By Carl Seiler, Senior Managing Director and General Counsel, IQ-EQ
It’s been less than a year since the US Congress passed the National Defense Authorization Act (NDAA), which included the Anti-Money Laundering Act (AMLA), the most substantial and sweeping legislative reform to anti-money laundering regulation in the US since the Patriot Act. The NDAA’s most relevant change was the addition of the beneficial ownership disclosure requirement, a requirement that has long been standard in the EU and UK but had previously not been part of US regulatory schemes. This requirement mandates that reporting companies, such as broker-dealers, disclose beneficial ownership information – that is, information about those who benefit from certain financial transactions despite not being the legal owner – to the FinCEN regulator. This type of sweeping reporting requirement is a hefty technological lift for companies of all sizes and has quickly created hurdles for the largely manual anti-money laundering (AML) and know your customer (KYC) sector in the US.
The NDAA has underscored a challenge felt by financial services organizations worldwide: the need to comply with regulatory guidelines is a challenging task that continues to grow more complex each year.
The stakes of a misstep are high and include reduced revenue, punitive sanctions or even criminal prosecution, so it’s critical to walk this tightrope carefully. But the old methods — reliance on printed documents and tracking data with 20th-century processes like pen, paper and manual data entry — aren’t keeping pace with the speed of change.
The passage of the NDAA and AMLA have pushed increased investment in AML start-ups across the US, while the introduction of a digital assets bill in July of this year – which seeks to address deficiencies and ambiguities in trade reporting, consumer products as well as AML and KYC procedures for digital assets – has also shone a spotlight on AML reporting tech. Overall, increased scrutiny around AML and KYC processes is leading to tech investment across the board, and that likely will not slow down anytime soon.
For organizations looking to transform their tech stacks in the face of these challenges, many are looking to SaaS (software as a service) tech to help with KYC and AML compliance. This technology can scan, mine and ultimately learn from large quantities of data to identify high-risk individuals and transactions, reducing the burden on overwhelmed compliance officers and minimizing operational risk.
AML & KYC in the 20th century
If your firm has already begun automating processes, this might seem antiquated. But many firms continue to rely heavily on outdated ways of working: signing physical forms or manually entering customer information into databases. The drawbacks and risks associated with manual processes are vast, such as massive labour costs, human error, increased exposure to corruption and fraud, lost documents, incomplete audit trails and a slow onboarding process which leads to high customer churn.
With that, it may sound like adopting the latest technology is an obvious choice — but of course, it isn’t that simple. Most firms are looking to lower costs and doing so while facilitating innovation and supporting legacy systems is a near-impossible task, at least, from a short-term perspective.
How technology can help you compete
Customers have adjusted their expectations of financial firm performance based on their experiences in other industries. In today’s market, regardless of channel, they want seamless interactions and real-time (or near-real-time) service.
It’s also a tactical approach. Automating and implementing more intelligent AML protocols allows for more accurate identification of red flags and reduced false-positive rates. Where the old model made it difficult to see the complex interdependencies of modern money laundering schemes, technology can accurately analyze massive volumes of data in an instant. Some benefits of automating AML and KYC processes include:
- Streamlined customer onboarding. The desire for a smooth, seamless onboarding experience is stronger than ever, and customers are prone to abandon onboarding processes that feel cumbersome.
- Accurate client risk profiles. Technology can automate the creation and maintenance of client risk profiles, assigning numerical risk scores based on data and monitoring changes over time. This enhances due diligence and ensures continued compliance throughout the client life cycle.
- Fewer false positives. The sheer volume of false positives is a significant pain point for compliance teams. Attaching alerts to high-quality data reduces volume and ensures thorough investigation into cases where an investigation is genuinely warranted. Technology can even recommend next steps based on past actions and predicted risk.
- Improved beneficial ownership. Today’s SaaS products can “read” data from both databases and scanned documents that previously required manual entry. For compliance teams working their way through massive piles of data, technology improves the ability to draw accurate conclusions for a risk-based approach. Due diligence on beneficial owners is a point of increasing focus worldwide, and technology supports firms’ efforts to comply without overwhelming staff.
- Automated audit trails. When client onboarding is completed within a compliance technology, there’s no need to maintain manual records or search for misplaced documents. A well-built system maintains itself, and adaptive technology tracks every interaction automatically, so you’ll always know who completed which actions and when. When regulators ask for an audit trail, well-prepared firms can easily supply one with the click of a button.
- Managing regulatory change across markets. The regulatory environment is ever-changing, particularly as organizations navigate international borders. Technology can adapt to changing requirements in real time, tracking regulations worldwide and automatically identifying information gaps and creating corresponding alerts. This reduces the burden on compliance teams to hit a constantly moving target.
The benefits of automation outweigh the risks
Many financial services firms have been reluctant to implement new technology that touches AML and KYC protocols as they aren’t sure how regulators will react.
Data security and governance are top of mind, as are concerns about the logistics of migrating to new software systems and risking sensitive customer data in the process. But the benefits of adopting cutting-edge technology far outweigh the risks, so it’s well worth exploring the necessary steps now to position your firm on the leading edge.