Andrew Davies, VP, Global Market Strategy, Financial Crime Risk Management, Fiserv
Anti-money laundering regulations in Europe will shift into the spotlight this summer as the fourth EU Directive on Money Laundering becomes law in June. Add to this the fact that the frequency of financial crime attacks is on the rise,financial institutions (FIs) must work harder and collaborate to tackle financial crime and fraud. In the UK for example, more than 75 cyber attacks were reported to the Financial Conduct Authority (FCA) in the UK in 2016, with only five instances reported in 2014.
Industry collaboration plays a large role in reducing financial crime and fraud; something which will be essential to combat the risks that are becoming more and more complex. In addition, FIs must also align on collaboration as not only do organisations lose money from financial crime itself, they also face huge fines from the FCA for failing to prevent an attack. CEB Tower Group statistics show how fines have increased exponentially over the past 10 years; the increased frequency and higher value nature of the attacks has resulted in fines growing by 55,000 percent.
The unpredictability of financial crime creates difficulties for FIs as they implement prevention strategies. In order to successfully put these resource-sharing strategies in place, and reduce the impact of fraud, organisations to need ensure that they have the appropriate infrastructure to manage the process. Anti-Money Laundering (AML), Know Your Customer (KYC) and fraud prevention solutions are all key to reducing and managing financial crime risk, yet knowing which one to prioritise can prove a challenge. By pulling together full customer profiles, unusual behaviour that is indicative of money laundering, tax evasion, human trafficking and instances of fraud can be identified early.
Understand the customer
Not only do AML and KYC solutions ensure organisations manage risk, they also enable them to stay ahead of competition. If an organisation does not know and understand their customer fully, it is impossible to understand the risk associated with them. Combining data collected from industry groups of FIs with these customer-centric profiles is one way organisations can identify what might be crime and what is just a slightly unusual transaction. More accurate detection will result in greater operational efficiency.
Implementing customer-centric infrastructure is only one benefit of collaborative work between teams and within the industry to combat risk. The new EU AML Directive heightens the attention that FIs must also pay to reputational risk and their moral imperative. If a company is found to be a vehicle for money laundering activities for criminals, the reputational damage to that organisation is substantial. Customers will often feel exposed and take their business elsewhere. Research by CEB Tower Group revealed that only 14 percent of fraud departments amongst FIs have a complete customer-centric view. This highlights a knowledge gap across the industry that must be overcome in order to provide a full customer profile that can be used to reduce financial crime.
Reap the rewards of data
The way that customers interact with FIs and manage their money is constantly changing. Consumers want access to their financial assets through multiple channels and across multiple devices, whenever and wherever it suits them. With this in mind, it is crucial that FIs gather data on every aspect of customer behaviour regardless of what channel or device they choose to use to interact with their institution.Cross-divisional work and collaboration ensures that thorough customer profiles can be compiled with threats identified more quickly and acted upon more efficiently.
Siloed AML and fraud prevention teams are the traditional structure within an FI, resulting in both teams gathering information on the same customer separately. However, research has shown that there is an 80 percent overlap in AML and fraud detection tools and processes, demonstrating the benefits of leveraging these assets across multiple groups to make financial crime risk management and prevention more effective and reliable.
By collaborating and integrating assets and processes, data can be more efficiently leveraged. Fraudulent behaviour is more likely to be recognised before it has happened, allowing the FI time to prevent it and consequently reduce the loss they suffer while also mitigating the negative impact on customers. By automatically collecting and analysing data, companies are able to gather this type of information, evaluate it through a scorecard system, and define the risk associated with each person.
Bringing AML and fraud teams together creates a comprehensive strategy towards KYC risk management and ensures that suspicious behaviour is detected as early as possible. Now more than ever, a common infrastructure that displays customer-level risk data at an FI level is essential if institutions are to pinpoint and tackle increasingly sophisticated criminal activity.
Consolidate the internal with the external
The richer the pool of data that FIs have at their disposal, the more informed and valuable the analysis of the data becomes, particularly in relation to analytic models. Customer checks on fraud and AML risk typically only happen as customers are on-boarded to identify the risk that they bring. However, the risk assessment process must continue for the duration of their time as a customer. Joined-up AML and fraud teams and technology can facilitate this, by comparing a customer’s behaviour in relation to other customers and leveraging best practices to accurately detect fraudulent activities, while also providing FIs with operational efficiencies.
Institutions are able to build an even more detailed, cross-industry profile of a customer by compiling data collected internally with data from external sources. Being able to understand customers more comprehensively ensures that organisations can identify and flag unusual behaviour, resulting in fraudulent activity being detected more quickly, and more accurately.The data from multiple sources across industries also allows FIs to understand nuances in customer behaviour more easily.
Integrating assets and data needs strong management to make sure that anomaly detection systems are versatile and allow both AML and fraud teams to see problems in their entirety.Taking a risk-based approach ensures that the compliance team is able to focus on genuine suspicious activity and hence reduce disruption to legitimate customers. By progressively renovating systems, KYC data will stay up-to-date, flexible and constantly in action. This constantly evolving implementation approach acknowledges the necessity for converged data to make sure that organisations fully understand the customer and can manage financial crime across all channels.
Companies in the financial sector are working hard to explore the benefits and opportunities of collaboration; something which is crucial with the EU AML Directive coming into force. Organisations are focusing on how they can better collaborate to use the data at their disposal to reduce, and hopefully prevent, fraud and money-laundering activities within the industry. The wealth of data available means that FIs can achieve a holistic view of customers’ behaviour. Additionally, by collaborating and combining data from internal processes with other collective-data sources, organisations are able to better analyse suspicious activity in real-time. The data available permits an FI to know their customers better, and this will result in prompt adherence to the new regulations, while also ensuring that legitimate customers receive the best experience possible without unnecessary disruption.
UK might need negative rates if recovery disappoints – BoE’s Vlieghe
By David Milliken and William Schomberg
LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.
Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.
Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.
Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.
“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.
“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.
Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.
Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.
Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.
Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.
Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”
“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.
By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”
Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.
“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.
($1 = 0.7146 pounds)
(Reporting by David Milliken; Editing by William Schomberg)
UK economy shows signs of stabilisation after new lockdown hit
By William Schomberg and David Milliken
LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.
The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.
A separate survey of households showed consumers at their most confident since the pandemic began.
Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.
The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.
Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.
Official data for January underscored the impact of the latest lockdown on retailers.
Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.
“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.
The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.
BORROWING SURGE SLOWED IN JANUARY
There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.
Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.
That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.
The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.
Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.
“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.
Some economists expect higher taxes sooner rather than later.
“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.
Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.
The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.
IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”
However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.
Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”
($1 = 0.7160 pounds)
(Editing by Angus MacSwan and Timothy Heritage)
Oil extends losses as Texas prepares to ramp up output
By Devika Krishna Kumar
NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.
Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.
This week, both benchmarks had climbed to the highest in more than a year.
“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.
Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.
Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.
“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.
Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]
The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.
“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.
(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)
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