How Financial Institutions Can Fight Money Laundering in a Disrupted Global Environment (John Edison)

The disruption and uncertainty created by COVID-19 has slowed business execution across all aspects of businesses. Anti-financial crime and compliance functions are no exception. However, the challenges and pressures of fighting money laundering and other financial crimes have not eased. Instead, the current environment is making the need to drive efficiency and effectiveness across anti-financial crime programs even more urgent, as financial institutions must squeeze more value from each dollar spent while navigating the economic realities and aftermath of the pandemic. Here are a few thoughts on how:

Make Sure Financial Crime Detection Effectiveness Remains High in the New Normal

As COVID-19 counteraction measures cause consumers to quarantine at home and businesses to cut spending, we obviously expect that there will be fewer financial transactions than usual. Numbers are still coming in, but Visa already reported that March 2020 transaction volumes were 4% lower than the prior year and Tradeshift is reporting that B2B transaction volumes are down significantly. We expect that money laundering volume is down as well, as shelter in place mandates disrupt normal drug trafficking and other criminal operations. Thus, you need to make sure that your financial crime detection thresholds are properly tuned to work throughout what may be an extended period of below average transaction volumes.

In particular, if you have rules and models built around set volume or dollar amount thresholds, you will need to reset these thresholds so that they can still detect money laundering during this period of decreased normal and criminal activity, perhaps by lowering thresholds in proportion to the decline in transaction volumes. A more accurate approach would be to modify these rules to consider volatility (e.g. standard deviation) instead of static thresholds. Building models based on volatility can help you evaluate behaviors in the context of average peer and individual activity, an approach that continues to work even as averages change.

The need for agility in times like these brings attention to one of the biggest inhibitors of rapid action within organizations: the age-old problem of data. No one has the time to spend extensive ETL cycles to make the necessary data available to the right locations at the right time. Therefore, it becomes paramount to ensure that you have the right architecture and capabilities in place to leverage your detection data pipeline for your data science and data engineering teams to test, tune and re-deploy your existing and new rules and models, supervised or unsupervised. You should also be able to able to run your rules, supervised models and unsupervised models against the same data pipeline.

Prepare for New Types of Money Laundering Schemes

In addition to adjusting your thresholds for lower transaction volumes, financial institutions will need to adjust them or create new ones to detect new money laundering and fraud patterns that are emerging to take advantage of COVID-19. Some examples include:

Pay Special Attention to Your Onboarding Program

As with any societal disruption, consumer fraud is on the rise, with scammers conning people with opportunities for test kits and vaccines (the U.S. Federal Trade Commission even made an “FTC Scam Bingo” card). And new government programs, such as the Small Business Administration (SBA) lending program in the U.S. and the Coronavirus Business Interruption Loan Scheme (CBILS) in the U.K., create opportunities for fraudsters to file false claims.

As distributors of the government lending program money, banks need to balance the need to quickly onboard new business clients—who urgently need funds—with their KYC obligations under their respective regulators. This is a tremendous challenge, as in our experience, it takes a bank an average of 26-27 days to onboard a new business customer. These dual obligations are already causing tension, with U.S. banks being accused of prioritizing existing customers, and banks asking FinCEN to let them collect customer information and verify it after the loan application is processed (FinCEN did not grant that request). Financial institutions will also need to make sure that their internal watchlists are updated according to any changes to sanctions that are implemented in response to COVID-19.

My view is that financial institutions can balance the needs for fast onboarding and thorough due diligence by streamlining their KYC programs in a few key ways. These onboarding enhancements can be useful not only to financial institutions but also for other institutions that need to onboard new vendors quickly to meet changing production demands due to COVID-19. In combination these improvements can give you the 360-degree customer view you need to onboard new customers as quickly as possible.

  • Leverage third-party data providers and entity resolution capabilities to gather and process the information needed to meet KYC requirements faster. Data sources, both internal and external, structured and unstructured, help with onboarding businesses as well as individuals by creating the most accurate risk profiles possible.
  • Make sure your KYC is deeply integrated with your compliance backend and case management capabilities. The previously mentioned third-party data should be integrated into your case manager via connectors so that analysts and investigators have all the information they need in one place to write reports and close out onboarding processes.

Changes Now Can Help You Succeed in the Future

Financial crime and compliance leaders are dealing with a lot right now, from managing employees that are suddenly working from home for the first time, to dealing with regulatory filing backlogs. That’s why the changes mentioned above can pay off big in terms of agility, efficiency and effectiveness over the long term. By making your detection capabilities more adaptable and flexible and by streamlining customer onboarding now, you will not only be prepared to successfully manage the coming weeks and months, but you will also save time in the future, as we expect fluctuating business conditions and changing criminal activity to become our “new normal.” These actions will also give you the resilience and agility you will need to ride out uncertainties like we are seeing today.