Compliance systems: filling in the gaps

KK Gupta, CEO at Facctum

 

Financial crime and other regulatory compliance can be a costly, time consuming and resource-heavy endeavour for businesses in any sector.  With the banking industry increasingly under a regulatory magnifying glass, it’s even more important to get it right.

Indeed, nearly half (46%) of organisations surveyed earlier in 2022 by PwC reported that they had experienced fraud, corruption or other economic crimes over the course of the last two years. Penalties for compliance failures are now higher than ever, and banks must take action to navigate the complex compliance landscape. But how?

 

Finding the gaps

The current regulatory landscape – particularly when it comes to sanctions on Russia and other nations – is fluid, and therefore harder to ensure compliance. This, coupled with the fact that many firms’ data is incomplete, inconsistent, and imprecise, means that businesses struggle to effectively adapt to increasing compliance demands.

The success of compliance activities requires the provision of easily accessible, high-quality data. However, with compliance IT capability degrading, whether it be from age, neglect or oversight, there are two clear gaps in banks’ existing compliance systems.

 

Employee understanding

The first of these gaps is a lack of employee understanding of why and how transaction monitoring systems trigger compliance alerts. In addition, those operating such monitoring systems are often found wanting in their understanding of them, leading to bad decisions entering decision models.  Furthermore, employees often lack the information that is required to conduct appropriate assessments with 76% of compliance managers saying they often track regulatory changes manually.

This is a fatal flaw in compliance systems, as if the required information is of poor quality or incomplete, systems can fail to alert high-risk transactions or other potentially criminal activity, reducing the overall effectiveness of the screening process.  Similarly, a lack of transparency of how matching technology is used to create alerts leads to operational inefficiencies.

 

Legacy systems

Data quality often depends on the connectivity of the systems hosting the data, and this is where we come to the second gap plaguing banks’ compliance processes. Older legacy systems often fail to provide banks with a connected single view of their customers, which can result in less effective outcomes.

For instance, newer ‘know your customer’ (KYC) procedures are becoming increasingly significant in customer identification, and are critical controls for the prevention of financial crime. However, legacy systems fail to connect the dots between lines of business, geographies and products. For a European bank, for example, the same customer might have a current account in the UK and a business bank account in Germany, but if systems aren’t talking to each other properly, this individual can be counted as two separate people.

These older systems also often aren’t agile enough to cope with the high intensity of monitoring, conducting data analysis. or providing connectivity required to keep pace with high impact regulatory changes and environment.

 

Switching to data-based tools

To fill these gaps and combat issues with existing systems – including efficiency, connectivity, and accuracy – organisations must consider data and cloud first screening platforms. Such platforms aim to improve risk detection and reduce workloads for banks’ in-house compliance teams, while also achieving and maintaining compliance effectiveness.

Gathering and analysing company wide data can reveal patterns and anomalies which uncover misconduct, whilst providing in-depth insight from a compliance perspective. By using a data-first approach, banks can monitor activity closely, reducing the likelihood of exposure to high-risk transactions and maintaining regulatory compliance. Furthermore, managing and reducing risk can reduce customer friction, improving their perceptions of providers and bolstering loyalty.

Such value-add monitoring is most likely to be achieved through the implementation of not only a data-first compliance approach but also via data analytics tools. For example, an enterprise-wide data model built for anti-money laundering monitoring should allow data to be segmented by products and services, to provide a company-wide view as well as providing understandable and actionable insight for business owners and regulators alike.

The use of data first tools also provides richer, higher-quality data, allowing more advanced analytics, minimising false positives, and providing clear and well-structured information to detect and report suspicious activity with far greater precision than their current system may offer.

 

Successful implementation

Adopting newer compliance technologies provides banks with more effective and efficient compliance processes – but that’s not the only benefit. These updated systems are immensely scalable and can be easily configured to fit a wide range of risk profiles and regulatory requirements – and can help banks to stay ahead of the curve.

While undertaking tech updates is a daunting task for any organisation, it’s necessary to support them through the risk landscape. Firms were previously hesitant to adopt cloud first compliance technology, but these barriers to successful implementation of such technology are now falling away. Over time, installation costs have decreased, and regulators are also increasingly encouraging banks to adopt this newer technology to make compliance easier and more effective.

With regulatory regimes around the world changing so frequently, banks are finding it increasingly difficult to maintain adequate compliance technology capacity. Regulators are requiring organisations to step up their compliance processes and onboard the latest technology. It’s not just legal compliance requirements that are changing – regulatory expectations of the standard of financial crime prevention are also evolving quickly.

 

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