Redressing the balance in financial crime compliance

A new report by LexisNexis Risk Solutions provides fresh insight into the changing financial crime compliance landscape. Despite spend often appearing heavily skewed towards people rather than technology, the research paints a promising picture of a sector fully invested in the need for automation, integration and full digital transformation.

One of the many preconceptions shared by market commentators is that the financial services industry lags when it comes to implementing technology solutions to manage financial crime compliance.  

Numerous studies contribute to this narrative. These include the Cutting the Cost of AML Compliance research published by LexisNexis Risk Solutions last year, which revealed UK banks are spending almost £30bn annually complying with AML regulation, with three-quarters of budgets spent on people and only a quarter on technology.

The company has now published a follow-up report, Tech Blockers 2022, to better understand and validate the sector’s focus on people-centric delivery and whether this balance is expected to change in the near future. 

Working in partnership with Oxford Economics, LexisNexis Risk Solutions interviewed 16 c-suite executives and found, on average, they currently spend 1.5 to three times more on people than technology in order to solve financial crime compliance challenges. And it’s not just the more traditional or established businesses – the challengers and fintechs, with technology at their core, are also spending significantly more on people.

Whilst this new research largely corroborates the people vs technology split as the industry norm, it also offers fresh perspectives and adds important context. It shines a light on the underlying organisational, financial and procedural drivers behind firms’ approaches to AML screening, and uncovers a strong appetite for evolution, automation and digital transformation. 

The respondents appreciate significant gains in both efficiency and cost effectiveness are achievable through a better use of data and technology. The Chief Operating Officer of one of the UK’s leading mortgage loan providers, for example, said: “The higher the technology adoption across different operations and compliance processes, the better it will be for us to automate and execute a robust, transparent and fool-proof framework to mitigate risks.”

With the spectre of recession looming, the recruitment market booming – driving up costs of new hires and making retention harder – and financial crime becoming increasingly sophisticated and hard to detect, it certainly feels the right time to embrace a more technology-driven approach. 

Online fraud is particularly rife, with UK Finance reporting Authorised Push Payment (APP) fraud losses in the UK reached £583.2m in 2021, up 39% from the year before. Criminals are changing how they move stolen money, such as by using social media platforms to recruit people as money mules.  

“We all operate differently following the pandemic and criminals are no exception,” said Nina Kerkez, an AML expert at LexisNexis Risk Solutions. “People are increasingly transacting online and so there are many more opportunities for the bad guys to defraud in the digital space. As they evolve, the industry needs to try and be one step ahead of them.” 

Overcoming the barriers to smarter tech adoption

Financial institutions are ready and willing to make better use of technology to tackle financial crime effectively, and deal with the demands of their customers and business strategies, so what’s stopping them? 

The Tech Blockers research highlights a number of hurdles, which can differ depending on the size and age of the organisation. For challenger banks and other newer players, technology integration is part of their DNA, but their relative youth often requires them to buy in data augmentation. For larger, older organisations, it’s usually the age-old issue of legacy systems and data not talking to one another. 

“Some tech stacks are old – and the people who built and understood them may have left, taking the knowledge with them,” said Kerkez. “And whereas regulation used to change perhaps once every 10 years, now it’s every year, so many organisations are simply patching up the holes in their systems as changes come into effect.”

There are also challenges common to all types of business, such as the time to implementation and the risk it may expose the company to, while testing is underway. One problem for the majority of organisations is the lack of technical skills to operate new technology and interpret results, with the Chief Digital Officer of a UK-based challenger bank saying: “We need to work more on the balance of technology and skilled employees.”

Then there are question marks over the quality of the data itself. Many firms struggle to gain adequate return on investment from adopting new technology because their current data is in poor shape and  hard to extract.  

“Your systems are only as good as the data behind them, which provides the foundations” added Kerkez. “How strong is your customer data for AML screening? If it’s not good enough, your systems will collapse. The industry also needs to become savvier in how it extracts value from data gathered for compliance. What else can it be leveraged for? Can you get a better understanding of your customers, and their needs, to then adapt products, services or operational processes?”

For the Chief Technology Officer (CTO) of a UK retail bank interviewed for the report, the short-term objective is to make their data “accurate, reliable, consistent and scalable.” Once that’s achieved, the bank expects to be able to automate further and reduce the number of people who need to look at the data.

Finding the right solutions

To help overcome such challenges, organisations are implementing cross-discipline training for their staff. A number of banks are educating their compliance teams in IT skills, to become more tech and data literate, and training their IT teams in financial crime compliance. Some institutions are also hiring in new financial crime IT specialists to help with specific business processes and the integration of specialist external providers.  

The CTO of a well-known challenger bank in the UK has built up a separate IT compliance team of around 30 people – half the size of the overall compliance team – to investigate technology-related compliance issues, such as user access, information security, data integrity and assisting in regulatory compliance. This is where the issue of spend becomes more nuanced: a recurring theme throughout the report is that much of the investment in people-related costs is actually related to harnessing technology.

“We’re also seeing financial crime compliance teams merging more with their fraud and AML colleagues, boosting the so-called FRAML method,” added Kerkez. “FRAML is a forward-looking, holistic approach rooted in the use of data and analytics, such as behavioural biometrics – which analyse the unique ways each customer interacts with their device.”

These new-look teams need more sophisticated software. Better integration between systems and data helps optimise the balance of people and technology, enabling automated processes where a machine deals with low value, high repeatability cases, whilst people focus on high value exception cases. 

Modern compliance teams are therefore looking to streamline their financial crime workflows, given that most currently use between five and 10 different data sources to assess risk at different points throughout the customer journey. Some are now shifting from this multi-vendor approach to a one-stop orchestration solution. Orchestration platforms, such as the API-led RiskNarrative platform, enable speed of delivery and integration, offering banks and other financial institutions a sharper competitive edge. 

Overall, the Tech Blockers report provides an encouraging glimpse at the near future of financial crime compliance screening. We can expect to see a major shift towards technology in budgets as leaders look to achieve greater efficiency whilst maintaining productivity. This lies in a harmonious blend of people and technology that cuts out many of the menial, repetitive tasks associated with screening, massively reduces false positives and allows humans to do what they’re best at – considered analysis and horizon scanning.