A quantum shift

Enterprise-wide financial crime management is becoming mainstream reality, says Norkom's Hilary Duffy. But those that combine it with a risk-based approach will reap the most reward

The move towards an enterprise-wide approach represents a quantum shift in financial crime management. And it's clear that, despite the considerable barriers to its achievement - decentralised management structures and siloed technologies - that shift is under way and gathering pace. Twenty-seven percent of research respondents have implemented enterprise-level technologies that draw information from their disparate detection systems to rationalise investigation management, overcoming the technology barrier without an expensive rip-and-burn strategy. In addition, 79% tell us their anti-money laundering (AML) activities are now consolidated under a single reporting line. The number is only slightly lower (66%) for fraud. More than half of respondents (53%) have gone a step further by combining AML and fraud activities. Forty percent have achieved this across their entire organisation, while 13% are progressing towards that goal, having achieved consolidation in at least some geographies. It's clear that long-established bastions are beginning to topple.

An appetite for risk

The gritty determination that characterises the move towards an enterprise-wide approach is equally evident in the way institutions are addressing risk. This year's research tell us that 72% of financial institutions have responded positively to the regulators' demands that they adopt a risk-based approach for their AML activities. The figure is only slightly lower, at 69%, for fraud. The trend looks set to continue: a further 16% say they'll adopt it for AML over the next 12 to 24 months, 10% for fraud. The risk-based approach is being adopted with almost as much enthusiasm in fraud departments, where it is not required by regulation, as in anti-money laundering departments, where it is.

This is hardly surprising. After all, the economic benefits on offer are considerable. Enlightened organisations recognise, for example, that if, during the customer due diligence (CDD) process, 80% of new customers can be clearly identified as low risk, justifying a minimal verification process, most new business can be brought onto book quickly, leaving only a small minority to pass through a more rigorous, and therefore time-consuming and costly, process.

More than four-fifths (84%) of our respondents that have instituted a risk-based approach confirm they've been able to bring new business on board more quickly as a result, speeding up revenue generation and improving customer responsiveness, as well as easing the investigative cost burden. Sixty-five percent of those yet to make the move anticipate similar benefits when they do.

The benefits are not restricted to customer due diligence activities undertaken at account opening. If monitoring activities can be intensified for customers with a high risk profile and relaxed for those whose activities are more straightforward, expensive investigatory resource can be allocated more meaningfully, with a resulting reduction in false positive rates and increased investigatory success. Our research tells us that organisations are hot in their pursuit of this objective. Of those that are using a risk-based approach in CDD, 87% are also determining risk profiles that will dictate the degree of monitoring dedicated during the lifetime of the account. Furthermore, the overwhelming majority (98%) appreciate that a risk allocation is only truly valuable if it can be regularly reviewed and adjusted as an account holder's circumstances and financial dealings change.

The challenge being met

It is important not to underestimate the size of the challenge this represents. It's one thing to allocate a risk profile to a customer at account opening, quite another to make sure it is constantly re-evaluated as the customer's circumstances change. Over one-fifth (21%) of our respondents are to be applauded for having technologies in place that monitor behaviour and automatically suggest changes to the risk profile. Others are relying on manual, and frequently irregular, processes to achieve this, which are unlikely to meet regulatory scrutiny long term or deliver the optimum economic benefits.

But, to turn full circle, the re-evaluation of technologies already under way to address the enterprise-wide management challenge will help here, too. As institutions re-invest to support organisational consolidation, they would be wise to look for technology solutions - and they are certainly available - that address both issues in tandem.

As the move towards an enterprise-wide approach to financial crime gathers pace, the benefits of a risk-based approach will be realised in full, making it clearer than ever that, in this case at least, what's good for the regulator is good for business, too.

Hilary Duffy is a manager with Norkom Technologies, a specialist provider of financial crime technology. Contact Hilary on 00 353 1873 9600 or email [e-mail] Norkom is a leading provider of financial crime and compliance solutions to the global financial services industry. Used by clients in over 100 countries, its solutions are proven to reduce financial losses, protect reputation, improve operational efficiencies and lower the total cost of ownership.