FRAML Integration Could Help Cut Compliance Costs and Modernise Risk Management

FRAML Integration Could Help Cut Compliance Costs and Modernise Risk Management

Katarina Pranjić

The growing convergence of Fraud and Anti-Money Laundering (FRAML) operations within the UK financial services sector has the potential to save firms tens of millions of pounds of compliance costs each year. It could also create a runway for them to evolve their compliance operations from risk management to a risk orchestration led approach. Katarina Pranjić, a Financial Crime Compliance expert at LexisNexis® Risk Solutions, explains why.

Customer-focused compliance

Our latest research with Oxford Economics shows the costs of Financial Crime Compliance (FCC) for UK firms continues to rise. Since our first True Cost of Compliance report in 2020, costs have increased from £28.7bn to £34.2bn per annum, representing 19% growth. Customer due diligence consumes a large portion of these costs, which can present an opportunity for efficiencies. Integration and convergence of customer checks and screening can help to minimise duplication to generate time and cost savings.

Customer interactions sit at the heart of effective fraud and financial crime prevention strategies. Advanced analytics and Artificial Intelligence (AI) can be utilised to better understand patterns of good customer behaviour, enabling firms to build profiles and insights that can be used to spot potential malicious activity and risk. This is vital today, given the prevalence of social engineering, where the genuine customer is weaponised by criminals as the prime access route to obtaining funds illicitly, or, for example, roped into facilitating financial crime by becoming a money mule. Both scenarios work on the notion that it’s easier to manipulate and exploit people, rather than attempting to circumvent banks’ increasingly sophisticated and advanced financial crime and fraud defences.

These heightened threats are, in part, fuelling the increased spend on customer due diligence (CDD), as firms go to greater lengths to fully understand and build genuine trust with their customers. Two thirds (67%) of compliance costs are now consumed by CDD activities, equating to an average annual cost per firm of £130.4 million. This involves processes including Know Your Customer (KYC) and Identity Verification (IDV) during customer onboarding, as well as AML screening, transaction monitoring and ongoing monitoring of customers – all areas where there are definite synergies between fraud and anti-money laundering attacks and prevention measures.

A more unified approach

There are multifarious types of economic crime, each defined by its nuances and complexities. In response, specialist expertise and experience must be deployed, specific to the criminal threat being addressed. As a result, prevention has become very targeted and rule-based, but this is changing fast, as firms prioritise a ‘single customer’ led approach. Prevention measures such as transaction monitoring are very customer-centric and essentially provide the bridge between anti-fraud and AML efforts. In turn, this is driving banks and financial institutions to adopt a new combined approach to financial crime compliance – FRAML checks.

An integrated approach to prevention fosters collaboration, leading to more effective sharing of data and analysis of risk within financial services organisations. Comprehensive ‘single customer’ views can be created and maintained within this shared ecosystem, enabling firms to work smarter and to better consider risk across the entire ecosystem, rather than in siloes.

Risk appetites can be optimised to reduce false positives. For example, the research found that suspicious activity reports account for just over 6% of FCC costs, while internal investigations consume just over 7% of spend and alert remediation, 8%. This means that an average firm is spending over £41million per year to manage the impacts of their risk management strategies, often having to dedicate time, resource and expense to customers that pose no risk.

The True Cost of Compliance report shows that converging fraud and other FCC activities, such as AML, is a key priority for firms over the next three years. Half (50.3%) of financial services organisations are planning such a convergence in 2023, with a further 16% earmarking by 2025. A third (32%) of firms have already implemented a more integrated approach.

This level of convergence will doubtless drive investment in data quality – a key component for a reliable and informed ‘single customer’ view – and will also improve data sharing. Many firms are already prioritising automation of processes to cut costs, increase efficiencies and free-up time for their teams to focus on more value-adding activities. Integrating and blending teams and processes will create more unified ways of working that naturally lend themselves to the streamlining of automation.

Transitioning to a more integrated anti-fraud and financial crime model will also accelerate the shift from risk management to risk orchestration.

Modernising risk management

A FRAML approach is already helping overcome the siloes that are a by-product of traditional risk management strategies and encouraging a more purpose-led approach to fighting economic crime. Governance, advisory and assurance are becoming more harmonious, and firms are rethinking structures and processes to be much more outcomes based. Risk management is essentially evolving to better consider the wider context of economic crime threats, and the links that exist between different malicious activities.

Building an end-to-end monitoring and management system is essential to make this a success. That is why we are now seeing growing adoption of fraud and financial crime risk orchestration platforms. The definition of orchestration is to make things happen together in harmony. Risk orchestration platforms do just that, harmonising the many different systems and data sources that are utilised by firms to fight financial crime. Onboarding, screening, and ongoing monitoring activities are synchronised to create a more coherent view of customers, and to ensure this single view remains up to date. Doing so generates more reliable insights that help optimise the assessment and handling of threats to save time, resource, and money.

Orchestration supports the convergence of FRAML activities and creates a platform for effectively integrating different fraud and financial countermeasures, so that they complement each other, rather than risking conflicts or missed opportunities. It’s a change in approach that promises to reduce duplication of effort and further enhance the automation and digitisation of processes to benefit customers and reduce FCC costs.

To download the full True Cost of Compliance report, visit

https://risk.lexisnexis.co.uk/insights-resources/white-paper/true-costs-of-compliance