Between 2009 and end of 2017, regulators in the US and Europe have imposed $342bn of fines on banks for misconduct, including violation of AML rules. Estimates suggest that is likely to top $400bn by 2020. Responsible for monitoring money laundering or theft, and detection of any potential financing of terrorism (CFT), FIs must perform KYC procedures for every customer to verify their identity. This complex task today requires regtech tools to understand data patterns, and to assess, flag & notify every suspicious transaction. Large FIs spend $150m+ on KYC with an average of 32 days to onboard business clients.
Introduced in 2001 as part of the Patriot Act, KYC laws are obligating FIs to deliver on two requirements: Customer Identification Program (CIP) and Customer Due Diligence (CDD). CIP is a particularly important element of performing KYC for any FI in relation to onboarding and CX/UX/UI. To help the government fight the funding of terrorism and money laundering activities, federal law requires FIs to obtain, verify, and record information that identifies each person who opens an account.
Our study on 38 banks across the globe analyzing their third-party regtech implementations found that the regtech solutions in the space of eKYC/real-time AML screening, AI/ML-based fraud prevention, and real-time compliance monitoring had the highest level of adoption by banks. More than 15 banks had implemented eKYC/advanced AML and sanction screening solutions. Solutions in the space of real-time compliance monitoring and AI/ML-based fraud detection were implemented by eight banks each.
A number of FIs that are in close collaboration with regtech startups have seen measurable improvements in regulatory procedures. An implementation of a CDD/KYC software by a regtech startup at an FI resulted in a 37% improvement in case handling time and efficiencies for the medium client risk category alone. This reduced average handling time for each case down from 27 hours each to 16.47 hours, shaving off a cumulative average of 27,380 hours in total for the medium risk client category for the investment banking client.
As regulatory environments become increasingly more complex, the silos of unstructured data generated by disconnected business functions, inefficient processes, and lack of standardization lead to significant resource expenditures on data collection and organization. According to the Cost of Compliance 2017 Report, Thomson Reuters captured 52,506 regulatory alerts from over 750 regulatory bodies averaging more than 200 updates a day.
Moreover, 300+ million pages of regulatory documents will be published by 2020 and 600+ legislative initiatives need to be cataloged by a medium-sized sell-side institution in order to have a holistic view of their rulebook. Analysts today spend 90% of their time only on data collection and organization, and only 10% on data analysis.
Keeping up to date with the sheer volume of regulatory information being published is a perennial challenge. FIs are increasingly relying on technology as a key enabler in this ongoing challenge to stay on top of regulatory requirements. Large US and European banks are spending as much as $20bn a year on technology to help them comply with the newly evolving regulations in increasingly complex regulatory environments.
Compliance costs for FIs amount to substantial parts of total expenses, with a negative correlation between the size of the institution and the percentage of total costs. Having on average 10–15% of their staff dedicated to compliance, banks globally are spending in excess of $270bn per year on compliance and regulatory obligations. Up to $4bn a year for some banks covers demands ranging from checks to prevent money laundering, to requirements to give more data to regulators for stress tests, FT estimates.
Those investments, however, fade in comparison to the cost of misconduct financial institutions are continuously facing.
“Global banks’ misconduct costs have now reached over $320bn – capital that could otherwise have supported up to $5trn of lending to households and businesses.” – Mark Carney, Governor of the Bank of England (March 2017), Cost of Compliance 2017 Report
In response to ever-increasing regulatory complexity, technology startups developed tools to address the main issues across use cases. There are 660+ regtech startups operating around the world, 100+ of which are in the AML/KYC/CFT segment – one of the largest segments along with authentication and fraud prevention. Pendo Systems is one of the regtech companies with experience across a number of use cases; AML/KYC, in particular. The Pendo Platform allows institutions to digitize key AML documents and automate the capture of data against standards to dramatically improve process capability while reducing the cost of compliance by creating structured data sets ready for straight-through processing and available cross-enterprise re-use to support Single Client View.
Pendo’s AML Model Enrichment Use Case leverages unstructured data sources not previously available to transaction monitoring systems (TMS) to expand and enrich the corpus of sources available for analysis and expedite investigation processes. As a result, institutions can demonstrate that they are actioning investigations in a timely manner, enhancing tuning capability and freeing-up financial crime investigators with more productive alerts to review.
Sign up for the “Digitizing AML" webinar by Pendo Systems for a lively and engaging discussion about all things AML with Ann Heron (Chief Strategy Officer, Pendo Systems) and Susan J. Galli (President, Galli AML Advisory LLC).