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The financial crimes paradox: The cost of compliance is up. But so are fines. What's the answer?
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?
Specific to the know your customer (KYC) space – seven factors contribute to this apparent paradox:
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.
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:
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.