Support for new approaches to tackle money laundering have a long way to go among Asia-Pacific lenders, with banks fearing that without a push from local regulators, they might never get there at all.
High profile cases such as the 1MDB scandal, coupled with an uptick in the frequency and severity of fines for noncompliance, have made scrutiny of financial firms’ AML controls a higher priority among regional regulators. But fines and scrutiny alone don’t seem to be enough to part banks from current simple rules-based approaches to monitoring suspicious transactions.
“Regulators have got to stop being okay with how things currently are,” said Richard Carrick, regional head of financial crime assurance for the Asia-Pacific region at Barclays, at OpRisk Asia in Singapore today (May 28). “They are fine with the transaction monitoring and the sanction rating system we all use, which everybody knows throws out the 95% false positive across the industry.”
In December, the US Federal Reserve released a policy statement talking up the prospect of banks using new technologies to fight financial crime. However, they also said they would not penalise banks that maintain effective defences but choose not to pursue innovative approaches. US banks faced fines for anti-money laundering breaches of $1.37 billion in 2018.
Though many Apac banks have explored the use of machine learning-based techniques – helpful for sifting through vast reams of transaction data in search of patterns of suspicious behaviour – in the fight against money laundering, it might take a similar intervention from regional regulators to top the balance, said Carrick. Maintaining the status quo leaves banks with a “false sense of complacency”, he added.
“I always say banks don’t manage financial crime; they manage the regulatory risk associated with financial crime,” he added.
Regulators in Asia-Pacific have been gradually encouraging banks to leverage new technologies to provide new solutions to the risks they face, while banks have been seeing the potential in such technologies to reduce cost, boost efficiency and create greater risk oversight. Singapore in particular could be leading that effort in the region, dealers said.
The Monetary Authority of Singapore has created a financial technology regulatory sandbox to enable financial institutions and fintech firms to experiment with new financial products or services – with appropriate safeguards to contain the consequences of failure – an approach also taken by the UK’s Financial Conduct Authority.
“Among the regulators [in Apac], MAS is probably well ahead in terms of explaining what they are expecting in terms of using these solutions,” said Praveen Jain, Singapore-based head of financial crime compliance at Standard Chartered, speaking on the same panel.
Last year, the watchdog also created a ‘proof of concept’ scheme to fund Singapore-based financial institutions and technology providers’ experiments on nascent technologies. Applicants can get reimbursement for costs such as personnel, equipment and licensing of intellectual property. The year before, it unveiled a grant scheme aimed at fostering use cases for artificial intelligence in the financial sector.
Banks hope to use machine learning to augment rules-based systems to monitor existing transactions for money laundering, supplementing the human resources that are used to investigate false positives, transaction monitoring and screening.
“We’ve seen an army of people provide rationale for discounting all of these thousands of false positive red flags,” said Barclays’s Carrick, adding that the technology will help save that cost. “If you could have greater oversight of the risk through using things like AI and data analytics to get a 360-degree view of your clients, you could probably slow down or reverse some of the undue risks.”
Editing by Tom Osborn