RiskTech Forum

Chartis: Relationship troubles are just one worry for firms in the FinCrime fight

Posted: 7 August 2017  |  Author: Phil Mackenzie  |  Source: Chartis


Relationships can be complicated at the best of times. And right now, few financial institutions (FIs), or their financial crime teams, would claim to be enjoying the best of times. One of their toughest challenges is negotiating the complex networks of relationships they have established over the years. Deep in these counterparty labyrinths could be lurking all sorts of unsavory risks, among them money laundering, fraud and sanctioned entities. FIs must determine not just the risks posed by a particular counterparty, but also those posed by the third parties transacting through that counterparty.

This problem has a history. In recent years, FIs have been stepping cautiously away from their international correspondent banking relationships, unnerved by a lack of information about their correspondents’ Anti-Money-Laundering (AML) processes, and just who their counterparties are doing business with. More recently, and partly as a result of the Panama Papers scandal, a slew of regulations around Ultimate Beneficial Ownership require FIs to ascertain who is at the end of a potential chain of companies before they are deemed safe to transact with. And in the very near future, it’s likely that Open Application Programming Interfaces (APIs) will be an everyday part of the financial landscape, unlocking FIs’ systems for a myriad of FinTechs and other third parties.

Relationships are just one sore point for FIs. Other reporting requirements and regulatory burdens (especially around Suspicious Activity Reports [SARs]) continue to pile up, and cyber-enabled fraud (including advanced and persistent threats from organized crime and nation states) is growing. Tackling these issues effectively will take the considered use of tools, people and process – all as budgets continue to tighten.

Technologies can help. Several are proving useful here, but three in particular – specialized platforms (such as Hadoop and time-series databases), Artificial Intelligence (including Robotic Process Automation) and entity resolution (allowing the clarification of entities from potentially incomplete or fragmented information) are seen as key elements of successful solutions. A variety of vendor offerings can tackle the relationship problem too, including information sharing capabilities (such as Know Your Customer [KYC] utilities), and more complex hierarchy modeling (to build out networks of contacts).

These are powerful tools in the fight against financial crime. Crucially, however, FIs must recognize both their pertinence and their limitations, and match them to appropriate use cases. A crowded, increasingly disrupted vendor landscape is often populated with idiosyncratic solutions, with defined strengths and weaknesses in analytics, resources and platform capabilities. Firms must choose whether to use enterprise solutions that can capture financial crime under a single umbrella, or whether to mix and match point solutions to solve specific problems as efficiently and effectively as possible.

For more analysis of these trends, and detail on the specific areas of anti-money laundering, enterprise fraud management, watchlist and sanctions screening, KYC and trader surveillance, see the Chartis report Financial Crime Risk Management Systems: Market Update 2017.