analysis and investigations. To address the need for expertise, some financial institutions have started to move from having AML compliance professionals serving in generalist roles towards having more functional specialists designated to handle specific risk types.

Still, coverage of all risk types, typologies and scenarios within AML teams is expected to continue to be a major challenge in 2022. Meanwhile, financial institutions will have to remain vigilant to guard against new threats, and stay ahead of bad actors, who will continue to evolve at rapid pace as the year unfolds.

With this in mind, the increased willingness of financial institutions to invest in technology to bolster their AML capabilities had a number of respondents to the research feeling certain the industry is at least heading in the right direction.

While some institutions are undergoing complex transformation programmes or overhauling entire technology stacks, others are targeting their investments towards specific systems or moving to adopt third-party vendor solutions. These trends are expected to continue in 2022 and beyond.

The full report is available for download here.

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