It’s a mistake to assume that smaller financial institutions don’t catch the eye of regulators because of the size of their operations. While global players are often mentioned when there’s news about non-compliance, small and mid-sized financial entities are equally vulnerable to financial crime.
Unfortunately, decision-makers in some smaller financial institutions fail to understand the effects that anti-money laundering (AML), know your customer (KYC), and sanctions violations have on their business. Such a mindset causes them to adopt a lackadaisical approach toward crime prevention in their respective companies. This, in turn, increases their risk of getting caught up in financial criminal activity.
The Cost of Compliance
It is estimated that the global financial sector spends around USD 180.9 billion on efforts to maintain financial crime compliance. On average, labor costs account for more than half of the compliance expenses at 57 percent. A sizeable 40 percent is spent on technology, while the remaining 3 percent is set aside for other related expenses. There’s also the problem of keeping skilled professionals within the team, as compliance work is said to hurt employee retention and productivity.
It’s always been a challenge for smaller banks to find a robust, versatile, yet economical AML case management system. In the same vein, adding new people to an AML investigation team means increased expenditures for the company. As they have access to a more modest pool of resources compared to their global counterparts, smaller financial institutions need to invest in AML solutions that are the right size for their organization but are also poised to grow with the needs of the business and the changing policies against financial criminal activity. Businesses may also choose to hire a private detective if they suspect fraudulent activity and want to investigate without their employees being aware of an investigation taking place.
Common Issues that Smaller Banks Often Face
With limited options available to them, smaller financial institutions are often forced to make compromises in terms of compliance and the measures they can take to combat financial criminal activity. Here are some of the key issues that they may face:
Absence of a Centralized Data Source
Without a centralized data source, it will be more difficult for banks to find out exactly what factors trigger their system’s alarms. Investigators need to be able to readily access customer activity, transaction history, and other pertinent details so that they can conduct a thorough probe and come up with accurate conclusions. In the absence of a centralized source of information, the AML team will need to go over third-party sources. This demanding task can harm the team’s productivity or the quality of the investigation.
Rigid Workflows That Don’t Quite Suit Their Processes
Every financial institution has a different way of investigating suspicious activities. A bigger bank that processes a large number of transactions may have different priorities compared to a smaller bank with a more localized list of clients, for example. This can affect how they approach possible cases of fraud or money laundering.
Most AML solutions are prepackaged with workflows that are designed to track production time. A rigid workflow, however, can be detrimental if it’s not configured to the specific needs of the business. Should the financial institution undergo organizational changes or if there are new policies that can affect AML processes, then it will be necessary to find a workaround for the AML software’s rigid workflow.
Lack of Process Automation and Case Categorization
Banks adopt AML solutions specifically because these programs reduce the resources needed to conduct thorough assessments of possible cases of financial crime. An AML solution should be able to automatically assign cases to the right individuals or teams and categorize cases based on levels of priority. A solution with this level of automation can make the investigation process more efficient. It will also allow the AML team to focus on high-value activities instead of getting wrapped up in menial tasks.
Issues with Third-Party Integration
It’s not out of the ordinary for financial institutions to require third-party services to complete their KYC and AML processes. It should be noted, though, that some AML and KYC solutions are not designed for the easy integration of third-party information. In cases like this, the bank will have to spend additional resources to translate the outside data into a form that their internal system can process. This can take up a lot of time and effort. Without doing this, the financial institution risks making inaccurate conclusions.
An AML Solution That Fits the Size of the Operation
No matter the size of their operations, every financial institution has the responsibility and burden of preventing financial crimes from taking place within their premises. Smaller banks need to be afforded quality AML compliance solutions that suit their business goals and the processes that they use. At the same time, these smaller institutions should be on the lookout for scalable and highly versatile options out in the market. This way, their AML program will be able to accommodate changes in compliance policies and the needs of their growing business.
