COVID-19 has caused a significant shift in the way financial institutions are doing business. Fenergo’s Rachel Woolley discusses what they must do now in order to minimize financial crime.
As seen in a recently released report, the penalties issued to financial institutions for AML and KYC breaches reached over $36 billion between 2008 and 2019, an increase of 160 percent since 2018. Despite the impact to supervisory activities globally as a result of the COVID-19 pandemic, we have continued to see significant fines imposed in recent months. While we may see a reduction in the volume of fines issued in the coming 12 to 18 months as a result of the crisis, financial institutions must be vigilant to financial crime, particularly as the crisis opens the door to more illicit behavior and financial crime.
Market volatility has created opportunities for financial crime, and criminals are working overtime to exploit vulnerabilities, including the misuse of financial services and bypassing customer due diligence measures. There has also been a significant increase in COVID-related fraud, with criminals engaging in telephone fraud, fishing scams and even developing fake websites for personal protective equipment (PPE). These criminals are preying on the uncertainty and fear people are experiencing during times of crisis.
Global industry bodies and regulators have issued notices outlining guidance for financial institutions, highlighting the need for vigilance against financial crime and the importance of reporting suspicious activity. Many have encouraged the use of digital technology to ensure continuity of the financial services industry in light of social restriction measures and to mitigate the risk of financial crime. With all these factors coming in to play, now more than ever financial institutions must ensure they have adequate processes and procedures in place to detect and prevent financial crime while meeting regulatory obligations.
Regulatory Expectations Are Likely to Increase
Client onboarding requirements are a key concern for banks and financial institutions, with increasing focus on the effectiveness of AML and KYC processes and controls. Initial onboarding and ongoing monitoring processes are often manual, paper-heavy and labor-intensive, and many financial institutions still rely on desktop procedures and Excel data to meet compliance obligations. Additionally, client data and documentation are often stored across a number of systems, which can lead to inefficient and ineffective onboarding processes. Furthermore, data is often siloed by department or branch, rather than stored digitally in one centralized repository. This can also increase operational risk, due to misplaced data and documentation, high rates of error and duplicated activities. A disjointed approach can also result in onboarding delays and client frustration due to unnecessary and repeated requests. In fact, a recent survey found that financial institutions are losing up to $10 billion in revenue a year due to poor data management practices.
Financial institutions must ensure their data policy is up to scratch while also ensuring continued compliance with evolving requirements and obligations. This can pose a significant challenge to financial institutions given the pace of regulatory change since the financial crisis in 2007. Between 2009 and 2015 alone, 50,000 regulations were created across the Group of 20 (G20). The regulatory landscape has continued to evolve in recent years, with increased regulatory reporting obligations, OTC Reform, stringent data protection requirements and an emphasis on AML effectiveness with further reform expected in the coming years.
Recognizing the challenges banks are facing, regulators have issued guidance on meeting compliance obligations and addressing financial crime risks during the crisis. The Financial Crimes Enforcement Network (FinCEN) in the U.S. noted they are monitoring Bank Secrecy Act (BSA) reports relating to suspicious activity connected to COVID-19, highlighting several emerging trends such as investment or product related scams. Meanwhile, the Office of Foreign Assets Control has encouraged financial institutions to communicate any concerns with meeting reporting obligations. Sanctions violations account for 59 percent of fines issued between 2008 and 2019 with the majority issued by OFAC. Regulators globally, including the U.K.’s FCA and AUSTRAC in Australia have published guidance on flexible customer identification and verification measures that can be implemented during the crisis.
Digital Transformation Lies at the Heart of Banks’ Success
In order to streamline the onboarding process and create a frictionless client journey, financial institutions need to invest in the right technology that ensures a risk-based approach to AML compliance.
In the past, financial institutions would increase resources to address emerging concerns; however, digitizing compliance processes and using automation can address these challenges more efficiently. Regulators are encouraging financial institutions to utilize digital technology, which can also lead to more effective risk mitigation.
Through increased process automation, manual processes can be more streamlined and drive efficiencies across the spectrum. Advanced technologies and capabilities such as natural language processing (NLP), machine learning (ML), optical character recognition (OCR) and Identification and Verification (ID&V) technology enable FIs to collect client data by extracting the required information and text from scanned documents, which can then be cross-referenced against other data sources internally and externally. This technology is readily available, and the pandemic is highlighting the need for financial institutions to accelerate their digital transformation strategies or risk being outpaced by digital-first competitors.
COVID-19 Has Forced Banks to Accelerate the Move to Digital
The current climate has forced banks to digitize further and faster. This situation has brought to light that financial institutions lack the technology to onboard customers remotely, which has been highlighted by increased social distancing measures in recent weeks. Many are struggling to operate with reduced staff and closed branches, security issues and customer service concerns while also meeting AML and KYC requirements.
In the U.S., this became especially important as many small businesses sought to access critical funding provided for under the CARES Act, such as the Payment Protection Program (PPP). As a result of widespread bank branch closures, it is no longer possible to apply for a loan or open a business bank account in person, and many banks are unable to onboard new customers remotely. Implementing digital onboarding processes could enable customers to access financial services remotely and enable financial institutions to meet compliance obligations. This is particularly important given the number of fraudulent PPP applications that are now coming to light.
The COVID-19 pandemic further highlights how imperative it is for financial institutions to leverage the use of digital technology in support of client onboarding processes, allowing them to operate completely digitally. It also highlights not only how, in times like these, it must be a top priority to remain vigilant about emerging financial crime risks, but also how digitization can help to ease some of the operational challenges. This technology is no longer a “nice to have,” but rather a necessity to address inefficient data management, enhance customer service and ensure the detection and prevention of financial crime.