Companies increasingly have the advanced tools to combat financial crime, but as industry specialist Sujata Dasgupta explains, the fragmented nature of financial compliance programs often means the biggest benefits remain unrealized.
Financial crime is steadily rising around the globe, not just in volume but in complexity, scale and sophistication, so it’s no surprise that the cost of compliance is expected to touch about $250 billion this year for KYC and AML alone.
What continues to surprise me is that the adoption of advanced technologies by financial institutions remains low and patchy.
After all, the virtues of machine learning (ML) and other forms of AI, robotic process automation (RPA), dynamic biometrics, graph technology, privacy enhancing technology (PET) and many more are well-known and have long been acknowledged by the industry to address the challenge of reducing compliance cost while improving the effectiveness of crime prevention and detection. Moreover, advanced technology can enhance operational efficiency for banks and financial institutions.
So what strategy is needed to drive enterprise-wide digital transformation in compliance? And can digital governance actually accelerate maturity in fincrime modernization, reducing costs while improving effectiveness and efficiency? Let’s take a closer look at the problem.
Bridging the gap: Fragmented ownership of FCC digitization in FIs
Financial crime risk and compliance within FIs is governed by multiple units. KYC-CDD, sanctions screening (for customers and transactions), AML, fraud control, anti-bribery and corruption and so on. Within these, there are further splits based on lines of businesses: retail, corporate, private wealth and others. Change and transformation decisions are generally driven by owners of the compliance function, while the corresponding technology implementations are executed by IT teams of the respective sub-units. The result of this structure can lead to fragmented ownership of change across the overall financial crime compliance ecosystem.
For instance, multiple units across a financial institution may have adopted AI, machine-based decisioning and other advanced technology-enabled solutions to automate manual processes, such as digital onboarding with automated workflows for KYC. Machine learning-based false-alert reduction for sanctions/PEP screening and AML is another example, along with L1 alert disposition, entity resolution of corporate customers for CDD, AI-based adverse media screening, network and linkage analysis.
However, these initiatives often remain sporadic at an enterprise level, with individual point solutions addressing only the specific needs of a particular unit (or sub-unit) rather than being applied holistically across the organization.
There are examples of financial institutions that have invested substantially in digital initiatives for their fincrime compliance programs but are still found deficient by regulators, resulting in heavy penalties. The fragmented nature of their digital changes restricted the financial institution from reaping the full value of the innovative solutions they invested in.
Digital governance roadmap for FCC modernization: 5 key pillars
Solving the complex problems around financial crime risk and compliance can’t be achieved in patches. When it comes to maturing from “start-up” to “scale up” mode, a cross-functional model of digital governance is imperative. Here’s how to design a model that can accelerate the journey:
- Employ a governance framework: Lack of collaboration among sub-units is a key constraint in enterprise modernization. A governance layer unites all these departments while assuming digital leadership, establishing accountability and change management ownership, enabling cross-function cooperation, co-creation and adherence to common standards.
- Design a digital strategy: Digital transformation requires considering the dependencies and synergies among sub-functions: data, workflows and risk models applicable to KYC-CDD, for example, and screening and transaction monitoring for AML or fraud. A strategic vision for digitization over the next three to five years is a key driver here. A compliance-first approach supported by future-proof technologies can make for a strong foundation.
- Assess digital maturity: Understanding digital maturity at an enterprise level, assessed on a few parameters (digital strategy, governance, people, process, technology and others) can reveal whether the enterprise’s efforts are nascent (conceptual), emerging, moderate, transformed and so on. The roadmap for a digitization journey rests on this maturity, and a plan to achieve the desired maturity level must be drawn from here.
- Design a digital target operating model: Moving from fragmented and mostly manual to integrated and mostly digital is a huge transformation and requires a redefined target operating model. This must cover redesigned financial crime compliance processes, workflows, customer touchpoints and human interventions across all functions to align with the digital strategy.
- Monitor continuously: FIs are constantly introducing new channels, products and market offerings. This requires a continuous monitoring of the financial crime compliance aspects the company must adhere to due to these innovations, including how they can be brought into the fold of FCC digital governance to align with the target vision. This can help break down silos, avoid duplication and maintain digital maturity of the organization.
By adopting a digital governance framework, financial institutions can unify the digital aspirations of the various financial crime functions, foster collaboration and optimize the use of resources. Cross-function synergies across data, workflows and reporting can help ensure a harmonized digitization journey in financial crime compliance.