Let’s consider the industry sectors that make disproportionally large contributions to global GDP; legitimate sectors such as real estate, professional/business services and healthcare are obvious leaders, but money laundering – if one considers it as a real industry – would be a top contributor too. A United Nations Office on Drugs and Crime (UNODC) estimate puts global money laundering at two to five percent of global GDP, which amounts to $800 billion to $2 trillion per year.
Money laundering is becoming a global threat even as Anti-Money Laundering (AML) rules are becoming more stringent, and the associated costs of compliance continue to rise. Even with all the efforts put in by regulators, governments and the private sector, experts believe that 99 percent of money laundered is never caught. Why are existing AML and Know Your Customer (KYC) procedures not effective? More importantly, how can AML/KYC systems improve their performance and cost effectiveness?
Different regulators and obliged entities have their own requirements, processes and strategies. While there are commonalities, every AML/KYC program runs differently with little standardization within a jurisdiction or across divisions. This results in difficulties optimizing performance, or coming up with best practices.
The lack of prescriptive rules was intentional; regulators felt that creating a set standard would lead to compliance teams simply meeting the minimum requirements, as opposed to developing the most robust, effective program possible.
Unfortunately, money laundering rings are often run by sophisticated criminal networks; they continue to devise new schemes and techniques to exploit new vulnerabilities. Regulators, trying to do their best, often revise requirements. On top of all this, technology continues to evolve, presenting more options to consider. For compliance teams, this all adds up to ongoing change, continually having to revise their systems and procedures.
Balancing business needs
While compliance is compulsory, there are other business objectives that require consideration to create an effective AML/KYC program. If the onboarding process is too onerous, prospects could abandon and move on to competitors. Containing compliance costs is mandatory to ensure the overall cost structure of the business is healthy. Other compliance factors are also required; spending too much time and money on AML/KYC affects the ability to perform other compliance measures.
Fighting fraud with AI and ML
Learn how the 2008 financial meltdown paved the way for existing AML/KYC practices, and how FIs can work toward remaining compliant: