Financial institutions around the world are going through a rapid transformation of risk and compliance processes to cope with the onslaught of regulatory requirements of their jurisdictions. To comply, institutions regularly add logical rulesets to their anti-money-laundering (AML) systems resulting in many alerts, all of which must be reviewed.
In October 2016, the Monetary Authority of Singapore (MAS) fined two major banks for over 1 million SGD each for breaching AML requirements. To prevent additional penalties these banks are now tightening controls by adding processes to counter deficiencies discovered by the MAS. These measures will likely increase the number of suspicious alerts for review by employees of the banks’ financial crime divisions.
In 2015, the Joint Financial Intelligence Unit (JFIU), Hong Kong’s legal arm for managing and analyzing suspicious transaction reports, received over 42,000 reports with 82 percent filed by the banking sector. In 2016, the number of suspicious transaction reports increased by 80% compared to the previous year, with over 76,000 reports received by the JFIU and 90%t of them filed by the banking sector.
The phenomenal growth in suspicious transaction reports filed with the JFIU suggests that behind the scenes, banks are processing higher volumes of alerts at a rapid pace. To cope with the demand for processing alerts generated by their control systems, there is a huge appetite for experienced resources who can immediately step in and help clear the backlog of alerts.
A cursory search for “AML” on local employment websites results in hundreds of job opportunities for analysts, officers and managers, supporting the theory that this increase in alerts is spurring the demand for additional resources to tackle the problem head on.
But is such a hiring drive the best solution to the problem? Do banks have unlimited budget to hire unconditionally for every percentage increase in alerts they must manage? In today’s restrictive environment, the reality is that banks are under extreme pressure to reduce operating costs. Hiring additional resources as a brute-force method to stem the tide of alerts may work as an interim solution, but keeping the high number of staff required to manage the alerts at an acceptable level would be extremely expensive.
In line with most cost reduction strategies, the key to fighting alerts is to simplify and reduce the process through automation. The conventional process of clearing an alert begins when the analyst downloads relevant data from multiple systems and then manually reviews the underlying account transaction details, profiles of the subjects and their transactional counterparties. The analyst then compiles his findings into an investigations summary report, uploads his supporting documents to a common repository and files the report for the regulator if the alerted transaction is deemed suspicious. Depending on complexity of the alert, standards of the bank and experience of the analyst, the entire investigations process can take from two to six hours.
To automate the alert clearing process, the analyst needs a tool which interfaces with different systems and consolidates relevant data. With a full set of data in place, the tool compares the alert against a pre-defined suite of related scenarios. Once the proposed scenario has been confirmed by the analyst, the tool generates a tailored summary containing alert details and account transactions, matching transactional counterparties against country sanction lists or known profiles of politically exposed persons (PEP). The analyst can then use this information in his final investigations report, significantly reducing manual effort and preparation time.
Compared with the current approach of manually compiling data from each system, the introduction of an automation tool enables the analyst to process a higher volume of alerts at a significantly faster rate. With the expected rise in the number of suspicious transaction reports being filed annually, automation is undoubtedly the way forward for banks to manage their alerts both timely and economically.
Jacky Poon is a Principal Consultant with Capco's Hong Kong Regulatory Compliance practice. He is currently leading a transactional monitoring project at a global bank.
The content and opinions posted on this blog and any corresponding comments are the personal opinions of the original authors, not those of Capco.