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By Andrew Davies, Director, Financial Crime Risk Management, Fiserv

Trying to stop financial crime before it happens is nothing new for the financial industry. In some cases, such as terrorist financing and sanctions violations, there is a clear legal obligation to do whatever is necessary to prevent these transactions from being completed. In fraud prevention, financial institutions (FIs) have clear incentives to protect themselves and their customers. Yet in other financial domains the water is a bit murkier. For example, while there are clear policy objectives to avoid facilitating corruption, bribery and tax evasion, to date there is no clear approach to preventing it.

In the case of anti-money laundering (AML), transaction monitoring programs have traditionally followed an “observe and report” process. Increasingly though, international compliance teams are choosing to stop transactions before they are executed – based on suspicions of money laundering activity. More and more, the industry has been asking itself if this approach of rejecting suspicious activity is a more effective strategy to prevent money laundering. And if so, what are the impacts on legitimate customers?

‘Observe and report’

From the Financial Action Task Force (FATF) down, regulators appear to be focused on gathering financial intelligence more than preventing the successful movement of the proceeds of crime in to the financial system. The general guidelines are to report suspicions to a local Financial Intelligence Unit (FUI) and collaborate with law enforcement without tipping off the suspects. A closer look at the language and structure of the FATF regulations highlights room for interpretation. For example, the fourth recommendation concerning Customer Due Diligence (CDD) as defined in the FATF Recommendations outlines that if a transaction is not consistent with what you would typically expect for an individual customer, the transaction should not be performed. That is not, however, the prevailing interpretation adopted by most FIs or expected by regulators in today’s paradigm.

One business argument for “observe and report” is that blocking transactions which are in fact legitimate will alienate loyal customers. This inherently raises the question of where the “burden of proof” lies. While this has historically often laid with the FI and local law enforcement organisations to demonstrate the transaction is nefarious, lately we’ve seen cases where customers have been required to demonstrate that the transaction is in fact legitimate.

New capabilities help balance customer risk and experience

Andrew Davies
Andrew Davies

To what extent this proactive approach will be adopted to avert money laundering is still uncertain, but it brings to the fore key questions about how FIs can strike the balance between both managing customer risk and the customer experience. The latest generation of behavioural monitoring and analytics help FIs transform AML “observe and report” operations into proactive monitoring of suspicious activity. This provides a deeper insight into money laundering and other risks, giving FIs more reliable information regarding “normal” activity history, which transactions require further investigation and which can be safely processed to ensure a positive customer experience. Predictive models built by analysing historical data and joining it with the outcomes of previous alert and case review can discover hidden patterns indicative of money laundering risk.

AML solutions that provide analytic models specifically built for false positive reduction (legitimate transactions that score high because of unusual but not nefarious customer behaviour) can be particularly helpful in balancing the need to investigate suspected money laundering activity while protecting the rights and experience of good customers. Well-built analytics can also demonstrate a transparent data driven risk-based approach to regulators.

This more sophisticated behavioural monitoring also enables financial services companies to expand their real-time interdiction capabilities. Financial institutions are well-versed in real-time interdiction as it relates to sanctions screening and watch lists for drug trafficking and terrorist financing. With advancements in the precision of behavioural monitoring, real-time interdiction can be also be applied to suspicious transactions to increase money laundering prevention while preserving a positive customer experience for the vast majority of customers. Together, predictive models for more precise suspicious activity detection combined with real-time decision-making enables instant decisions to block suspicious transactions, where appropriate, before funds are released. On the flip side, real-time decisions also release genuine transactions for funding right away.

While some aspects of implementing real time AML detection requires additional consideration, including specific regulatory considerations in certain jurisdictions, vitally real time detection requires an IT and operational investment for which the benefits (to the institution and/or to society) must outweigh the cost.

Looking ahead, a shift in approach?

With spending on AML programs still growing, it is important to address the impact that such growth has had on the industry and its customers. The public is aware that financial institutions have structures in place to counter money laundering, so can it really be justified as a “tip off” when we scrutinise financial activity?

Though it is a complex issue without one answer, it is perhaps time to accelerate the pace of the conversation and analysis. The technological capabilities to evaluate financial behaviour in real time and to detect unusual and suspicious transactions before funds are moved exist today, and there are a number of valid use cases for this capability, even if as an industry we are not yet ready to fully embrace preventing suspicious transactions from being completed. These same technologies also help us protect and expedite transactions for legitimate customers protecting their rights to prompt and convenient services.

With payments continuing to get faster, the financial industry has a long, complex road ahead when it comes to money laundering. The industry should look to re-evaluate the cost of the current AML approach versus its benefits, and compare that to the alternative of implementing preventative measures to combat money laundering, while always considering the convenience and safety of the end customer.