Four Innovation Tactics European Banks Can Use for Their Anti-Money Laundering Programs

This post discusses how anti-money laundering innovation can help European financial institutions address four key issues: COVID-19, increased lookback requests, new sanctions, and managing costs.

Amid COVID-19, Increase Flexibility

Global crises, like COVID-19, present a perfect environment for spikes in financial crime. Understanding this inherent connection, the European Union (EU) has launched a new Financial and Economic Crime Centre within Europol to tackle an expected surge in financial crime in the economic downturn triggered by the pandemic. Combined with expanded law enforcement and regulatory focus across Europe, the growing threat brings new challenges to financial institutions and their fraud detection/anti-money laundering programs. To succeed when resources are strained across their business, financial institutions need to infuse new levels of agility, precision, and intelligent automation into their financial crime and compliance management programs.

Financial criminals are adapting to the pandemic’s disruption to the global economy―staying home yet finding new ways to conduct their nefarious business. Organizations, including Europol and UK Finance, have warned of investment scams that take advantage of the financial downturn and websites posing as charities that could target citizens, businesses, and governments. Besides, criminals are exploiting the pandemic to recruit money mules via WhatsApp, Twitter, and other social media channels. This may enable them to launder cash from human trafficking, terrorism financing, or drug dealing, and criminals may use real people’s identities to target individuals with clean financial histories or government organizations in need.

In one case, financial institutions and authorities across Germany, Ireland, and the Netherlands uncovered a COVID-19 fraud scheme involving compromised emails, advance-payment fraud, and money laundering. Over 1.5 million euros were frozen after procurement for face masks was exposed as being fraudulent. Authorities also recovered €880,000 before it could be transferred to the criminals under the guise of “emergency funding.” Quick coordination with INTERPOL helped lead to arrests in April.

In this environment, financial institutions must adjust thresholds or create new ones to detect new money laundering and fraud patterns emerging. They must remain agile to test, tune, and re-deploy existing and new rules and models, both supervised or unsupervised. Besides, financial institutions should streamline customer onboarding to navigate fluctuating business conditions over the next few years successfully.

Respond More Agilely and Efficiently to Burgeoning Regulatory Requests

Financial institutions face a growing financial crime compliance burden at a time when their resources face tremendous strains. For example, institutions across the EU see an increasing number of look back requests, which historically involve massive amounts of manual intervention and data. Look backs are transaction reviews mandated by banking regulators to assess the effectiveness of their regulatory reporting process. Regulators are employing look back mandates more often in recent years, beyond just examining an institution’s procedures and controls. Financial institutions are asked to rerun their detection with different thresholds or scenarios, which becomes a costly and arduous process for the bank’s compliance, operations, security, accounting, and IT functions.

Streamline Sanctions Screening

We’re seeing a similar increased focus on elevating the intensity of sanctions screening. This is especially true of the U.S. sanctions, which have proliferated dramatically in recent years. This has had significant implications for EU companies, which seek to comply with “secondary sanctions” to continue to do business in the U.S. According to ControlRisks, the global sanctions landscape in 2020 is increasingly complex and less predictable. As the U.S. is introducing and enforcing sanctions more frequently, even with internal disagreement on the use of sanctions, the U.S. and EU are growing apart on sanctions policy. There are EU laws known as blocking regulations, which prohibit EU companies from following US secondary sanctions. The U.S. is encouraging its allies to adopt their sanctions, and extraterritorial sanction regimes are proliferating.

Adopting purpose-built applications powered by advanced analytics can help European financial institutions wrangle these complex requirements by keeping them up to date with sanctions changes and helping them discover and identify patterns―improving compliance while reducing costs and risk. The key is to focus on ensuring quality data, having the correct watchlist records, and segregating them accurately. Applying pre-defined rules that have been developed over many years based on real customer data and enhancing that with machine learning can help analysts improve their decision making.

Find Additional Cost Savings

The pandemic has created financial upheaval amid weak investment returns with market uncertainty as to the backdrop. COVID-19’s effect on business continuity and long-term value creation is a priority for banks as they navigate the imminent economic downturn and eventual recovery period. The pandemic’s impact is responsible for half of the expected credit loss expense that European banks reported in Q1 2020. According to EY’s figures, credit loss averages about €700 million per financial institution. Banks must be efficient and agile in how they manage their ongoing as well as unanticipated costs.

Another area of potential cost savings is leveraging the cloud. The cloud presents European banks an opportunity to create digital tools for consumers that provide speed and differentiation, thereby maintaining market share. Moving processes to the cloud, such as Know Your Customer (KYC) verification, holds promise for saving money and increasing efficiency. Keep in mind that European financial institutions are subject to rules and conditions―by the EBA, for example―before outsourcing to cloud providers.

Today, financial services must fine anti-money laundering solutions that are agile and cost-efficient, that meet dynamic policy requirements, and rise to the challenge of fighting sophisticated financial criminals.