The financial crimes paradox: The cost of compliance is up. But so are fines. What's the answer?

When it comes to financial crimes, 2021 is shaping up to be a record-setting year for fines. According to Kyckr, regulators fined almost two dozen banks a cumulative $1.2bn in the first quarter alone. This means the industry is on track for more than a 50% year-over-year increase in fines.

But any systematic inadequacies that exist are not from a lack of investment. In fact, global spending on anti-financial crime programs has been steadily rising for years. And, partly due to the pandemic, spending increased by about a third again within the past year, according to LexisNexis.

So, why are financial institutions still lagging behind regulatory expectations despite all the investment?

Today's know-your-customer challenges

Specific to the know your customer (KYC) space – seven factors contribute to this apparent paradox:

1. Subpar collaboration: Unfortunately, industry stakeholders still aren't collaborating well, which leads to duplication of effort and information silos. For example, KYC information may not be shared across different departments within a bank. And banks may not share KYC best practices with each other.
2. Changing customer preferences: Post-pandemic customer preferences are heavily weighted toward digital experiences over branch visits and/or heavy relationship management. This makes it is harder for banks to get to know their customers in the traditional way – namely, by placing eyes on them.
3. Compliance complexities: Based on a corporate customer's entity type, jurisdiction, and products, there can be great complexity in policy requirements.
4. Underestimated risk: Without the proper framework in place, financial institutions might be overlooking data points that would recategorize customers into riskier buckets.
5. Manual processes: Collecting documents and data from the customer manually not only degrades the customer experience, but also contributes to operational inefficiency.
6. Compounding backlogs: Managing and keeping customer data up to date can be challenging, and backlogs inevitably lead to regulatory scrutiny and remediation efforts.
7. Poor customer experience: The onboarding process often leaves customers with a poor experience, facing extensive lead times and uncertain outcomes.

Pitfalls to current solutions

To resolve these problems, financial institutions typically invest in one area. But the 'silver-bullet' approach just isn't working.

For example, institutions that work with trusted advisors to design best-in-class operations are often disappointed to find that they cannot practically implement the new strategy required to achieve their desired future state. At least not with their existing resources and technology.

Likewise, technology solutions alone cannot guarantee large-scale efficiencies in KYC programs. There are just too many other variables. For example, the processes underpinning the technology may be inefficient. The bank's data management processes practices may be poor. Or the bank's staff may not be properly trained. These are just a few of the many reasons technology providers shy away from guaranteeing return on investment for KYC programs.

Still other banks try to solve the problem by hiring an army of external consultants. But if processes are broken or inefficient, this just leads to more staff being stuck with the same bottlenecks and a variance in the quality of output from internal and external staff – which can lead to more regulatory scrutiny.

A holistic approach

Institutions, therefore, need to adopt a more holistic approach. This means evaluating their KYC programs across people, process, and technology.

This will allow banks to ensure that their defenses are not only robust and compliant with regulation, but also balanced against the needs and expectations of their customers, who increasingly demand more seamless and personalized experiences.

A holistic approach can deliver enhanced productivity, more accurate risk outcomes, major cost savings, and a materially better customer experience.

To get started:

• Assess your current function and processes: A fact-based understanding of your compliance function's cost and performance drivers, including any gaps and areas for improvement, is critical. Banks can achieve this by conducting an assessment of their program and processes using either internal resources or a reputable third party that specializes in financial crime risk management optimization. The right external partner can also benchmark your bank's program against industry best practices.
• Identify and optimize the necessary technologies: Redundancy of technologies across functions is common. For example, a historical division between AML and anti-fraud has created disconnects and data silos. This means institutions often under-leverage the technology they have at their disposal. Understanding how best to use the technology you already have and what additional technologies are available to support your KYC efforts is key to success.
• Transition to an adaptive workforce: An adaptive workforce is one that blends the strengths of humans and machines. Banks can automate most KYC processes. For example, banks can use robotic process automation to automatically gather, compile, and validate customer information and to screen, assess, and service their customers. Automating KYC processes reduces costs, increases efficiency, minimizes the risk of errors and security breaches due to human intervention, and improves customer experiences. When manual oversight is required, it can easily be outsourced, reducing operational complexities and allowing in-house teams to focus on more strategic initiatives.

Despite the billions being invested, traditional approaches to KYC are not working. A holistic approach to KYC is the answer to the apparent paradox of rising investment and fines. And it is your organization's best defense.