Why Anti-Money Laundering Should Be a Top Priority for Financial Institutions
via Visual Capitalist
The to-do list for any financial executive is surely daunting. From navigating technology changes to managing talent effectively, there’s many initiatives competing for attention.
One issue that’s been in the headlines for many years is anti-money laundering (AML). When criminals are able to successfully hide the illicit origins of their cash, both the financial institution and society suffer. So, what makes AML more important now than it has been in the past?
Rising up the Priority Ladder
Today’s infographic from McKinsey & Company explains the factors which have brought anti-money laundering urgently to the forefront in recent years.
1. Regulatory Action
Enforcement actions related to AML have been on the rise. Since 2009, regulators have levied approximately $32 billion in AML-related fines globally.
2. Threat Evolution
Criminals are using more sophisticated means to remain undetected, including globally-coordinated technology, insider information, and e-commerce schemes.
3. Reputational Risk
AML incidents put a financial institution’s reputation on the line. There’s a lot at stake: today, the average value of each of the top 10 bank brands is $45B.
4. Rising Costs
Most AML activities require significant manual effort, making them inefficient and difficult to scale. In 2018, it cost U.S. financial services firms about $25.3B to manage money laundering risk.
5. Poor Customer Experience
Compliance staff must have multiple touch points with a customer to gather and verify information. Perhaps not surprisingly, one in three financial institutions have lost potential customers due to inefficient or slow onboarding processes.
It’s no wonder anti-money laundering has now become a top priority for many CEOs in the financial industry.
A Wave of Innovation
In the last five years, there has been an explosion of “RegTech” startups—companies that address regulatory requirements using technology.
Global RegTech Investments, 2014-2018
| Year | Amount Invested (USD) |
|---|---|
| 2014 | $923M |
| 2015 | $1,110M |
| 2016 | $1,150M |
| 2017 | $1,868M |
| 2018 | $4,485M |
Over 60% of these are focused on solving Know Your Customer (KYC) and AML issues. What does this technology look like in practice?
Customer onboarding
A hypothetical U.S. retail firm, ABC Electronics, applies online to open an account at AML Innovators Bank. Their information is verified and screened using a fully automated process.
If they are determined to be a lower-risk client, they will be fast-tracked through the approval process with decisioning in six hours or less. For high-risk clients, decisioning occurs within about 72 hours.
Transaction Monitoring
ABC Electronics requests to send multiple international wire payments to various beneficiaries. Each transaction is automatically screened based on various factors:
- A same name or subsidiary transfer carries the lowest risk
- Transfers to a known, similar industry in a high-risk jurisdiction carry medium risk
- Transfers to an unknown industry in a high-risk jurisdiction carry high risk
These transaction scores, combined with algorithms that track a client’s expected vs. actual transaction behavior, will update ABC Electronics’ risk rating in real time.
Management oversight
As risk updates occur, ABC Electronics’ rating is integrated into AML Innovator Bank’s overall portfolio risk.
Senior risk management teams will be able to view a heat map that highlights the highest risk areas of the business.
Structural Change, Big Gains
Just as financial crimes continue to evolve, so do AML schemes.
How can organizations stay ahead of the game? They can focus on actively managing risk, deliberately investing in technology and analytics, and prioritizing areas where RegTechs will have the highest near-term impact.
By investing in AML, financial institutions create competitive advantages:
- Improved efficiency
- Superior customer experience
- Scalability
- Readiness to adapt to new regulations
- Reduced reputational risk
- Ability to attract top talent
With such benefits on the table, one thing is clear: Anti-money laundering efforts are more important now than they have ever been.
