Home Banking How Small Banks Can Fortify Against Financial Crime

How Small Banks Can Fortify Against Financial Crime

by internationalbanker

By John Edison, Vice President and Global Head of Financial Crime and Compliance Products, Oracle

Oracle Vice President and Global Head of Financial Crime and Compliance Products John Edison discusses the sheer number of transactional financial crimes around the world and why banks of all sizes need to act now to avoid hefty fines.

Financial criminals target banks, large and small. Over time, the level of sophistication employed to infiltrate banking systems has grown in direct proportion with the ability to protect banking systems, and technology is at the heart of that battle. So, it is unsurprising that given the technology currently available to stop money-laundering schemes, governments around the world have tasked banks with getting on the front foot with the problem and started imposing fines for those not getting it right. Last year alone, British banks and other companies were fined more than £300 million[i] for money-laundering breaches—proof that more need to change their operations if they are going to target money-laundering activity effectively.

The pressure is on.

The pressure on the financial sector to meet regulations is getting stronger, and we can expect to see higher expectations for financial security over the next 12 months. Indeed, the Government of the United Kingdom made AML (anti-money-laundering) regulations tougher at the start of this year[ii], and many experts believe it is set to get even more stringent post-Brexit[iii]. It is expected to take a harder stance on banks and introduce sanctions more in line with those in the United States than in the European Union (EU). Yet, as regulations tighten, the threats and money-laundering techniques become more and more sophisticated.

So, how can banks protect themselves from financial crime? What steps can they take to meet regulatory guidelines?

The challenge for small banks

Banks need to prepare to deal actively with money laundering—the problem isn’t going away. If protecting themselves from the financial impact of having money laundered isn’t enough of a motivator, then surely the consequences of not meeting strict financial regulations should be.

Smaller banks are just as vulnerable, if not more so, to financial crime as multi-jurisdictional banks. After all, fines are only a tiny part of being caught on the wrong side of a money-laundering scam. The cost of reputational damage can be immense—especially to a smaller bank that relies on exceptional service and a clean reputation to attract new customers.

Unfortunately, many smaller banks have underinvested in their anti-money-laundering programs due to the perception that compliance is a drag on business or that it’s something that can be done periodically rather than continually. They may be reluctant to invest in new infrastructure if they believe new technologies will become outdated soon after implementation. As a result, some smaller banks lack the people, policies, procedures and tools required to fight money laundering and other financial crimes successfully.

Making the right change

So what needs to change? At the moment, when it comes to AML procedures, smaller banks tend to perform periodic reviews on high-risk accounts, conducting investigations[iv] based on transactional histories and looking at several risk indicators. The software that they use to help facilitate this AML process is generally quite basic and minimally meets the compliance requirements placed on banks.

But these banks are often challenged because many AML tools lack vital aspects such as flexibility, automation and future-readiness. They’ve been built for the environment in which they were created rather than to help banks prepare for the future. They don’t have the agility to adapt to future threats, so they struggle as soon as money-laundering schemes become more sophisticated.

Furthermore, they can’t give a holistic view of everything happening across the estate; the user is left to look for something it already knows is there rather than identifying new threats based on suspicious activity. Red flags are harder to spot in this environment, so the bank is always playing catch-up rather than getting ahead on detecting crime. Moreover, these tools are invented to stand alone; they don’t integrate well with third-party software—so tracking investigations from end-to-end across various teams and departments is nearly impossible.

Small banks can use AML technology to create a competitive advantage.

The to-do list for any financial executive is undoubtedly daunting; from navigating regulatory changes to managing talent effectively, many initiatives compete for attention. Often banks are already under stress about regulatory compliance, so the prospect of investment in technology and analytics understandably induces anxiety, conjuring up visions of perceived disruption to business and significant expense to implement.

AML technology is at a critical inflection point, driven by the unsustainable operational costs and inefficiencies created by incumbent systems on the one hand and the recent emergence of machine learning and other next-generation technologies on the other. So, when choosing to invest, small banks need to get it right. That means finding an AML system that is developed specifically to cater to the needs and business challenges of a small bank.

Three critical elements to chart ahead:

There are three key factors that smaller banks should consider when deciding on an AML solution.

  • Invest in a comprehensive AML platform that is built for now and the future.
    Maintaining multiple modular applications for different parts of AML compliance can turn out to be a significant burden on institutions’ information-technology (IT) budgets, and the non-compatibility between systems can compound the problem. Invest in a single, integrated platform powered by artificial intelligence (AI), machine learning (ML) and advanced analytics that encompasses customer onboarding, real-time watchlist screening, customer due diligence, transaction monitoring, case management and regulatory-reporting capabilities—a nimble and intuitive platform that keeps the bank ahead of emerging risks and changing regulations.
  • Get data ready for rapid deployment.
    Small and midsize firms must get their data ready to determine what to monitor. This is pivotal for a successful and seamless rapid adoption of an integrated AML platform. Clean and accurate data improves technology efficiency, reduces false positives, enhances the quality of alerts and helps firms make the best decisions. Having clean and quality data ready with the end objective in mind delivers the fastest time to value by expediting the implementation so that small banks can reap the benefits of an integrated AML solution in a matter of weeks.
  • Think total cost of ownership (TCO); think the Cloud; think SaaS.
    The Cloud is revolutionizing technology delivery. Cloud-based solutions can provide banks with access to next-generation AML that leverages scalable, high-performance computing, virtually unlimited data storage and tools to support advanced analytics and machine learning. Moreover, cloud solutions offer these tools without the need to build advanced-technology capabilities in-house. A comprehensive SaaS (software as a service) solution can not only help banks remove many of the operational burdens, such as software enhancements, experienced to comply with new AML regulatory requirements but also dramatically reduce ongoing operational costs. SaaS-solution adoption helps banks move away from fixed-cost to variable-cost models and also provides flexibility and agility in supporting AML activities across an expanding operational footprint, multiple lines of business or various regions. In sum, for banks that rely on traditional AML software, SaaS-based solutions offer a path forward to the next generation of AML technology, providing significant gains in operational efficiency, reductions in compliance costs and potential improvements in compliance efficacy.

In conclusion

The situation is pressing: the volume of transactions is increasing each year, money-laundering schemes are getting increasingly sophisticated, and regulations are going to get only stricter. Today, for many banks, just meeting the bare minimum regulatory requirements is an uphill battle. But just covering the basics now won’t prepare smaller banks for the future, which could mean incurring more fines or falling victim to cutting-edge criminal schemes.

By investing in AML, small financial institutions can stay ahead of the curve and drive efficiency, superior customer experience and readiness to adapt to new regulations—and reduce reputational risk.


[i] https://www.thetimes.co.uk/article/british-companies-fined-300m-for-money-laundering-breaches-cwzsc56xv

[ii] https://www.pinsentmasons.com/out-law/news/uk-updates-anti-money-laundering-rules

[iii] https://www.complianceweek.com/europe/experts-weigh-in-on-brexit-consequences-for-gdpr-aml-more/28420.article

[iv] https://www.oracle.com/industries/financial-services/analytics/crime-compliance-studio/

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