Banking: Siloed risk management leading to fraud - Survey | Sunday Observer

Banking: Siloed risk management leading to fraud - Survey

13 September, 2020

Siloed risk management approaches across banking operations, customer due diligence, sanctions screening and trade-based transactions are the root cause for systemic inefficiencies leading to fraud, a survey report on ‘South Asia Anti Money Laundering Preparedness 2020’ by Deloitte Touche Tohmatsu India LLP (DTTILLP) released last week stated.

According to the survey, meeting increased regulatory expectations and enforcing Anti Money Laundering (AML) compliance pose operational challenges to banks, even as 81 percent of respondents indicated that their AML program was compliant with all regulatory requirements. These challenges range from reliance on manual processes, inadequate data, and the inability to recruit or retain skilled staff.

“Historically, AML programs have been incident-driven with lean teams to manage response to events, or changes in regulatory developments. But that is no longer adequate today. With increased regulatory scrutiny, and expectations being “If you could have known, then you should have known”, banks need to move to a proactive approach to demonstrate their compliance to avoid fines, rather than rely on the traditional reactive approach.

This calls for investments in an integrated enterprise wide approach to manage compliance and prevent failures. Such an approach that provides a comprehensive view of customers and transactions can make it difficult for criminals to exploit gaps between business systems, databases and countries,” said Partner, Forensic, Financial Advisory, DTTILLP, K.V. Karthik. Overall, survey respondents also highlighted technology-related challenges such as high false positives, data accuracy and unstructured data limited integration with core banking systems, and incomplete coverage of all products and processes. This lack of technological maturity, and data governance appears to have had a cascading impact on every aspect of the AML program.

In the area of sanctions screening, nearly 60 percent respondents indicated that they are struggling with false positives. An ever growing and complicated sanctions list management has emerged as another major issue among the respondents.

In the area of trade-based money laundering, 86 percent of the respondents indicated screening trade finance transactions against internal lists, regulatory lists, and sanctions lists.

The respondents also pointed at challenges such as identifying hidden relationships between trade partners and ports, estimating pricing and invoicing of goods, and unavailability of a single automated system that can combine all screening data.

“In the past, banks have made discretionary investments in technology to meet certain immediate concerns around AML compliance.

These have created issues pertaining to the availability and quality of data, systems working in a siloed manner, and inherent module based limitations, leading to significant reliance on manual processes to close gaps in compliance.

Regulators today expect banks to have a consolidated view of customer transactions across businesses and jurisdictions, to identify any unusual transactions and behaviour, or potential sanctions violations. The current technology frameworks may pose a challenge to doing that and banks need to take a strategic and longer term view of technology investments,” said Karthik. 

The report proposes the need for strategic investments in re-designing AML compliance programs in banking and financial services sectors.

The estimated amount of money laundered globally in one year is 2−5 percent of the global GDP, or in the range of US $ 800 billion to US $ 2 trillion.Though the margin between these figures is huge, even the lower estimate underlines the seriousness of the problem that governments, banks, and FIs need to address. In South Asia particularly, the rapid adoption of online payments and wallet technologies means banks and FIs have had to fast-track and enhance their know your customer (KYC), and transaction monitoring processes.The Covid-19 pandemic has further accelerated digital transaction volumes, changing customer behaviour. As a result, efforts to combat money laundering need to be increased. As a result, the efforts to combat money laundering need to be increased.

“In this backdrop, we wanted to understand the preparedness levels of banks in South Asia to meet revised regulatory requirements and challenges faced by them.

“We undertook a survey of leading banks and FIs in India, Sri Lanka, and Bangladesh in January−March 2020. We hope that the survey report will influence discussion and debate among banks, practitioners, regulators, and governments on how to improve AML and counter terrorist financing efforts,” the report stated.